Document: Oral Statements
Date: 1 November 2006
Document codes: WT/DS267/RW
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX D

RESPONSES OF PARTIES TO THE PANEL'S QUESTIONS
AND OTHER COMMENTS AND DOCUMENTS
RECEIVED FROM PARTIES

Contents Page
Annex D-1 Brazil's Request for the Panel to Seek Production of
Documents and Information Pursuant to Article 13 of the
DSU – 1 November 2006
D-2
Annex D-2 Responses of Brazil to the Panel's Questions on the DSU
Article 13 Issue - 19 January 2007
D-18
Annex D-3 Responses of the United States to the Panel's Questions
on the DSU Article 13 Issue - 19 January 2007
D-21
Annex D-4 Comments of Brazil on the Oral Statements of the
United States at the Meeting with the Panel – 9 March
2007
D-24
Annex D-5 Comments of the United States on the Oral Statements of
Brazil at the Meeting with the Panel – 9 March 2007
D-46
Annex D-6 Responses of Brazil to th e Panel's First Set of Questions
(Sections A-C) – 26 February 2007
D-78
Annex D-7 Responses of Brazil to th e Panel's First Set of Questions
(Sections D&E) – 6 March 2007
D-114
Annex D-8 Responses of the United States to the Panel's First Set of
Questions (Sections A-C) – 27 February 2007
D-134
Annex D-9 Responses of the United States to the Panel's First Set of
Questions (Sections D&E) – 6 March 2007
D-152
Annex D-10 Brazil's Comments on the Responses of the United States
to the Panel's First Set of Questions – 16 March 2007
D-177
Annex D-11 United States' Comments on the Responses of Brazil to
the Panel's First Set of Questions – 16 March 2007
D-220
Annex D-12 Responses of Brazil to the Panel's Second Set of
Questions – 2 April 2007
D-269
Annex D-13 Responses of the United States to the Panel's Second Set
of Questions – 2 April 2007
D-355
Annex D-14 Brazil's Comments on the Responses of the United States
to the Panel's Second Set of Questions – 24 April 2007
D-443
Annex D-15 United States' Comments on the Responses of Brazil to
the Panel's Second Set of Questions – 24 April 2007
D-518

ANNEX D-1

BRAZIL'S REQUEST FOR THE PANEL TO SEEK PRODUCTION
OF DOCUMENTS AND INFORMATION PURSUANT
TO ARTICLE 13 OF THE DSU

(1 November 2006)

1. The Government of Brazil would like to thank you, as well as Ambassador Ahn and
Ambassador Matus, for agreeing to serve as panelists in United States - Subsidies on Upland Cotton
(Recourse by Brazil to Article 21.5 of the DSU). We appreciate your willingness to devote time and
energy to assisting Brazil and the United States to re solve this matter. Brazil also looks forward to
providing you, the panelists and the Secretariat with whatever assistance it can in these proceedings.

2. In this letter, Brazil seeks that the compli ance Panel exercise its discretion under Article 13.1
of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU")
1 to
request the United States to produce documents and information relating to (a) payments to
U.S. producers of upland cotton under the U.S. counter-cyclical payment program established by the
FSRI Act of 2002, and (b) the U.S. agricultural export credit guarantee programs (principally the
General Sales Manager 102 ("GSM 102") export credit guarantee program). Annex 1 to this letter
sets out the precise documents and information th at Brazil requests the Panel to seek from the
United States.

3. All of the documents and information sought by Brazil is within the exclusive control of the
United States. All of it is highly relevant to Br azil's claims and the issues before this compliance
Panel. Therefore, Brazil considers that it is "n ecessary and appropriate" for the compliance Panel to
seek the documents and information requested at th is early stage of the compliance proceeding.
Doing so is also "necessary and appropriate" given the shortened timeframe for the panel procedure,
provided for in Article 21.5 of the DSU, and in light of the importance accorded to this information by
the panel in the original proceeding.

4. Prior to making this request, Brazil sought to secure the agreement of the United States to
produce this information.

5. Annex 2a to this letter contains Brazil's letter , dated 7 June 2006, requesting informal
discussions on the U.S. implementation of the recommendations and rulings of the Dispute Settlement
Body in this dispute; Annex 2b contains the questions presented by Brazil prior to and during the
informal discussions on this matter on 19 July 2006.
6. In the few instances in whic h the United States provided documents or information during the
informal discussions, Brazil has not repeated the ques tion in Annex 1 to this letter. For the majority
of the documents and information requested by Brazil, the United States indicated during the informal
discussions that it was not in a position to produc e the documents or information. Nor has the
United States subsequently offered to produce the requested documents or information. During those
discussions, the United States indicated that at least part of the documents or information requested

1 Article 13.1 provides, in relevant part: "Each panel shall have the right to seek information . . . from
any individual or body which it deems appropriate. . . . A Member should respond promptly and fully to any
request by a panel for such information as the pane l considers necessary and appropriate. Confidential
information which is provided shall not be revealed without formal authorization from. the individual, body, or
authorities or the Member providing the information."

was confidential and that it was not prepared to provide them in the context of discussions not
formally protected by confidentiality. The United Stat es added that the situation would be different if
such request was presented during panel proceedings which, pursuant to Article 18 of the DSU, take
place under a confidentiality clause.

7. Brazil and its representatives also made re quests seeking these documents and information
under the U.S. Freedom of Information Act ("FOIA"). In most instances, Brazil has not received
documents or information pursuant to those FOIA requests. In the few instances in which Brazil
received documents or information in response to th ose FOIA requests, relevant questions have been
eliminated from Annex 1 to this letter.

8. Brazil sets out the requested documents and information regarding the U.S. counter-cyclical
payment program in Part A of Annex 1. This request is essentially identical to the original panel's
final request to the United States pur suant to Article 13.1 of the DSU.
2 The United States eventually
provided considerable data to the original panel in response to this request. The relevant background
concerning the original panel's final request (as we ll as previous requests) under Article 13.1 of the
DSU is set out in paragraphs 7. 20-7.42 of the Panel Report in United States - Subsidies on Upland
Cotton.

9. That data produced by the United States allo wed the original panel to make an assessment of
both the amount and type of counter-cyclical paym ents received by current upland cotton producers.
For the reasons set out below, it is "necessary and a ppropriate" for the compliance Panel to exercise
its discretion, under Article 13.1 of the DSU, to re quest the United States to produce an update of this
same data.

10. Brazil recalls that the original panel found that the "support delivered to upland cotton by
[counter-cyclical payments] is a central issue in this dispute."
3 Using the information on counter-
cyclical payments obtained from the United States in response to its Article 13.1 request, the original
panel made extensive findings of fact.4 For example, the original panel found that "the overwhelming
majority of farms enrolled in the programmes which plant upland cotton also hold upland cotton
base."5 The original panel further found that the data produced by the United States

show a strongly positive relationship between those recipients who hold upland
cotton base acres and those who continue to plant upland cotton, despite their
entitlement to plant other crops, which is indicative of the relationship between
payments calculated with respect to upland cotton base acreage and recipients who
plant upland cotton.
6
In addition, the original panel found that the ma gnitude of the price-contingent counter-cyclical
payments received by current producers of up land cotton ($869.4 million using Brazil's Methodology,
or $864.9 using the Cotton-to-Cotton methodology 7) constituted "very large amounts of United States
government money benefiting United States upland cotton production."8

2 Panel Report, United States - Subsidies on Upland Cotton , Annexes L-1.22, dated 3 February 2004,
and L-1.23, dated 16 February 2004.
3 Panel Report, United States - Subsidies on Upland Cotton, para. 7.633.
4 See, inter alia , Panel Report, United States - Subsidies on Upland Cotton , paras. 7.608-7.633
and 7.634-7.647.
5 Panel Report, United States - Subsidies on Upland Cotton, para. 7.636.
6 Panel Report, United States - Subsidies on Upland Cotton, para. 7.637.
7 Panel Report, United States - Subsidies on Upland Cotton, Tables A-5, A-6, paras. 7.641-7.647.
8 Panel Report, United States - Subsidies on Upland Cotton, para. 7.1349.

11. Before the compliance Panel, a central question will be whether the failure of the
United States to withdraw, or remove the adverse effects of, the counter-cyclical payment program of
the FSRI Act of 2002 causes present serious prejudice to the interests of Brazil, or a threat thereof.
The existence and strength of a causal link between counter-cyclical payments and serious prejudice
is, in part, a function of the magnitude and type of counter-cyclical payments received by current
producers of upland cotton. Thus, the magnitude and type of these subsidies continues to be a central
issue. As in the original panel proceeding, the da ta requested by Brazil would constitute the basis for
factual findings regarding the magnitude and type of countercyclical payments that continue to
support the production and export of U.S. upland cotton.

12. Publicly-available USDA data shows that, in marketing year ("MY") 2005 for example, total
counter-cyclical payments to holders of upland cotton base acreage exceeded $1.3 billion. While
USDA collects data on plantings of each recipient that allow the calculation of the amount of counter-
cyclical payments that were received annually by current upland cotton farmers, these data are not
publicly available. They are therefore not availabl e to Brazil or the compliance Panel. Significantly,
during the original proceedings, the United States produced these data for MY 2002. The original
panel relied on certain methodologies of using the da ta to calculate the amount of counter-cyclical
subsidies received by current U.S. upland cotton farmers for MY 2002.
9

13. Wile awaiting the production of the requested data by the United States, Brazil, based on the
best information currently available to it and the compliance Panel, intends to rely on the
methodology found "appropriate" by the original panel.

14. Brazil sets out its questions with respect to the agricultural export credit guarantee
("ECG") programs, and in particular, the GSM 102 program
10, in Part B of Annex 1 to this letter.
Brazil notes that it has considerably reduced the numb er of questions compared to those originally
requested prior to and during the 19 July 2006 inform al discussions. Brazil was able to obtain some
of the originally requested documents through FOIA requests, and has taken account of limited
responses from the United States in informal discussions on 19 July. (The United States provided no
documents in connection with these informal discussions.)

15. The documents and information regarding expo rt credit guarantees requested in Annex 1 are
exclusively within the control of the United States. The majority of the questions seek documents and
information concerning the risk profile of the GSM 102 portfolio, how GSM 102 takes the various
risks encountered in guaranteed transactions into account, and default rates on GSM 102 guarantees.
The requested documents and information will he lp the compliance Panel fulfill its mandate to
undertake an objective assessment of the United Stat es' ECG-related measures taken to comply, and
to consider Brazil's claims that GSM 102 guarantees constitute export subsidies, as well as that they
circumvent U.S. agricultural export subsidy commitm ents. Brazil believes, therefore, that it is
"necessary and appropriate" for the compliance Panel to exercise its discretion under Article 13.1 of
the DSU, and to request this information from the United States.

16. Finally, Brazil asks the compliance Panel to request the United States to produce this
information within three weeks of th e date the Panel issues its request.
11 Brazil considers this time
period is justified in view of the shortened timeframe provided for in Article 21.5 of the DSU. It is
also consistent with the relative importance of the information requested.

9 Panel Report, United States - Subsidies on Upland Cotton, Attachment to Section VII:D,
paras. 7.634-7.647.
10 Brazil notes that one questions relates also to the GSM 103 and Supplier Credit Guarantee programs.
 11 Brazil recalls that the original panel allotted the Un ited States eight days (until 11 February 2004) to
respond to its 3 February 2004 request for information. See, Panel Report, United States - Subsidies on Upland
Cotton, Annex I-1.22.

ANNEX 1

Brazil's Request to the Compliance Panel to Pose Questions
to the United States, under Article 13.1 of the DSU

1 November 2006

Part A: Documents and Information on Base and Planted Acres

1. Brazil requests updated information on upland co tton planted and base acres under the Direct

and Counter-Cyclical Payment Program for each of the 2003, 2004, 2005 and 2006 marketing years,
showing as many of the underlying calculations as po ssible. Brazil also requests information on base
acreage and planted acreage for other "program crops" ( i.e., corn, barley, oats, sorghum, rice, wheat,
soybeans, peanuts and minor oilseeds) and other acr eage on farms with upland cotton planted acreage
in these same years. Finally, Brazil requests the amount of payments units for Direct Payments and
Counter-Cyclical Payments by program crop for each category of farms.

 Brazil requests this information in the format outlined by the Panel in part (b) of its
"Supplementary Request for Information Pursuant to Article 13 of the DSU," dated 3 February 2004.
1
Specifically, Brazil requests that the United States address the following questions:

(A) How many farms that planted upland cotton had fewer upland cotton planted
acres than upland cotton base acres, or equal numbers of each? We refer to
these as "Category A" farms. What was the total of their upland cotton base
acreage? What was the total of their upland cotton planted acreage?

(1) How many farms that have upland cotton base acres did not plant any
upland cotton? What was the total upland cotton base acreage on
these farms? We refers to these as "Category A-1" farms.
2

(B) How many farms had more upland co tton planted acres than upland cotton
base acres? We refer to these as "Categor y B" farms. What was the total of
their base acreage for each covered commodity, including upland cotton?
What was the total of their planted acreage for each covered commodity,
including upland cotton? Please also provide the following information
concerning these farms:

(1) How many Category B farms had e qual numbers of acres planted to
all covered commodities and base acres for all covered commodities?
We refer to these as "Category B-1" fa rms. What was the total of the
base acreage of Category B-1 farms for each covered commodity,
including upland cotton? What was the total of the planted acreage

1 Panel Report, Annex L, item 22. The Panel's request for information is contained in the
Communication from the Panel on 3 February 2004. The full Communication (Panel Report, Annex L, item 22)
is attached in Appendix I of this document.
2 For Category A Farms, the Panel requested "farms [that] had fewer upland cotton planted acres than
upland cotton base acres." ( See Panel Report, Annex L, item 22, p. 2 ).2 The United States interpreted this
request as covering all farms that had upland cotton base and planted less than their full upland cotton base to
upland cotton or that planted no upland cotton at all. ( The full response by the United States is attached in
Appendix II of this document ). In its updated request, Brazil would like the United States to separate (i) farms
that had upland cotton base acres and planted fewer upland cotton planted acres than upland cotton base acres
and (ii) farms that had upland cotton base acres but planted no upland cotton. (See also Panel Report, Annex L,
item 26, para. 5)

of Category B-1 farms for each covered commodity, including
upland cotton?

(2) How many Category B farms had fewer acres planted to all covered
commodities than base acres for all covered commodities? We refer
to these as "Category B-2" farms. How much was the total acreage
of Category B-2 farms planted to all covered commodities less than
their base acreage for all covered co mmodities? What was the total
of the base acreage of Category B-2 farms for each covered
commodity, including upland cotton? What was the total of the
planted acreage of Category B-2 farms for each covered commodity,
including upland cotton?

(3) How many Category B farms had mo re acres planted to all covered
commodities than base acres for all covered commodities? We refer
to these as "Category B-3" farms. How much did the total acreage of
Category B-3 farms planted to all covered commodities exceed their
base acreage for all covered commoditie s? What was the total of the
base acreage of Category B-3 farms for each covered commodity,
including upland cotton? What was the total of the planted acreage
of Category B-3 farms for each covered commodity, including
upland cotton?

(C) How many farms had upland cotton pl anted acres but no upland cotton base
acres? We refer to these as "Category C" farms. What was the total of the
base acreage of Category C farms for each covered commodity? What was
the total of the planted acreage of Category C farms for each covered
commodity, including upland cotton?

(D) In addition, for the marketing years 2003 through 2006, please reply to the
above questions with respect to all crops on cropland covered by the acreage
reports, not simply commodities covered by the programs.

 Brazil requests that the United States continue to provide the requested information on both
state level and federal level ( i.e., totals). Further, as noted above, Brazil requests that the
United States provide aggregate payment unit data by crop for each group of farms.

 For convenience, Brazil attaches the Pane l's communication dated 3 March 2004, which
contains the Panel's "Supplementary Request for Info rmation Pursuant to Article 13 of the DSU," in
Appendix I to this document. Brazil further attaches , in Appendix II to this document, an excerpt of
the U.S. response to the Panel's data request, dated 3 March 2004.

Part B: Documents and Informat ion on Export Guarantee Programs

2. In the original panel proceedings in WT/DS267, the United States provided, as Exhibit
US-150, two memoranda, dated 8 April 2002 and 25 March 2003, titled "Annual Review of Fees for
USDA Credit Programs". Please provide any memoranda or similar documents constituting annual
reviews for subsequent years.

3. What return does the U.S. government require on capital employed for the GSM 102
program?

4. Please provide data regarding the value of GSM 102 guaranteed transactions, by tenor and by
country (rather than by Commodity Cred it Corporation ("CCC") regional groupings) 3, for the cohort
of GSM 102 guarantees issued in each fiscal year for FY 2002-2006.

5. For FY 2006, please separate GSM 102 ECGs in to applications received by individual
country (rather than by CCC regional groupings).
4

6. Please provide data regarding GSM 102 fees collected, by country (rather than by CCC
regional groupings), by year for each of FY 2002-2006.
5

7. For each country eligible for export credit guarantees through the GSM 102 program, please
provide the current sovereign-risk rating and the private risk-rating established through the
Interagency Country Risk Assessment System (" ICRAS"), as well as any ICRAS papers or analyses
justifying those ratings. Please provide the same information and documen ts for FY 2002-2006, to
the extent ratings in that period diverge from current ratings.

8. Please indicate the number of risk categori es into which CCC classifies guarantees for the
GSM 102 program, and explain: (i) how those risk categories are established; and (ii) how those risk
categories correspond to the ICRAS categories.

9. Whether CCC uses the ICRAS risk categories or its own risk categories, please:

(a) provide a correspondence table and documentary support showing the
correspondence between the CCC risk categories and the ratings ( e.g., BB, BBB,
BBB-, etc.) in the Moody's or Standard and Poor's rating systems;

(b) for FY 2002-2006, indicate the value of guaranteed transactions in each CCC risk
category for GSM 102 guarantees issued in each of those years;

(c) for FY 2005 and 2006, indicate the value of guaranteed transactions in each CCC risk
category for the portfolio of GSM 102 guarantees outstanding on the last day of each
fiscal year;

10. For the cohort of GSM 102 guarantees issued in each of FY 2002-2006, please provide data
dividing the cohort according to the value of the transactions guaranteed. Please use increments
of $1000.

11. For the cohort of GSM 102 guarantees issued in each of FY 2002-2006, please provide data
dividing the cohort according to the credit rating of the foreign bank.

12. For the cohort of GSM 102 guarantees issued in each of FY 2002-2006, please provide data
dividing the cohort according to the credit rating of the foreign purchaser of U.S. agricultural exports.

13. For the cohort of GSM 102 guarantees issued in each of fiscal years 2002-2006, please
provide data dividing the cohort according to the va lue of the transactions guaranteed, and, further,
indicates loss or default rates for each $1000 increment of transaction value.

3 Monthly exposure reports for GSM 102 demonstrat e that CCC maintains data on a country-specific
basis.
4 Monthly exposure reports for GSM 102 demonstrat e that CCC maintains data on a country-specific
basis.
5 Monthly exposure reports for GSM 102 demonstrat e that CCC maintains data on a country-specific
basis.

14. Please provide data and documentary support addressing default rates for the GSM 102
program for each fiscal year during the period 2002-2006.

15. For each country eligible for export credit guarantees through the GSM 102 program, please
provide the Office of Management and Budget's (OMB) default estimate.
6

16. With respect to the total amount of outstandi ng principal and interest guaranteed through
GSM 102, GSM 103 and SCGP on 1 July 2005:

(a) What proportion of that outstanding principa l and interest was associated with exports
of unscheduled products, and what propor tion was associated with exports of
scheduled products?

(b) Of the proportion associated with schedul ed products, what proportion was associated
with exports of rice?

17. Please provide monthly "Exposure Reports" for GSM 102 all months beginning in July of
FY 2006.
7

18. Please provide the "FAS Risk Assessment Handbook".
8

19. Please provide any "FAS Portfolio Analys is" of the export credit guarantee programs
conducted and/or reported subsequent to 24 March 2003.9

20. Please provide the quarterly "Commercial Export Credit Reports" for all quarters from Q2 of
FY 2004 to the present.
10

21. Please provide the quarterly "Geographic and Commodity Analyses" for all quarters from
FY 2002 to the present.11

22. Please provide the quarterly "FAS GSM to Exports Powerpoints" from Q3 of FY 2004 to the
present.
12

23. Please provide the "Contingent Liability by Country Risk Grade Powerpoints" from FY 2002
to the present.13

[Appendix 1 and Appendix 2 omitted.]

6 OMB's default estimate methodology is discussed on page 79 of the "Analytical Perspectives"
document associated with the U.S. 2007 budget, available at http://www.whitehouse.gov/omb/budget/fy2007/.
7 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.
8 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.
9 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.
10 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.
11 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.
12 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.
13 Cited as "evidence" in an OMB assessm ent of the ECG programs, available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html.

ANNEX 2a

BRAZIL'S LETTER OF 7 JUNE 2006
TO THE UNITED STATES

The Government of Brazil is concerned that measures taken by the United States to comply
with the recommendations and rulings adopted by the WTO Dispute Settlement Body ("DSB) on
21 March 2005 in United States - Subsidies on Upland Cotton
 (DS 267) may not exist or not be
consistent with the U.S. obligations under the Dispute Settlement Understanding, the Agreement on
Subsidies and Countervailing Measures and the Agreement on Agriculture. In particular, the
Government of Brazil believes that it would be useful to hold further substantive discussions
concerning ongoing and future efforts by the U.S. Government to eliminate or make significant
changes to the marketing loan and countercyclical programs for upland cotton under the Farm
Security and Rural Investment Act of 2002, as well as the GSM 102 and SCGP export credit
guarantee programs.

Therefore, the Government of Brazil suggests that informal contacts be held at your earliest
convenience to provide an opportunity to exchan ge views and information regarding the above-
mentioned concerns. To prepare for this meeting, and in order to facilitate the discussions, Brazil
would send in advance a list of questions that coul d be addressed during the talks. I look forward to
your response to this suggestion.

Please accept, Excellency, the assurances of my highest consideration.

ANNEX 2b

BRAZIL'S LETTER OF 29 JUNE 2006
TO THE UNITED STATES

With reference to your letter of 23 June 2006 confirming the disposition of the United States
to discuss with Brazil issues related to the implem entation of the Dispute Settlement Body's ("DSB")
rulings and recommendations in the context of the dispute United States - Subsidies on Upland Cotton

(DS 267), I would like to propose that representatives of our countries meet on 17 July 2006 in
Geneva.

As anticipated in my letter of 7 June 2006, and with a view to ensuring that this exchange of
views and information be as valuable and inform ative as possible, please find enclosed a list of
questions.

Please accept, Excellency, the assurances of my highest consideration.

Questions for the United States
29 June 2006

Information on the Amount of Step 2 Payments by Marketing Year

1. Brazil requests information on the annual am ount of user marketing (Step 2) payments for
upland cotton in marketing years 2002-2005. Brazil requests separate data for Step 2 export payments
and Step 2 payments for domestic users.

Information on the United States' Intention to Take Further Implementing Action

2. Does the United States intend to change th e Counter-Cyclical Payment Program and/or
Marketing Loan Program to bring them/it into confor mity with U.S. WTO obligations? If so, what is
the envisioned outline and time-frame of such ch anges. If not, please provide a reasoned and
substantiated explanation of why it believes that no further implementing action is needed to comply
with the DSB's rulings and recommendations in United States – Subsidies on Upland Cotton.

Information on Base and Planted Acres

3. Brazil requests updated inform ation on upland cotton planted and base acres under the Direct

and Counter-Cyclical Payment Program for each of the marketing years 2003, 2004, 2005 and
20061, showing as many of the underlying calculations as possible. Brazil also requests information
on base acreage and planted acreage for other "program crops" ( i.e., corn, barley, oats, sorghum, rice,
wheat, soybeans, peanuts and minor oilseeds) and ot her acreage on farms with upland cotton planted
acreage in these same years. Finally, Brazil re quests the amount of payments units for Direct
Payments and Counter-Cyclical Payments by program crop for each category of farms.

 Brazil requests this information in the format outlined by the Panel in part (b) of its
"Supplementary Request for Information Pursuant to Article 13 of the DSU," dated 3 February 2004.
2
Specifically, Brazil requests that the United States address the following questions:

(A) How many farms that planted upland cotton had fewer upland cotton planted
acres than upland cotton base acres, or equal numbers of each? We refer to
these as "Category A" farms. What was the total of their upland cotton base
acreage? What was the total of their upland cotton planted acreage?

(1) How many farms that have upland cotton base acres did not plant any
upland cotton? What was the total upland cotton base acreage on
these farms? Brazil refers to these as "Category A-1" farms.
3

1 Brazil understands that information on marketing year 2006 may be preliminary or incomplete.
2 Panel Report, Annex L, item 22. The Panel's request for information is contained in the
Communication from the Panel on 3 February 2004. The full Communication (Panel Report, Annex L, item 22)
is attached in Annex I of this document.
3 For Category A Farms, the Panel requested "farms [that] had fewer upland cotton planted acres than
upland cotton base acres." ( See Panel Report, Annex L, item 22, p. 2 ).3 The United States interpreted this
request as covering all farms that had upland cotton base and planted less than their full upland cotton base to
upland cotton or that planted no upland cotton at all. ( The full response by the United States is attached in
Annex II). In its updated request, Brazil would like the United States to separate (i) farms that had upland cotton
base acres and planted fewer upland cotton planted acres than upland co tton base acres and (ii) farms that had
upland cotton base acres but planted no upland cotton. (See also Panel Report, Annex L, item 26, para. 5)

(B) How many farms had more upland co tton planted acres than upland cotton
base acres? We refer to these as "Categor y B" farms. What was the total of
their base acreage for each covered commodity, including upland cotton?
What was the total of their planted acreage for each covered commodity,
including upland cotton? Please also provide the following information
concerning these farms:

(1) How many Category B farms had e qual numbers of acres planted to
all covered commodities and base acres for all covered commodities?
We refer to these as "Category B-1" fa rms. What was the total of the
base acreage of Category B-1 farms for each covered commodity,
including upland cotton? What was the total of the planted acreage
of Category B-1 farms for each covered commodity, including
upland cotton?

(2) How many Category B farms had fewer acres planted to all covered
commodities than base acres for all covered commodities? We refer
to these as "Category B-2" farms. How much was the total acreage
of Category B-2 farms planted to all covered commodities less than
their base acreage for all covered co mmodities? What was the total
of the base acreage of Category B-2 farms for each covered
commodity, including upland cotton? What was the total of the
planted acreage of Category B-2 farms for each covered commodity,
including upland cotton?

(3) How many Category B farms had mo re acres planted to all covered
commodities than base acres for all covered commodities? We refer
to these as "Category B-3" farms. How much did the total acreage of
Category B-3 farms planted to all covered commodities exceed their
base acreage for all covered commoditie s? What was the total of the
base acreage of Category B-3 farms for each covered commodity,
including upland cotton? What was the total of the planted acreage
of Category B-3 farms for each covered commodity, including
upland cotton?

(C) How many farms had upland cotton pl anted acres but no upland cotton base
acres? We refer to these as "Category C" farms. What was the total of the
base acreage of Category C farms for each covered commodity? What was
the total of the planted acreage of Category C farms for each covered
commodity, including upland cotton?

(D) In addition, for the marketing years 2003 through 2006, please reply to the
above questions with respect to all crops on cropland covered by the acreage
reports, not simply commodities covered by the programs.

 Brazil requests that the United States continue to provide the requested information on both
state level and federal level ( i.e., totals). Further, as noted above, Brazil requests that the
United States provide aggregate payment unit data by crop for each group of farms.

 For the United States' convenience, Brazil atta ches the Panel's communication dated 3 March
2004, which contains the Panel's "Supplementary Requ est for Information Pursuant to Article 13 of
the DSU," in Annex I. Brazil further attaches, in Annex II, an excerpt of the U.S. response to the
Panel's data request, dated 3 March 2004.

Information on the General Sales Manager 102 (GSM 102), General Sales Manager 103
(GSM 103) and Supplier Credit Guarantee (SCGP) Programs

4. In a press release dated 5 July 2005, USDA announced that the Bush Administration was
sending to Congress proposed statutory changes to remove the one-percent cap on fees for guarantees
issued under the GSM 102 and SCGP programs (the one-percent fee cap is required by
7 U.S.C. § 5641(b)(1)), and terminate the Inte rmediate Export Guaran tee Program (GSM-103).
4 In a
paper dated 17 February 2006 and titled "WTO Litigation and Negotia tion: Potential Implications for
Cotton", at page 2, Carol Goodloe, Senior Econom ist in USDA's Office of the Chief Economist,
suggested that the proposal to repeal the fee cap and to eliminate the GSM-103 program was not
"included" in budget reconciliation legislation because of "Senate rules".5

With respect to this issue, Brazil has the following questions:

(a) Was the 2005 Administration proposal not "included" in budget reconciliation
legislation because of "Senate rules"? If yes, please explain the nature of the Senate
rules. If not, please explain why the proposal was not "included" in budget
reconciliation legislation.

(b) Please provide a copy of any subsequent legislative proposals concerning repeal of
the fee cap or termination of GSM-103 progr am provided by the Executive Branch to
the US Congress. What is the legislative vehicle and timeline for consideration and
adoption of these proposals?

(c) Does the United States expect that the Congress will vote on an FY 2007 budget
reconciliation bill in calendar year 2006? Please explain.

5. Please explain why the United States stopped i ssuing ECGs under the SCGP program as of
1 October 2005.

6. On 23 January 2006, USDA invited public co mment on "options to reform" SCGP. Those
comments were due by 23 February 2006. What form will the results of USDA's reform inquiry take,
and when will those results be released? Wh en does USDA intend to re-commence issuance of
guarantees under the SCGP program?

7. Please prepare a table showing corresponden ce between the so-called "scheduled" products
listed in Table ES:1 of document G/AG/N/USA/53 and the list of products eligible for guarantees
under the GSM 102 and the SCGP programs.

8. Please provide the calculation underlying the "subsidy rates for credit guarantee programs"
stated on page 21 to the Notes to Financial St atements of the CCC for fiscal years 2004 and 2005
(available at http://www.usda.gov/oig/rptsauditsccc.htm
). Please provide these calculations also for
fiscal years 2002 and 2003.

9. Please provide the calculation underlying the "o riginal subsidy rate" a nd "current reestimated
rate" columns in Table 8 of the Federal Credit Su pplement to the Fiscal Year 2007 Budget of the
United State Government (available at http://www.whitehouse.gov/omb/budget/fy2007/), with respect
to the CCC Export Loan Guarantee Programs.

4 See http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2005/
07/0242.xml.
5 See http://www.usda.gov/oce/forum/2006%20Speeches/PDF%20speech%20docs/Goodloe2806.pdf.

10. In the original panel proceedings in WT/D S267, the United States provided, as Exhibit US-
150, two memoranda, dated 8 April 2002 and 25 March 2003, titled "Annual Review of Fees for
USDA Credit Programs". Please provide any memoranda or similar documents constituting annual
reviews for subsequent years.

11. Please list and describe all criteria taken in to account by CCC in setting the fee schedule for
the GSM 102 and SCGP programs, and in determin ing the applicable fee for a guarantee for a
particular transaction.

12. In determining the applicable fee for a GSM 102 or SCGP guarantee for a particular
transaction, is the interest rate spread charged by the market to banks or borrowers in the foreign
country involved examined, to identify changing market conditions? If the answer is in the
affirmative, please provide documentary proof that demonstrates how this factor is taken into account.

13. What return does CCC require on capital employ ed, both across all of its programs and, more
specifically, for the GSM 102 and SCGP programs?

14. Please indicate at what interval fee schedules for the GSM 102 and SCGP programs are
reviewed. Please provide CCC regulations or procedur es listing the elements to be taken into account
during a review of the fee schedules.

15. Please provide data regarding the value of gua ranteed transactions, by tenor and by country
(rather than by CCC regional groupings), separately for GSM 102, GSM 103 and SCGP, by year for
each of fiscal years 2000-2006.

16. For fiscal year 2006, please separate announced allocations for GSM 102 into individual
country allocations, rather than CCC regional group allocations.

17. Please provide data regarding fees collected , by country (rather than by CCC regional
groupings), separately for ECGs issued under GS M 102, GSM 103 and SCGP, by year for each of
fiscal years 2000-2006.

18. For each country eligible for export cr edit guarantees through the GSM 102 and the SCGP
programs, please provide the sovereign-risk rati ng and the private risk-rating established through the
Interagency Country Risk Assessment System (ICR AS), as well as any ICRA S papers or analyses
justifying those ratings.

19. Brazil understands that ICRAS has established eleven sovereign and nine nonsovereign risk
categories for use by U.S. government agencies and programs providing cross-border loans,
guarantees or insurance. Does CCC classify GSM-approved foreign banks, as well as foreign
borrowers under the GSM 102 and SCGP programs, according to these same eleven sovereign and
nine nonsovereign risk categories?

20. If the answer to the previous question is in the negative, please indicate the number of risk
categories into which CCC classifies guarantees for the GSM 102 and SCGP programs, and explain:
(i) how those risk categories are established; a nd (ii) how those risk categories correspond to the
ICRAS categories.

21. Whether CCC uses the ICRAS risk categor ies or its own risk categories, please:

(a) provide a correspondence table and documentary support showing the
correspondence between the CCC risk categories and the ratings ( e.g., BB, BBB,
BBB-, etc.) in the Moody's or Standard and Poor's rating systems;

(b) for fiscal years 2000-2006, indicate the va lue of guaranteed transactions in each CCC
risk category for GSM 102 guarantees issued in each of those years;

(c) for fiscal years 2000-2006, indicate the va lue of guaranteed transactions in each CCC
risk category for SCGP guarantees issued in each of those years;

(d) for fiscal years 2005 and 2006, indicate the value of guaranteed transactions in each
CCC risk category for the portfolio of GSM 102 guarantees outstanding on the last
day of each fiscal year;

(e) for fiscal years 2005 and 2006, indicate the value of guaranteed transactions in each
CCC risk category for the portfolio of SCGP guarantees outstanding on the last day
of each fiscal year.

22. In each of fiscal years 2000-2006, please list th e percentage of importers/purchasers in export
transactions for which an SCGP guarantee is provide d that are government-owned or -controlled, or
quasi-government-owned or -controlled.

23. Please describe the profile of a typical importer/purchaser in export transactions for which an
SCGP guarantee is provided, in terms of loan size, importer/purchaser's asset size, and
importer/purchaser's credit rating.

24. Please describe how loss or default ra tes on SCGP guarantees vary for different
importer/purchaser profiles (again, in terms of loan size, importer/purchaser's asset size, and
importer/purchaser's credit rating).

25. For the cohort of SCGP guarantees issued in each of fiscal years 2000-2006, please provide a
chart that divides the cohort according to the va lue of the transactions guaranteed. Please use
increments of $1000.

26. For the cohort of SCGP guarantees issued in each of fiscal years 2000-2006, please provide a
chart that divides the cohort according to the credit rating of the borrower/purchaser.

27. For the cohort of SCGP guarantees issued in each of fiscal years 2000-2006, please provide a
chart that divides the cohort accord ing to the value of the transactions guaranteed, and, further,
indicates loss or default rates for each increment of transaction value.

28. For the cohort of SCGP guarantees issued in each of fiscal years 2000-2006, please provide a
chart that divides the cohort according to the cred it rating of the borrower/purchaser, and, further,
indicates loss or default rates for each category of credit rating.

29. For the cohort of GSM 102 guarantees issued in each of fiscal years 2000-2006, please
provide a chart that divides the cohort according to the value of the transactions guaranteed. Please
use increments of $1000.

30. For the cohort of GSM 102 guarantees issued in each of fiscal years 2000-2006, please
provide charts that divide the cohort according to the credit rating of the foreign bank, and of the
borrower/purchaser.

31. For the cohort of GSM 102 guarantees issued in each of fiscal years 2000-2006, please
provide a chart that divides the cohort according to the value of the transactions guaranteed, and,
further, indicates loss or default rates for each increment of transaction value.

32. For the cohort of GSM 102 guarantees issued in each of fiscal years 2000-2006, please
provide charts that divide the cohort according to the credit rating of the foreign bank, and of the
borrower/purchaser, and, further, indicates loss or default rates for each category of credit rating.

33. Please provide data and documentary support addressing default rates for the GSM 102 and
SCGP programs (both separately and together) for each fiscal year during the period 2000-2006.

34. How does CCC arrive at the default and loss estimates presumably used to determine fees for
GSM 102 and SCGP guarantees?

35. For each country eligible for export cr edit guarantees through the GSM 102 and the SCGP
programs, please provide the Office of Management and Budget's (OMB) default estimate. (OMB's
default estimate methodology is discussed on page 79 of the "Analytical Perspectives" document
associated with the U.S. 2007 budget, available at http://www.whitehouse.gov/omb/budget/fy2007/

36. How does the OMB default estimate affect the fee schedule for the GSM 102 and SCGP
programs? What, if any, discretion does CCC enjoy to depart from the OMB default estimate in
setting fees for the GSM 102 and SCGP programs?

37. How does CCC fund accumulated losses?

38. What was the total amount of outstandi ng principal and interest guaranteed through
GSM 102, GSM 103 and SCGP on 1 July 2005? Pleas e provide data separately for each of the
three programs. With respect to this data:

(a) What proportion of the outstanding principa l and interest was associated with exports
of unscheduled products, and what propor tion was associated with exports of
scheduled products?

(b) Of the proportion associated with schedul ed products, what proportion was associated
with exports of rice?

39. Page 30 of the "Notes to Financial Statements " included with the CCC's Financial Statements
for Fiscal Years 2005 and 2004 (available at http://www.usda.gov/oig/rptsauditsccc.htm
) lists the
value of guaranteed transactions outstanding on 1 September 2005, divided by maturity date. Please
provide a similar chart with data as of 1 July 2005.

40. Does the CCC require that a party ( e.g., the exporter) to an export transaction for which an
SCGP guarantee is requested seek and provide to CCC credit references for the importer/purchaser?
Does the CCC itself seek such credit references? If answered in the affirmative, please provide the
relevant regulations or procedures setting out this requirement.

41. Does CCC require information regarding the credit rating of an importer/purchaser in an
export transaction for which and SCGP guarantee is requ ested? If answered in the affirmative, please
provide the relevant regulations or procedures setting out this requirement.

42. CCC maintains a list of foreign bank obligor s approved for particip ation in the GSM 102
program. The list is available at http ://www.fas.usda.gov/excredits/foreignbanks.html
. Does CCC
inquire into the credit rating for these banks? If so, please provide the credit rating for the banks
currently approved.
43. Are there statutory or regulatory limits on th e level of exposure (in terms of the value of
transactions, or any other variable) CCC can mainta in, under the SCGP program, with respect to any

given importer? If answered in the affirmative, please provide regulations or procedures setting out
the limits.

44. Are importers included on the default lists of the American Cotton Exporters Association
(ACEA) or the World Cotton Exporters Association (WCEA) allowed to participate in transactions
involving GSM 102 or SCGP guarantees?
6

45. Please provide a copy of any agreement governing the relationship between the U.S.
government and CoBank, with respect to CoBank's role as a lender under the GSM 102 program.

46. ExpectMore.gov has undertaken an assessment of the "Agricultural Export Credit Guarantee
Programs" subject to these consultations. The as sessment (program code 10002020), is available at
http://www.whitehouse.gov/omb/expectmore/detail.10002020.2005.html
. Please provide the
following documents, identified as "Evidence" in the assessment (each of which is highlighted in the
attached copy of the assessment):

• FAS Credit Guarantee Program Analysis;

• FAS GSM to Exports Powerpoint;

• FAS Portfolio Analysis (annual) (please provide for FY 1999 to the present, or if
maintained on a calendar or marketing year basis, then for calendar or marketing
years 1999 to the present);

• Contingent Liability by Country Risk Grade Powerpoint;

• FAS Decision Memo, 4/12/04 department wide meeting with OMB

• CCC Exposure Report (monthly) (please provide for all months from FY 1999 to the
present);

• FAS Risk Assessment Handbook;

• Geographic and Commodity Analysis (quarterly) (please provide for all quarters from
FY 1999 to the present);

• Commercial Export Credit Report (quarterly) (please provide for all quarters from
FY 1999 to the present).

[Annex 1 and Annex 2 to this document omitted.]

6 These lists are maintained at ht tp://www.acsa-cotton.org/Default_Lists/
ACEA_Default_List/body_acea_default_list.asp (for ACEA) and http://www.acsa-cotton.org/
Default_Lists/WCEA_Default_List/body_wcea_default_list.asp (for WCEA).

ANNEX D-2

RESPONSES OF BRAZIL TO THE PANEL'S QUESTIONS
ON THE DSU ARTICLE 13 ISSUE

(19 January 2007)

Question 1 (to Brazil)

Does Brazil deem that the questions posed in Part B 1 of Annex 1 of its request submitted
on 1 November 2005 ("1 November request" hereafter) are now unnecessary?

1. Brazil continues to believe that the informati on, documents and data requested in Part B of
Annex 1 of its request submitted on 1 November 2005 ("1 November Request") will assist the
compliance Panel in making "an objective assessment of the matter before it," within the meaning of
Article 11 of the Understanding on Rules and Pr ocedures Governing the Settlement of Disputes
("DSU").

2. Brazil notes that the documents requested in questions 17-23 of Annex 1 to Brazil's
1 November Request were cited by the U.S. Depart ment of Agriculture's Foreign Agriculture Service
in a self-assessment of the export credit guarant ee ("ECG") programs. This self-assessment was
provided to the compliance Panel as Exhibit Bra-588.

3. In previous discussions, the United States noted uncertainty regarding the definition of the
term "default rate," as used in questions 13 and 14 of Annex 1 to Brazil's 1 November Request. To
clarify, Brazil uses the term as it is used by the Commodity Credit Corporation ("CCC") in its
financial statements. Specifica lly, on page 28 of the Notes to the CCC's fiscal year 2006 and 2005
financial statements, provided to the compliance Panel as Exhibit Bra-585, CCC details "defaults" for
the ECG programs, phrased in percentage terms (and therefore as rates of default).
2

Question 2 (to Brazil)

Is Brazil asking the United States to respond to all of the questions posed in Part A of its
1 November request?

4. Brazil asks that the compliance Panel request the United States to provide data responsive to
all questions in Part A of Brazil's 1 November Request. The information provided by the United
States in the table in Section VI.A.(c) of its First Written Submission 3 demonstrates that the United
States has already collected and compiled the data necessary to respond to most, if not all, of Part A of
Annex I of Brazil's 1 November Request.

5. Brazil recalls that its 1 November Request , like the request by the original panel,
distinguishes between three categories of U.S. upland cotton farms: A, B and C.

1 Concerning Export Guarantee Programs.
2 These rates are only offered in the aggregate, and not for individual ECG programs or as related to the
credit ratings of obligors; Brazil has asked for further detail in its questions.
3 U.S. First Written Submission, para. 224.

6. With respect to Category A farms 4, i.e., upland cotton farms that "underplant" their base
acreage, Brazil notes that the table in Section VI.A.(c) of the U.S. First Written Submission 5 provides
incomplete information. While the United States provides information responsive to the question:
"What was the total of their upland cotton planted acreage?" 6, the United States does not provide
information responsive to the following question: "What was the total of their upland cotton base
acreage?" Further, the United States provides no information for farms that have upland cotton bases
acres but no planted acres (Category A-1 farms 7). These omissions make it impossible for Brazil to
update Tables A-1 and A-3 of the original panel's report. 8 Finally, the United States provides no
information on the actual number of farms that fall into these categories.

7. With respect to Category B farms, i.e., farms that "overplant" their upland cotton base
acreage9, and with respect to Category C farms, i.e., upland cotton farms that have no upland cotton
base acreage 10, Brazil notes that the United States also provides information that is partially
responsive to the questions proposed by Brazil. In pa rticular, the table in Section VI.A.(c) of the U.S.
First Written Submission11 provides information on the total number of upland cotton base and upland
cotton planted acres on these farms. This information, along with the limited information provided
with respect to Category A farms, enables Brazil to update Tables A-2, A-4 and A-5 of the original
panel's report. 12 However, the United States does not provide information on the base and planted
acreage of other covered commodities on these farms. This makes it impossible for Brazil to update
Table A-6 of the original panel's report. 13 The United States also provides no information on the
actual number of farms in these categories.

8. Finally, the United States does not provide information on direct and counter-cyclical
payment units for each program crop and each category of farm.

9. In sum, the U.S. First Written Submission an swered some of the questions in Part A of
Annex I to Brazil's 1 November Request. This pa rtial response demonstrates that the United States
has collected and compiled most, if not all, of the data necessary to fully respond to Brazil's
1 November Request. Brazil, therefore, requests that the compliance Panel ask the United States to
fully respond to Brazil's 1 November Request.

10. Specifically, Brazil identifies the questions th at it considers remain unanswered based on the
data submitted by the United States as part of its First Written Submission. For each of these
questions, Brazil asks that the compliance Panel re quest the United States to provide annual data
covering the period MY 2002-2005:

(a) How many Category A farms were there in the period? How many base acres were
on Category A farms?

(b) How many Category A-1 farms were there in the period? How many base acres were
on Category A-1 farms?

4 See Part A of Question 1(A) of Annex I of Brazil's 1 November 2006 Request.
5 U.S. First Written Submission, para. 224.
6 See Row 1 of the United States table at paragraph 224 of the U.S. First Written Submission.
7 See Part A, Question 1(A)(1) of Annex I of Brazil's 1 November 2006 Request.
8 See Panel Report, U.S. – Upland Cotton, paras. 7.636 and 7.639.
9 See Part A, Question 1(B) of Annex I of Brazil's 1 November 2006 Request.
10 See Part A, Question 1(C) of Annex I of Brazil's 1 November 2006 Request.
11 U.S. First Written Submission, para. 224.
12 See Panel Report, U.S. – Upland Cotton, paras. 7.636, 7.639 and 7.641.
13 See Panel Report, U.S. – Upland Cotton, para. 7.642.

(c) How many Category B farms had equal numbers of acres planted to all covered
commodities and base acres for all covered co mmodities? Brazil refers to these as
"Category B-1" farms. What was the total of the base acreage of Category B-1 farms
for each covered commodity, including uplan d cotton? What was the total of the
planted acreage of Category B-1 farms for each covered commodity, including
upland cotton?

(d) How many Category B farms had fewer acres planted to all covered commodities
than base acres for all covered commodities? Brazil refers to these as "Category B-2"
farms. How much was the total acreage of Category B-2 farms planted to all covered
commodities less than their base acreage for all covered commodities? What was the
total of the base acreage of Category B-2 farms for each covered commodity,
including upland cotton? What was the to tal of the planted acreage of Category B-2
farms for each covered commodity, including upland cotton?

(e) How many Category B farms had more acr es planted to all covered commodities than
base acres for all covered commodities? Brazil refers to these as "Category B-3"
farms. How much did the total acreage of Category B-3 farms planted to all covered
commodities exceed their base acreage for a ll covered commodities? What was the
total of the base acreage of Category B-3 farms for each covered commodity,
including upland cotton? What was the to tal of the planted acreage of Category B-3
farms for each covered commodity, including upland cotton?

(f) How many Category C farms were there in the period? What was the total of the
base acreage of Category C farms for each covered commodity? What was the total
of the planted acreage of Category C farms for each covered commodity, including
upland cotton?

(g) What were the average counter-cyclical payment yields for each program crop on
each category of farm?

ANNEX D-3

RESPONSES OF THE UNITED STATES TO THE PANEL'S
QUESTIONS ON THE DSU ARTICLE 13 ISSUE

(19 January 2007)

The United States is in receipt of the Panel's communication dated January 17, 2007, in which
it poses questions to the parties regarding Brazil's N ovember 1, 2006, request that the Panel collect
more than 35 different data items or documents pursuant to Article 13 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes ("DSU"). My authorities have instructed me to
provide the following responses:

Question 3 (to the United States)

If the United States is of the view that the Panel should not pose to the United States any
or all of the questions in Part A of Brazil's 1 November request, please cite the reasons for that
view.

Question 4
 (to the United States)

If the United States is of the view that the United States cannot respond to any or all of
the questions (or any part thereof) in Part A of Brazil's 1 November request, please explain that
view, bearing in mind the fact that the United States did provide the data to the original Panel.

1. The Panel notes in its communication that, in its rebuttal submission, Brazil reiterated its
request that the Panel collect certain data and documents from the United States pursuant to
Article 13.1 of the DSU. 1 Brazil complains in that submission that the Panel does not have before it
certain data collected by the original panel at Brazil's urging regarding farms that hold base acres
under the counter-cyclical program and those farm s' planted acres for cotton and other program
crops.2 However, Brazil's assertion is factually inco rrect as the United States submitted the relevant
data as an exhibit to its first written submission.

2. In Exhibit US-64, the United States submitte d precisely the same data in precisely the same
format as that submitted in response to the original panel's Article 13 request.
3 Moreover, the
United States explained in Annex I to its first wr itten submission how these data are relevant to the
claims and arguments at hand. Specifically, th e data fatally undermine the analysis of Brazil
regarding the effects of the counter-cyclical payment program. 4 Brazil has attempted to attribute an
entirely exaggerated effect to the c ounter-cyclical program by speculating, inter alia, that restrictions
on payments when fruits and vegetables are plante d on acreage in excess of a farm's non-base acres
serve to funnel planting decisions towards uplan d cotton because fruits and vegetables are allegedly
"the most relevant alternative in some major cotton areas."5 However, the empirical data requested by

1 January 17, 2007 Communication from the Panel.
3 See Response of the United States to the Panel's Fe bruary 3, 2004, Data Request, As Clarified on
February 16, 2004 (providing 8 data files via CD-ROM) (March 3, 2004).
4 U.S. First Written Submission, Annex I, paras. 36-37.
5 Brazil First Written Submission, Annex I, para. 63.

Brazil and presented in Exhibit US-64 demonstrate that Brazil's argument is pure speculation and
contradicted by the facts.
6

3. The United States also notes that the Panel shoul d reject Brazil's argument for how the data in
Exhibit US-64 should be used; namely, to allo cate counter-cyclical payments for both cotton base
acres and non-cotton base acres to upland co tton production using its self-titled "Brazil
methodology."
7 This argument misrepresents the panel and Appellate Body's analyses in the original
proceeding and ignores the resulting recommendations a nd rulings of the DSB. First, this "Brazil
methodology" was not applied in the context of the panel's assessment of significant price
suppression, as Brazil has implied, and therefore neither the Panel's finding of serious prejudice, nor
the resulting DSB recommendations and rulings, ex tended to counter-cyclical payments for non-
cotton base acres.8 Rather, as is clear from a review of Brazil's citations 9, it was only addressed in the
context of the original panel's analysis of "support to a specific commodity" under Article 13(b) of
the Agreement on Agriculture (the "Peace Clause" analysis). And, even in that context it was
specifically rejected. In fact, while Brazil touts the original panel's characterization of this
methodology as "appropriate,"
10 that panel did not rely on the methodology in its Peace Clause
analysis.11 Moreover, Brazil fails to mention that when it raised the methodology on appeal, the
Appellate Body specifically indicated that the methodology was unacceptable:

[W]e see little in the Panel's finding or on the record that would allow us to discern a
link between the support-conferring measures with respect to non-cotton historical
base acres and current production of upland cotton. We do not, therefore, accept the
methodology submitted by Brazil that included, in the Article 13(b)(ii) calculation,
payments with respect to both cotton and non-cotton base acres flowing to current
production of upland cotton.
12
4. Thus, because "support-conferring measures with respect to non-cotton historical base acres"
were not included in the support found to exceed the limitation in the Peace Clause proviso, such
measures were exempt, by virtue of the Peace Clause, from actions, including Brazil's serious
prejudice claims. Therefore, there could have been no, and there were no, DSB recommendations and

6 Specifically, the ratio of upland cotton base acr es to planted acres on such farms was low (for
example, only 32.7 percent in California), showing that there is no basis for the funneling effect claimed by
Brazil. Further, only about one third of the acres planted to cotton in the historical "base" period were still
planted to cotton in MY 2005. Moreover, in those areas in which fruits and vegetables are a viable alternative to
cotton, substantial acreage was planted to fruits and vege tables on farms with upland cotton base acreage (for
example, 600,000 acres in California and more than 1 million acres nationwide). This too demonstrates that
farmers do not feel compelled to plant cotton rather th an fruits and vegetables on these farms. As the
United States will explain in its forthcoming rebuttal submission, Brazil has no answer to these U.S. arguments.
7 This is the methodology under which Brazil attempts to further exaggerate the amount of counter-
cyclical payments by including payments made in respect of base acres for other programs crops simply because
they were made on farms on which the number of acres planted to cotton exceeded the number of upland cotton
base acres held by the farm operator. Brazil Rebuttal Submission, para. 171.
8 See, e.g., Brazil's November 1, 2006 request, paras. 9-13. Indeed, it is surprising that Brazil makes
this argument given that it vehemently opposed any precise calculation of the subsidy in the context of the
significant price suppression analysis (arguing that it was su fficient for the original panel to simply to find that
the payments under the Step 2, marketing loan, and counter-cyclical payment programs were allegedly,
respectively, "very large"). See, e.g., United States – Upland Cotton (AB), paras. 98-99.
9 Most of Brazil's citations in its November 1 re quest are to the following paragraphs: 7.608-7.633
and 7.641-7.647. These refer to the section of the original panel report entitled "Conclusion regarding
Article 13(b)" and to an "Attachment to Section VII: D" (which is itself entitled "Domestic Support Measures
and Article 13 of the Agreement on Agriculture").
10 See, e.g., Brazil Rebuttal Submission, para. 172.
11 United States – Upland Cotton (Panel), para. 7.580.
12 United States – Upland Cotton (AB), para. 380.

rulings with respect to such measures, and counter-cyclical payments for non-cotton base acres are not
"measures taken to comply" within the meaning of DSU Article 21.5.

5. In sum, Brazil's renewed request in its rebutta l submission that the Panel collect the data items
listed in Part A of Annex 1 of Brazil's November 1 request is moot since the United States has already
provided the data for the period relevant to Brazi l's present serious prejudice claims. Moreover,
Brazil's arguments about the relevance of this inform ation are incorrect and misleading; to the extent
they are relevant, the data support the U.S. view. In light of the foregoing, the United States
respectfully requests the Panel to reject the renewed request.

6. As the Panel has invited each of the parties to comment on any of the questions posed to the
other party, the United States also provides the following brief comment relating to Question 1
directed to Brazil:

Question 1
 (to Brazil)

Does Brazil deem that the questions posed in Part B of Annex 1 of its request submitted
on 1 November 2005 ("1 November request" hereafter) are now unnecessary?

7. To date, Brazil has failed to provide any reason in its November 1 request, its first
submission, or its rebuttal submission why the Pane l should collect the more than 25 items listed in
Part B of Annex 1 of its November 1 request. Nor has Brazil provided the type of item-by-item
explanation that is needed for the Panel to determine whether these items are indeed "necessary and
appropriate" within the meaning of Article 13 of the DSU for the Panel's objective assessment of the
evidence and arguments submitted by the parties. Under these circumstances, there is no basis to
grant Brazil's request.

LIST OF FIGURES AND TABLES

Page

Figure 7 – Expected Returns in Excess of th e Cash Costs of Growing Cotton, Corn or
Soybeans on a Base Acre of Cotton in MY 2005 33
Figure 8 – Expected Returns in Excess of the Cash Costs in MY 2005 with No Cotton
Marketing Loan or CCP Subsidies 34
Figure 9 – Expected Returns in Excess of the Cash Costs of Growing Cotton, Corn or
Soybeans on a Base Acre of Cotton in MY 2007 35
Figure 10 – Expected Returns in Excess of the Cash Costs in MY 2007 with No Cotton
Marketing Loan and CCP Subsidies 36
Figure 11 – Average Actual Returns in Excess of the Average Cash Co sts Associated with
Planting Cotton, Corn or Soybeans on an Cotton Base Acre in MY 2002-2006 37
Figure 12 – Average Actual Returns in Excess of the Average Cash Costs with No Cotton
Marketing Loan or CCP Subsidies in MY 2002-2006 38
Figure 13 – U.S. Adoption of GE Cotton Varieties 40
Figure 14 – Simple Graphical Demonstration of the Equivalence of a Production or
Demand Subsidy 44

LIST OF ABBREVIATIONS

DSU Understanding on Rules and Procedur es Governing the Settlement of Disputes
FAPRI Food and Agricultural Policy Research Institute
FSRI Act Farm Security and Rural Investment Act of 2002
ICAC International Cotton Advisory Committee
MY Marketing Year
SCM Agreement Agreement on Subsidies and Countervailing Measures
U.S. United States
USDA U.S. Department of Agriculture
WTO World Trade Organization

LIST OF EXHIBITS
U.S. Export Sales Data, accessed at www.fas.usda.gov/export-sales/h1404.htm Exhibit Bra-663
Monthly Export Sales Exhibit Bra-664
Analysis of Planting Decisions Based on Expected Returns and Cash Costs Exhibit Bra-665
Actual Costs and Returns Analysis Based on Cash Costs Exhibit Bra-666
Expected Costs and Returns Using Variable Costs Exhibit Bra-667
Actual Costs and Returns Using Variable Costs Exhibit Bra-668
"Adoption of Genetically Engineered Crops in the U.S.: Cotton Varieties,"
Economic Research Service, U.S. Department of Agriculture, accessed March 2007
at http://www.ers.usda.gov/data/biotechcrops/ExtentofAdoptionTable2.htm
Exhibit Bra-669

TABLE OF CASES
Short Title Full Case Title and Citation
Brazil – Aircraft (21.5)
Appellate Body Report, Brazil – Export Financing Program for Aircraft
 – Recourse by Canada to Article 21.5 of the DSU , WT/DS46/AB/RW, adopted
4 August 2000, DSR 2000:VIII, 4067.
U.S. – FSC (21.5)
Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" – Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55.
U.S. – FSC (21.5 II)
Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" – Second Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW2, adopted 14 March 2006.
U.S. – Softwood Lumber IV
Appellate Body Report, United States – Final Countervailing Duty Determination
with Respect to Certain Softwood Lumber from Canada , WT/DS257/AB/R,
adopted 17 February 2004, DSR 2004:II, 571.

1. I NTRODUCTION

1. Brazil thanks the compliance Panel for the opportunity to comment on the United States'
Opening and Closing Statement at the Panel Meeting. In this submission, Brazil comments on
selected issues and arguments raised by the United St ates. Brazil also refers the compliance Panel to
its own Closing Statement at the Panel Meeting, in which Brazil responded to the majority of new
U.S. arguments.

2. Specifically, in its Closing Statement, Brazil made, inter alia, the following points in response
to U.S. adverse effects-related arguments:

• Mandatory and price-contingent marketi ng loan and counter-cyclical subsidies
granted subsequent to the original panel' s reference period are properly before this
compliance Panel.1

 • Brazil's argument that there is a rapid tran smission of prices in an integrated world
market is consistent with the fact that farmers outside the United States react more
slowly to higher prices from the elimination of U.S. subsidies.2

 • The fact that the average acre planted to upland cotton covered its production costs
with market returns in MY 2003 was an aberration.3

 • Brazil has demonstrated that the world market price-suppressing effects from
marketing loan and counter-cyclical subsidies are "significant."4

3. Additionally, in its Closing Statement, Braz il made the following points in response to the
U.S. export credit guarantee-related ("ECG") arguments:

• The amended GSM 102 program does not meet its long-term costs and losses, under
item (j) of the Illustrative List. The U.S. government continues, every year, to project
that GSM 102 ECGs issued in that year will result in losses.5

 • Even if the GSM 102 program meets its long-term operating costs and losses, within
the meaning of item (j), this does not, under the proper interpretation of footnote 5 to
the SCM Agreement, "demonstrate[] dis positively" that GSM 102 ECGs are not
export subsidies.6

 • Even if the GSM 102 program meets its long-term operating costs and losses, the
United States has failed to achieve "full withdrawal" of the prohibited subsidy,
instead merely replacing it with another pr ohibited subsidy. Specifically, under the
amended fee schedule, GSM 102 ECGs are export-contingent contributions that
confer "benefits".7

1 Brazil's Closing Statement, paras. 2-4.
2 Brazil's Closing Statement, paras. 5-8.
3 Brazil's Closing Statement, paras. 15-16.
4 Brazil's Closing Statement, paras. 17-20.
5 Brazil's Closing Statement, paras. 21-22.
6 Brazil's Closing Statement, para. 24, quoting U.S. Oral Statement, heading III.A.1.
7 Brazil's Closing Statement, paras. 25-27, quoting Appellate Body Report, U.S. – FSC (21.5 II) ,
para. 83.

• Article 14(c) of the SCM Agreement sets forth only "guidelines" that the Appellate
Body, at the United States' urging, has concluded must not be followed rigidly, even
in countervailing measure disputes to which the provision expressly applies.8

 • By continuing to pay claims on certain ECGs outstanding on 1 July 2005, the United
States has failed to "withdraw the subsidy" , under the interpretation of that phrase
made by the Appellate Body.9

4. Brazil will not revisit these points, but w ill instead address a number of additional adverse
effects-related issues raised in the United States' Opening and Closing Statements. In this submission,
Brazil does not offer any additional comments on ECG-related issues raised in the United States'
Opening and Closing Statements.

2. L
OWER U.S. EXPORTS IN MY 2006 ARE DRIVEN BY LOWER WORLD DEMAND, NOT THE
ELIMINATION OF THE STEP 2 PROGRAM

5. The United States continues to argue that the elimination of the Step 2 program caused the
decrease in U.S. upland cotton exports in MY 2006. 10 As explained in Brazil's Closing Statement,
this is inaccurate.11

6. The United States has provided weekly February export data to show that the repeal of the
Step 2 program has resulted in a decline in exports. By comparing MY 2006 to MY 2005, the United
States claims that "U.S. exports are down 30 per cent".
12 However, the United States fails to mention
that exports surged prior to the repeal of the Step 2 program. Data shows that prior to the elimination
of Step 2 subsidies, sales were at their second highest level for the MY 2002-2007 period. 13
Considering the average of the two months prior to the repeal of Step 2 subsidies (June-July 2006)
and the two subsequent months (A ugust-September 2006), reveals that exports fell by 85 per cent. In
other words, they were 7 times less. 14 Brazil also notes that during the two months prior to the
elimination of Step 2 subsidies, U.S. exports we re close to double their av erage over the previous
five- marketing years (MY 2000-2004). 15 One consequence of these massive sales in MY 2005 is a
subsequent decline in exports in MY 2006. This is consistent with the attempt by rational exporters to
cash in the last available Step 2 payments.

7. During the first weeks of calendar year 2007, i.e., half-way through MY 2006, data on U.S.
exports continues to show lower sales. The United Stat es attributes this to the elimination of Step 2.
A close analysis of world trade however provides a different explanation. In fact, all major cotton
exporters, with the exception of India, ha ve seen their exports decline in MY 2006.
16 The primary
reason for this decline is weak international dema nd. As Brazil has repeatedly shown by providing
market reports, China, the biggest importer, is usi ng up "a large supply of cotton imported prior to the

8 Brazil's Closing Statement, paras. 28-29, citing Appellate Body Report, U.S. – Softwood Lumber IV ,
para. 92.
9 Brazil's Closing Statement, para. 30, citing Appellate Body Report, U.S. – FSC (21.5) ,
paras. 2, 223-231, and Appellate Body Report, Brazil – Aircraft (21.5), para. 45.
10 Brazil notes that the United States fails to provide the source for some of its data (See, e.g., U.S. Oral
Statement, para. 11) or does not provide the link to its data (See, e.g., U.S. Oral Statement, para. 10.).
13 Exhibit Bra-663 (U.S. Export Sales Data, accessed at www.fas.usda.gov/export-sales/h1404.htm).
14 Exhibit Bra-664 (Monthly Export Sales).
15 Exhibit Bra-664 (Monthly Export Sales).
16 Exhibit Bra-652 (International Cotton Advisory Committee Review, Volume 60, Number 3 January-
February 2007, accessed February 2007, p. 4).

expiration of the Step 2 program." 17 Increasing Indian exports have added to export declines in the
United States and other exporting countries. 18 These undisputed facts largely explain the decline in
the U.S. share of Chinese imports and in the U.S. share of world exports.19

8. Moreover, the reduction in U.S. exports must be viewed in perspective. Brazil notes that
USDA (and ICAC) currently project U.S. exports in MY 2006 to be the second highest in history and
comparable to MY 2004 levels.
20 In addition, projections for MY 2007 and 2008 show an expected
annual increase of almost 10 percent compared to MY 2006 and 2007, respectively.21

9. Thus, the present decline in U.S. share of exports is not
 a result of Step 2 elimination but a
result of overall declining world trade.

3. B RAZIL HAS NOT CHANGED ITS POSITION REGARDING THE CAUSE OF SIGNIFICANT
PRICE SUPPRESSION

10. The United States claims that Brazil has shifted position from asserting that exports cause
price suppression, to asserting that stocks and production cause price suppression. Moreover, the
United States asserts that it is "too late … to be a ltering fundamental factors" and that Brazil submits
"no evidence or argument to substantiate its new assertion."22 These U.S. claims are false.

11. Brazil has not changed its position. Productio n, stocks and exports are interlinked – all
constitute supply; any supply not consumed domestically must eventually be exported. 23 Indeed, this
is a question of basic economics. Whether U.S. supply – generated by U.S. subsidies – ends up
temporarily in a warehouse, or is exported immedi ately, this excess supply suppresses world market
prices. In his Oral Statement during the Pane l Meeting, Andrew Macdonald confirmed this
relationship.24

12. In its Oral Statement, the United States not ed that domestic U.S. mill use for MY 2006 is
decreasing.
25 This lack of domestic demand for U.S. supply also contributes to the accumulation of
stocks of subsidy-generated U.S. upland cotton that will eventually be exported. Again, whether U.S.
supply resulting from subsidized production is exported immediately, or ends up temporarily as stocks
and is exported later, it affects, and in fact suppresses, world market prices for upland cotton.

4. A N ANALYSIS OF UPLAND COTTON VARIABLE COSTS AND RETURNS SUPPORTS BRAZIL'S
SERIOUS PREJUDICE CLAIMS

13. Next, Brazil addresses U.S. arguments regardi ng the "expected" and "actual" total costs and
return charts presented in Brazil's Oral Statement. These charts visually illustrate two effects of
upland cotton marketing loan and counter-cyclical subsidies. 26 First, the charts show that marketing
loan and counter-cyclical subsidies are essential for upland cotton farmers to be able to cover their

17 Exhibit Bra-662 (Elton Robinson, "High certificated cotton stocks slow trade, weigh on prices,"
Delta Farm Press, 1 December 2006, accessed February 2007 at
http://deltafarmpress.com/mag/farming_high_certificated_cotton/).
18 Exhibit Bra-652 (International Cotton Advisory Committee Review, Volume 60, Number 3 January-
February 2007, accessed February 2007, p. 4).
19 U.S. Oral Statement, paras. 10-11.
20 Exhibit Bra-651 (Cotton and Wool Outlook, USDA, 12 February 2007, p. 4, accessed February 2007
at http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-02-12-2007.pdf).
21 Exhibit Bra-635 (2002-2007 USDA Agricultural Baseline Projections, p. 46).
23 Brazil's Closing Statement, paras. 9-14.
24 See Brazil's Oral Statement, paras. 147, 160-162.
26 Brazil's Oral Statement, paras. 63-78.

costs of production and stay in the business of growing upland cotton. Market revenue by itself is
almost never sufficient, nor is it e xpected to be sufficient, to cover total costs. Further, expected and
actual market revenue is below or just above average variable costs in a number of years, suggesting
that many upland cotton farmers would exit cott on faming without marketing loan and counter-
cyclical subsidies even in the short term. Si milar evidence on the gap between U.S. upland cotton
producers production costs and market returns has been presented in Brazil's First Written
Submission
27, Rebuttal Submission28 and Oral Statement.29

14. Second, the charts in Brazil's Oral Statement show that upland cotton farmers would exit
upland cotton production by switching to the production of alternative crops but for the effect of
marketing loan and counter-cyclical subsidies. Absent those subsidies, expected returns from
growing corn or soybeans in almost every year make it more attractive to grow one of these
alternative crops. This evidence re sponds to U.S. criticisms that Br ail has not properly examined the
relative attractiveness of competing crops at the time of planting.
30

15. In its Oral Statement, the United States asserte d that variable costs and market returns are the
determinative factors driving farmers' year-to-year planting decisions.31 Yet, during the second day of
the Panel Meeting and in its Closing Statement, th e United States admitted that certain fixed costs,
including those that are "cash costs," 32 are also pertinent to planting decisions. 33 Indeed, the second
U.S. chart in the "U.S. Exhibit of February, 28 2007," entitled "Costs of producing cotton," includes
variable and fixed costs that constitute cash costs. It excludes land, own-labour and capital recovery
costs. However, these non-cash costs
34 account for almost 30 percent of the total cost of producing
cotton.35

16. Brazil also notes that the first chart in the "U .S. Exhibit of February, 28 2007" is based on
actual costs and actual market returns as realized in marketi ng year 2005. Brazil is puzzled that the
United States presents a chart of actual returns minus cash costs, when , in the words of the United
States, a farmer "cannot rewind time and make di fferent production decisions based on how things
actually turn out."
36 In other words, it is costs and expected returns at the time of planting that provide
one useful means to assess the impact of marketing loan and counter-cyclical subsidies. This is the
approach that Brazil has followed in figures 1-4 of its Oral Statement,

17. In any event, farmers can only survive by seeking to maximize their market and subsidy
returns over total costs, including cash and imputed costs, when making planting decisions.
Nevertheless, comparing total costs, variable costs or even cash costs to expected market returns leads

27 Section 7.11 of Brazil's First Written Submission, paras. 156-164.
28 Section 2.3.6 of Brazil's Rebuttal Submission, paras. 245-289.
29 Section 2.4 of Brazil's Oral Statement, paras. 54-91.
30 See U.S. First Written Submission para. 255. See also U.S. Rebuttal Submission, paras. 269, 275,
300-301.
31 U.S. Oral Statement, paras. 12 and 73.
32 According to The Commodity Costs and Returns Estimation Handbook "cash costs are costs that
require a cash payment at the time the transaction occurs or during a specified reported period such as a week or
month." See Exhibit Bra-649 ("Conceptual I ssues in Cost and Return Estimates," Chapter 2 of Commodity
Costs and Returns Estimation Handbook, a report of the AAEA Task Force on Commodity Costs and Returns).
33 See U.S. Exhibit of February 28, 2007. In this exhibit, the United States compares cash costs and
actual market returns of growing upland cotton, corn and soybeans in MY 2005. According to the United
States, cash costs include operating costs, hired labour, taxes, insurance and general overhead. See also U.S.
Closing Statement, para. 17.
34 Brazil notes that land is only a non-cash cost to th e extent it is owned by the farm operator. Rented
land is a cash cost.
35 Exhibit Bra-648 (Actual Costs and Returns Analysis).
36 U.S. Oral Statement, paras. 4 and 65.

to the same basic conclusion: planting upland co tton without marketing loan and counter-cyclical
payments would be economically irrational.

18. This irrationality is seen even when examini ng "cash costs," as identified by the United States
in the U.S. Exhibit presented on 28 February 2007, compared to expected as well as actual revenue.
Based on the relevant USDA and FAPRI data found in the attached exhibits, Figures 7 through 12,
below, are based on cash costs, but conceptually mirror figures 1 through 6, respectively, of Brazil's
Oral Statement, which were based on total cost.

Figure 7 – Expected Returns
 in Excess of the Cash Costs of Growing Cotton,
Corn or Soybeans on a Base Acre of Cotton in MY 200537

Corn
Soybeans
Cotton
No Subsidies
ML
ML, Cotton CCP
ML, Cotton CCP & DP
-$50
$0
$50
$100
$150
$200
$250dollars per acre

19. Figure 7 demonstrates that in MY 2005 the average acre planted to upland cotton did not
expect to be able to cover its cash costs with market revenue. Producing corn and soybeans, on the
other hand, was expected to yield market returns well in excess of cash costs ( see first row in red).
However, when expected marketing loan subsidi es are factored into farmers' expectations, the
expected returns in excess of cash costs are nearly equalized for all three crops ( see second row in
yellow).

37 Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected Returns and Cash Costs).

Figure 8 – Expected Returns
 in Excess of the Cash Costs in MY 2005
with No Cotton Marketing Loan or CCP Subsidies38

Corn
Soybeans
Cotton
ML, Cotton DP
$0
$20
$40
$60
$80
$100
$120
$140
$160dollars per acre

20. As depicted in figure 8, if upland cotton mark eting loan and counter-cyclical subsidies did not
exist in MY 2005, expected returns in excess of cas h costs for soybeans and corn would have been
much higher than for upland cotton, suggesting th at many farmers would have switched to the
production of alternative crops.

38 Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected Returns and Cash Costs).

Figure 9- Expected Returns in Excess of the Cash Costs of Growing Cotton,
Corn or Soybeans on a Base Acre of Cotton in MY 200739

Corn
Soybeans
Cotton
No Subsidies
ML
ML, Cotton CCP
ML, Cotton CCP & DP
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450dollars per acre

21. The first row of figure 9 shows that market returns in excess of cash costs are expected in
February 2007 to be nearly five times higher for co rn than for cotton and nearly three times higher for
soybeans than for upland cotton in MY 2007. Considering only market returns, it would be very
surprising if upland cotto n acreage declined by only 14 percent in MY 2007, as predicted by the
National Cotton Council.
40 However, when marketing loan su bsidies are factored into farmers'
expectations, returns for upland cotton are expected to be almost as high as those for soybeans and
just 40 percent less than returns for corn.41 Viewed in this context, it makes sense that only 14 percent
of upland cotton acres switched to alternative crops.

39 Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected Returns and Cash Costs).
40 Exhibit Bra-646 (Planting Intentions Survey, National Cotton Council).
41 Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected Returns and Cash Costs).

Figure 10 – Expected Returns
 in Excess of the Cash Costs in MY 2007
with No Cotton Marketing Loan and CCP Subsidies42

Corn
Soybeans
Cotton
ML, Cotton DP
$0
$50
$100
$150
$200
$250
$300
$350
$400dollars per acre

22. Figure 10 summarizes the planting decision fo r an acre of upland cotton base in February
2007 in the absence of upland cotton marketing loan a nd counter-cyclical subsidies. It again suggests
that more than 14 percent of upland cotton acreage w ould switch to alternative crops in the absence of
these subsidies.

23. As were figures 5 and 6 in Brazil's Oral Statement, the following figures 11 and 12 are based
on actual market returns:

42 Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected Returns and Cash Costs).

Figure 11 – Average Actual Returns in Excess of the Average Cash Costs
Associated with Planting Cotton, Corn or Soybeans on an Cotton Base
Acre in MY 2002-200643

Corn
Soybeans
Cotton
No Subsidies
ML
ML, Cotton CCP
ML, Cotton CCP & DP
$0
$50
$100
$150
$200
$250
$300dollars per acre

24. Figure 11 illustrates what actually happened between MY 2002 and 2006. The chart shows
that actual market returns in ex cess of cash costs for upland cotton we re far less than those for corn
and soybeans. However, when upland cotton market ing loan subsidies are taken into account, returns
in excess of cash costs were higher for upland cotton than for soybeans, and only slightly lower than
for corn.

43 Exhibit Bra-666 (Actual Costs and Returns Analysis Based on Cash Costs).

Figure 12 – Average Actual Returns
 in Excess of the Average Cash Costs
with No Cotton Marketing Loan or CCP Subsidies in MY 2002-200644

Corn
Soybeans
Cotton
ML, Cotton DP
$0
$50
$100
$150
$200
$250dollars per acre

25. Figure 12 illustrates that absent upland cotton marketing loan and counter-cyclical payments,
growing corn or soybeans on an upland cotton base acre would have been more profitable. Similar to
Brazil's figure 6 presented as part of its Oral Statem ent, and based on total costs, these charts based in
cash costs continue to show that planting soyb eans and corn on upland cotton base acres would be
attractive without price-contingent upland cotton subsidies.

26. This evidence shows that the effect of mark eting loan and counter-cyclical subsidies is to
provide strong financial incentives to maintain upla nd cotton acreage – even in the unlikely event that
farmers only consider variable or cash costs when making planting decisions. But for the marketing
loan and counter-cyclical payments for upland co tton, it would be far more profitable for upland
cotton farmers, on average, to plant corn or soybeans. Thus, as Brazil indicated during the Panel
Meeting, the usefulness of the comparisons based on total costs presented in figures 1-6 as part of its
Oral Statement is not diminished by the use of cash costs in figures 7-12 above. Removing non-cash
costs45 changes the level of expected or actual market returns minus costs, but does not change the
relative attractiveness of producing corn or soybean s – as compared to upland cotton – on a base acre
of upland cotton.

44 Exhibit Bra-666 (Actual Costs and Returns Analysis Based on Cash Costs).
45 According to The Commodity Costs and Returns Estimation Handbook "noncash costs are those in
which the timing of the physical use of resources and the cash payments differs." See Exhibit Bra-649
("Conceptual Issues in Cost and Return Estimates," Chapter 2 of Commodity Costs and Returns Estimation
Handbook, a report of the AAEA Task Force on Commodity Costs and Returns).

27. Analyzing actual and expected returns in excess of variable (as opposed to only cash) costs46
yields a similar result. Removing fixed costs changes the level of returns minus costs, but not the
relative attractiveness of growing cotton, corn or soybeans on a base acre of upland cotton. Exhibit
Bra-667 provides a complete comparison of expected returns
 in excess of variable costs in
MY 2002-2007. Exhibit Bra-668 provides a comparison of actual returns in excess of variable
costs.47

28. The United States presented a number of other misleading arguments about U.S. upland
cotton costs and returns in its Op ening Statement. The United States argued that an examination of
costs and returns in MY 2003 demonstrates that 92 pe rcent of upland cotton farmers are able to cover
their variable and total costs of production.
48 As Brazil explained in its Opening Statement 49, Closing
Statement50 and in response to oral questions from the compliance Panel, this assertion is misleading,
and to some extent simply incorrect.

29. First, it is important to un derstand that the allegedly "new" cost information broken down by
costs groups
51 (i.e., low-, mid- and high-cost producers) is based on the same underlying survey data
presented in Brazil's First Written Submission and u sed by Brazil in subsequent submissions and
statements.52 It is not "new," but instead an elaboration of USDA data that Brazil has relied upon
throughout this proceeding. In fact, the "new" gr ouping of farms into those that are low-cost, mid-
cost and high-cost is somewhat arbitrary. Brazi l has long maintained that upland cotton producers'
costs are not uniform.53 It is entirely unremarkable that some farmers have a lower cost structure than
others.

30. However, the critical flaw in the United States reliance on the "new" cost information is that it
pertains to MY 2003, a year in which cotton prices we re the highest they have been in the past ten
years. Concluding that upland cotton farmers are ge nerally able to cover their costs with market
revenue based on market returns in MY 2003 is misl eading and incorrect. In the past eight years,
MY 2003 is the only year in which the average acre planted to upland cotton was able to cover its
total costs of production.

31. The United States also claims that a fundamental shift occurred in the production costs of
U.S. upland cotton farmers. One reason cited by the United States is the adoption of genetically
engineered ("GE") cotton seeds. However, an exam ination of the rate of adoption of GE varieties
shows that this argument, once again, is incorrect.

46 Variable costs include operating, land and labour costs. See, inter alia, Brazil's Rebuttal Submission,
Sections 2.3 and 6.2.
47 Brazil notes that the excel files in Exhibits Bra-634, 648, 665, 666, 667 and 668 easily permit an
alteration of the "cost" to which market and subsidy returns are compared. The cells in the row entitled "No
subsidies" in the first three worksheets can be changed to reflect different cost concepts. The charts in the later
worksheets of the excel file will automatically update to reflect the new cost concept.
48 U.S. Oral Statement, paras. 11 and 72.
50 Brazil's Closing Statement, paras. 15-16.
51 Exhibit U.S.-93 (WTO Confidential).
52 See Section 7.11 of Brazil's First Written Submission; Section 2.3.6 of Brazil's Rebuttal Submission;
and Section 2.4 of Brazil's Oral Statement.
53 See, e.g., Brazil's Rebuttal Submission, paras. 267-272; Brazil's Oral Statement, para. 85.

Figure 13 – U.S. Adoption of GE Cotton Varieties
54

0
10
20
30
40
50
60
70
80
90
2000 2001 2002 2003 2004 2005 2006
marketing year
Percentage

32. The chart based on USDA data shows that th e adoption of GE varieties increased from 71
percent in 2002 to 79 percent MY 2005, hardly a dramatic shift. Furthe r, while GE varieties
undoubtedly raise yields (and thus lower per-acre costs) , they also increase the cost of seed, as seen in
USDA's new cost survey of MY 2003. In any event, all of these developments are already reflected in
the USDA's costs and return data relied upon by Brazil and the United States.

33. Moreover, the United States implies that the average profit made by upland cotton farmers in
MY 2003 and the small loss in MY 2004 is the beginning of a dramatic new trend. It is not. High
prices in MY 2003 allowed upland cotton farmers to c over their total costs for the first time in six
years. Record high yields and a relatively high harv est price (despite lower prices in the subsequent
marketing year) enabled upland cotton farmers to al most cover their costs in MY 2004. Yet, in
MY 2005, despite another year of abnormally high yields, the average gap between total costs and
market returns widened to $80 per acre. With lower yields and stagnant prices in MY 2006, the gap is
expected to grow even wider. 55 Further, projections of future costs and market prices by USDA and
FAPRI suggest that the gap between total costs and returns will continue indefinitely.56

34. In sum, the upland cotton cost and return s analysis presented by Brazil demonstrates that
marketing loan and counter-cyclical subsidies have played a decisive role in U.S. upland cotton
producers' ability to grow upland cotton profitably.

54 Exhibit Bra-669 ("Adoption of Genetically Engi neered Crops in the U.S.: Cotton Varieties,"
Economic Research Service, U.S. Departme nt of Agriculture, accessed March 2007 at
http://www.ers.usda.gov/data/biotechcrops/ExtentofAdoptionTable2.htm).
55 Exhibit Bra-648 (Actual Costs and Returns Analysis).
56 See, e.g., Brazil's First Written Submission, Figure 28 at para. 292.

5. C OMMENTS BY DANIEL SUMNER

35. In this Section, Brazil presents the comments of Professor Sumner on the U.S. critique of his
analysis, presented by Dr. Glauber:

36. In several documents, including the statement of Dr. Glauber
57, the United States lists what it
identifies as "key problem with Brazil's new model. " This same list appears in the U.S. Rebuttal
Submission58 and in U.S. responses to ques tions of the compliance Panel. 59 I have dealt with each of
the issues listed by the United St ates in earlier documents. Some of the issues were discussed further
at the Panel Meeting. My comments below summ arize the main points with reference to floor
discussion at the Panel Meeting and to earlier documents.

37. I respond to the claims of the United States in the order in which they appear in the U.S.
Opening Statement.
60

5.1. U.S. criticism: "lacks cross-commodi ty impacts and cross-price elasticities,
potentially leading to biased price effects"61

38. The United States is simply wrong on this point. My model fully accounts for cross-
commodity feedbacks to the cotton supply function that are relevant to assessing the impact of the
removal of U.S. subsidy programs. It does so ba sed on the U.S. supply elasticity parameter that I
apply. Of course, my model does not explicitly address the effect of removing cotton subsidies on,
for example, corn or hay acreage, because reporting tho se effects is not relevant to this proceeding.
To include explicit cross-commodity impacts and cr oss-price elasticities in the model would only be
justified if one has a policy interest in these othe r commodities. Yet, the impact of removing cotton
subsidies on corn or hay acreage in the United States is not at issue before this compliance Panel.

39. The United States argues that leaving out these cross-commodity impacts and elasticities
could "potentially" lead to bias. However, the only way that leaving out these extraneous equations
could lead to "bias" with respect to the price effects for cotton is if the model used failed to
incorporate feedbacks from induced changes in other crop prices on upland cotton supply. However,
my model uses a supply elasticity that fully account s for the feedback effects. This point was
explicitly and clearly raised and discussed in my Annex I analysis.
62 I also discussed the issue more
fully and provided citations in my rebuttal comments.63 Finally, I reviewed these previous discussions
in my supplemental statement submitted as Exhibit Bra-659.

40. While it is easy to make models more complic ated, complications for their own sake are just a
sign of poor modeling and a lack of understanding of the reason that models are created in the first
place. The continued repetition of this claim by the United States, with no acknowledgment or
engagement on the issue should not mislead the comp liance Panel. The use of general equilibrium
supply elasticities, such as the one I apply to my model, is well-known and well-established among
modelers. There is no ambiguity on this point.

57 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
58 U.S. Rebuttal Submission, Annex I, para. 4.
59 U.S. Response to Questions of the Panel, Parts D-E, 27 February 2007, para. 35.
60 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
61 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
62 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Annex I, Brazil's First Written Submission, para. 17.
63 "Response to the Submission of the United States titled ‘Annex I: A Review of the Simulation
Analysis Presented by Dr. Sumner,'" Brazil's Rebuttal Submission, Annex I, paras. 14-17.

5.2. U.S. criticism: "is static with no ex plicit relationship for changes in cotton stock
levels and no stock's equations"
64

41. Once again, the United States asserts that the model should have been made more
complicated simply for the sake of complicati ons. The United States does not indicate why a
"dynamic" model with respect to cotton stocks would be useful in this case. Certainly there are cotton
stock fluctuations from month-to-month and year-t o-year, just as there are weather events and
consumer trends in textile demand. The existen ce of stock fluctuations does not imply that such
changes in stocks would be induced by the kind of policy changes under consideration here.

42. While, one could create a complicated model designed to account for these extraneous events
or trends, such a model would not improve our ability to understand the effect of U.S. cotton
subsidies. Indeed, introducing unnecessary complica tions serves only to make a model unwieldy and
is likely to introduce unknown biases because it becom es impossible to trace clearly the effects of
policy change.

43. In its reparameterization of my model, th e United States simply uses a very large price
elasticity of demand for cotton in the short run. This is a mistake. Stocks respond in the short run to
unanticipated, temporary fluctuations in price, as firms liquidate stocks when prices are high in order
to rebuild stocks when prices are low. Modeling endogenous stockholding may be valuable for some
applications, but not for modeling policy changes th at are fully anticipated and expected to be
permanent.

44. Furthermore, as I explain more fully in the supplemental statement submitted as
Exhibit Bra-659, the econometric exercise used to create the so-called stocks demand elasticity
referred to by the United States is based on data from small year-to-year fluctuations in cotton stocks
and cotton prices. The policy experiment we are cons idering here is far outside the range of the data
used to create the estimates used by the United States. More importantly, the policy experiment we
are considering here is conceptua lly different from the kinds of pri ce fluctuations used to generate
stock changes in the statistical exercise relied on by the United States.

5.3. U.S. criticism: "contains foreign supply elasticities that are different from
FAPRI that underestimate the response of foreign producers to changes in world
prices"
65

45. I have devoted many pages to explaining the reasons for the parameter choices that are most
appropriate for application in my model to estimate the effects of removing U.S. cotton subsidies on
cotton market prices and quantities. An initial discu ssion appeared in my original Annex I analysis 66
and I included more discussion in my supplemental statement in Exhibit Bra-659. FAPRI estimates
of this parameter tend to overestimate the degree of supply response to world market price changes
that would be generated by a reduction in or elimination of U.S. cotton subsidies.

46. Anticipated and permanent removal of U.S. cotton subsidies would cause a substantial initial
decline in U.S. cotton acreage and production. The reduced production and exports from the United
States would cause higher world market prices for cott on. Foreign producers would respond to that
higher world market price gradually and in a mute d fashion. There are several reasons for this
gradual and muted response: (i) the degree of pr ice increase would not be known with certainty;
(ii) the price received by many growers would fail to fully reflect the price change in the world
market; and (iii) many growers have a limited ability to expand cotton acreage in the short run.

64 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
65 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
66 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Annex I, Brazil's First Written Submission, paras. 20-24.

I explain these points more fully in my original Annex I analysis67 and in subsequent documentation.68
The United States may disagree but has provided no r easoning or evidence, other than the claim that
FAPRI uses a different parameter value. That does not constitute a "key problem" with my model.

5.4. U.S. criticism: "treats production flexibility payments and direct payments
differently even though they operate in the same way"69

47. This is a puzzling claim. Production flex ibility payments applied during the period MY 1996
to 2001, and were replaced by direct payments under the provisions of the FSRI Act of 2002. Both
payment programs enter the cotton supply function as a partially coupled source of revenue. The only
difference in the treatment of th e two programs is that I use a sm aller coupling factor for production
flexibility payments than I use for direct payments.

48. Throughout my analysis, going back to my an alysis presented to the original panel in 2003,
I explained carefully why direct payments provi de larger production incentives than did production
flexibility payments. I used a coupling factor of 0.15 for production flexibility payments and a
coupling factor of 0.25 for direct payments. The main reason for the higher coupling factor for direct
payments is that the FSRI Act of 2002 allowed pr oducers to update their payment base for direct
payments. This update of base acres has two effects. First, it tied the direct payments more closely to
the actual acreage used for cotton production. S econd, it enhanced growers' perceptions of the
likelihood of future base acre updates, which is a major contributor to the production incentives
inherent in so-called decoupled payments. I deal with this issue more fully in my 2003 article in the
Australian Journal of Agricultural and Resource Economics.
70

49. For the purposes of this proceeding, it is also worth reminding ourselves that production
flexibility payments were discontinued in 2001 and, therefore, play little, if any, role in the results of
my analysis that are relevant for the compliance Panel's assessment.

5.5. U.S. criticism: "incorporates step 2 payments directly into the producer retinal
function as fully coupled payment"
71

50. This is not a problem in my model and raisi ng this issue suggests that the United States fails
to understand some basic microeconomic principles.

51. As I explain in my Annex I analysis
72, basic microeconomic analysis confirms that taxes or
subsidies applied to buyers or sellers may be an alyzed as either consumer subsidies or producer
subsidies at the convenience of the modeler without a ffecting the results of the analysis. A vertical
shift down in the effective price paid by buyer s (as in the case of Step 2 subsidies) may be
equivalently modeled as a vertical increase of the same magnitude in the supply price received by
sellers. The impacts on prices and quantities are identical no matter which way the subsidy is

67 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Annex I, Brazil's First Written Submission, paras. 27-31.
68 "Response to the Submission of the United States titled ‘Annex I: A Review of the Simulation
Analysis Presented by Dr. Sumner,'" Brazil's Rebuttal Submission, Annex I, paras. 20-24.
69 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
70 Sumner, Daniel. "Implications of the US Farm Bill of 2002 for Agricultural Trade and Negotiations."
The Australian Journal of Agricultural and Resources Economics , Volume 47, Number 1, March 2003,
pp. 99-122.
71 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
72 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Annex I, Brazil's First Written Submission, paras. 54-56.

incorporated in the analysis. This is a standa rd exercise on the incidence of taxation (negative
subsidy) for undergraduate students in microeconomics.
73

Figure 14 – Simple Graphical Demonstration of the Equivalence
of a Production or Demand Subsidy

52. In Figure 14, a demand subsidy is shown as a lower effective price paid by buyers in the
amount of P 0 – P1d. This lower effective price (which incl udes the subsidy) elicits a higher quantity
demanded Q1. In order to encourage that amount of add itional production, the market price must rise
to P 1s (the new price received by producers). Th us, the demand subsidy causes the market price
received by producers to rise to P 1s, while the price paid by buyers falls to P 1d. The amount of the
subsidy is P 1s – P 1d. Alternatively, if a subsidy of this amount is paid to producers, the quantity
supplied would rise to Q 1, the net price received by producers (inclusive of the subsidy) would be P 1s
and the price paid by buyers would be P1d. The equilibrium results are identical to those that would be
obtained if the subsidy were initially provided to bu yers. The net result in terms of price and quantity
effects of the subsidy depends on the magnitude of the per-unit subsidy and the supply and demand
slopes, or elasticities.

53. This conceptual framework is directly applied to my modeling of the Step 2 program. The
results of my analysis would be identical whether th e subsidy enters the model on the demand side or
the supply side. Thus, the United States has not identified a "key problem." Rather, it has identified a
natural modeling approach that I used to make the analysis transparent and straightforward.

54. Finally, I note that the United States' argumen ts do not affect my results from removing
marketing loan and counter-cyclical subsidies only, which are the most relevant simulation results for
the compliance Panel's assessment.

73 See Robert S. Pindyck. and Daniel L. Rubinfeld, Microeconomics, fifth edition Prentice Hall, 2001,
pages 313-320. See also exercise 13, page 323.
P
Q
S
P1s
P0
P1d
Q0 Q1
D

5.6. U.S. criticism: "appears to ignore statutory parameters, for example by
including countercyclical payment rates in each of the various price expectations
that sometimes exceed statutory maximum. The maximum countercyclical
payment paid on 85 percent of pace and program yields cannot exceed
13.7 three cents. Yet Dr. Sumner incorporates a value as high as 19.10 cents,
which is 39 percent greater than the maximum allowed rate"
74

55. The United States is also in error on this point . As I explained briefly in my oral remarks 75,
the United States failed to read with care the s econd Appendix of my Annex I analysis, where my
approach to modeling counter-cyclical payments is di scussed in detail. In particular, Table A.4, on
page 45 of my Annex I analysis, explicitly and cl early shows the projected counter-cyclical payment
rate per unit of output.76 The statutory maximum applies to counter-cyclical program payments per
unit of program base. Hence, there is no conflict. My pr ojected counter-cyclical payment rate per
unit of output is independent from the statutory limit placed on the counter-cyclical payment rate per
unit of program base. In particular, because counter-cyclical payment base exceeds production, we
expect the counter-cyclical payment rate per unit of output to be larger than the counter-cyclical
payment rate per unit of base.

 5.7. Conclusion

56. In sum, during the Panel Meeting, the United States has again criticized my model, but not
identified any real problems. Its repeated criticism result from a number of obvious U.S. errors that I
addressed above. In some cases, the United Stat es also simply repeats criticisms with no
acknowledgment of my earlier responses thereto.

6. C
ONCLUSION

57. Brazil looks forward to answering the fo rthcoming questions posed by the Panel.

74 U.S. Oral Statement, Statement of Dr. Glauber, para. 3.
76 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by
Daniel A. Sumner," Annex I, Brazil's First Written Submission.

2. The Cost of Production Analysis Submitted By Brazil Is
Fundamentally Flawed and the Pr oper Assessment of the Data
Supports the U.S. Argument That Marketing Loan and Counter-
Cyclical Payments Are Not H aving Any Significant Price
Suppressive Effects
 66
a. Variable costs – not total costs – are the relevant measure
in assessing year-to-year planting decisions 67
b. U.S. farmers expected to m eet and exceed variable costs in
each year, and in most yea rs upland cotton was the most
attractive option 68
c. U.S. farmers actually met and exceeded variable costs and
even total cash costs in most years under the FSRI Act
of 2002
 71
d. Conclusion 72
3. The Sumner II Model Is Oversimplified and Relies on Arbitrary
Parameters and Assumptions That Have No Basis in the
Economic Literature 72
IV. C ONCLUSION 75
ANNEX 77

Table of Exhibits

Exhibit US-

Title

131

Export Finance and Insurance Corporation (Australia) - Mission and
Objectives; http://www.efic.gov.au/static/efi/corporateinfo/mission.htm
Overview of EFIC's role;
http://www.efic.gov.au/static/efi/corporateinfo/governance.htm

132

AuslandsGeschaftsAbsicherung der Budesrepublik Deutschland, Federal
Export Credit Guarantees, Basics: Main Features of Export Credit Cover;
http://www.agaportal.de/en/aga/grundzuege/grundzuege_exportkredit.html

133

Korea Export Insurance Corporation , preface (emphasis added);
http://www.keic.or.kr/homepage2/english/main.html.;
 East-West Debt: "about the Korea Export Insurance Corporation";
http://www.eastwest.be/east_west/keic.htm

134

Bancomext 2005 Annual Report, pp. 2, 26;
http://www.bancomext.com/Bancomext/publicasecciones/secciones/7304/A
nnualReportBancomext2005.pdf

135

Daily A-Index and NY Futures Price Data

136

ICAC Cotton This Month (March 1, 2007) (Exhibit US -137).

137

Cecil Davison and Brad Crowder, "Northeast Soybean Acreage Response
Using Expected Net Returns" Northeastern Journal of Agriculture and
Resource Economics, April 1991

138

Duncan M. Chembezi and Abner W. Womack, "Regional Acreage Response
for U.S. Corn and Wheat: The Effects of Government Programs", Southern
Journal of Agricultural Economics, July 1992

139

Data Supporting Expected Market Returns Above Variable Costs Chart

Table of Reports

Short Form

Full Citation

Brazil – Aircraft (Article 21.5 II)

Panel Report, Brazil – Export Financing Program for Aircraft –
Second Recourse by Canada to Article 21.5 of the DSU ,
WT/DS46/RW/2, adopted August 23, 2001

Canada – Aircraft (AB)

Appellate Body Report, Canada – Measures Affecting the Export
of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999

Canada – Aircraft II

Panel Report, Canada – Export Credits and Loan Guarantees for
Regional Aircraft, WT/DS222/R, adopted 19 February 2002

EC – DRAMs

Panel Report, European Communities – Countervailing Measures
on Dynamic Random Access Memory Chips from Korea ,
WT/DS299/R, adopted 3 August 2005

Korea – Commercial Vessels

Panel Report, Korea – Measures Affecting Trade in Commercial
Vessels, WT/DS273/R, adopted 11 April 2005

US – Upland Cotton (AB)

Appellate Body Report, United States – Subsidies on Upland
Cotton, WT/DS267/AB/R, adopted 21 March 2005

I. I
NTRODUCTION

1. The United States appreciates the opportunity provided by the Panel to comment on Brazil's
"oral" presentation at the meeting with the Panel. In that meeting, Brazil not only presented 77 pages
of arguments and evidence orally over the course of approximately four and a half hours – unilaterally
consuming almost the entire first day of the mee ting with the Panel – but it also submitted 42 new
"exhibits" (and 9 resubmitte d exhibits) containing information that Brazil did not present orally but
simply attached to its oral statement.

2. The "exhibits" included with Brazil's oral statement include a third written submission
produced by Brazil allegedly to address issues "which there was not time to discuss in [Brazil's
economists'] brief statement before the Panel."
1 Leaving aside the irony of describing a four and a
half hour oral presentation – of which a substantia l portion was taken up by Brazil's economist – as
"brief," Brazil's written submission was made in breach of the Panel's working procedures. The
working procedures provide for two written submis sions, a first written submission and a rebuttal
submission, both of which are to be submitted "[b]ef ore the substantive meeting of the Panel with the
parties to the dispute." 2 The working procedures do not contemplate any third written submission
either in or after the meeting of the Panel with the parties. While the Panel's working procedures do
contemplate – indeed, require – that the parties submit a written product either at or shortly after the
meeting with the Panel, the procedures are very clear as to what that written product must be.
Specifically, parties must submit "a written version of their oral statement" presented to the Panel and
the other parties during the meeting.
3 The Panel's working procedures neither contemplate nor permit
the submission of arguments and evidence which were not part of any oral statement ("which there
was [allegedly] not time to discuss in" an oral pr esentation that otherwise spanned almost an entire
day).4 Given that the third written submission in BRA-659 is not permitted under the Panel's working
procedures, the United States respectfully requests that the Panel reject that submission.

3. The United States also notes that much of the new evidence and arguments presented by
Brazil in its oral statement was known and availabl e to Brazil well before the date of the Panel
meeting. Yet Brazil appears to have chosen to w ithhold it until the meeting with the Panel when little
time remained to subject it to scrutiny. Upon review of this new evidence and argument, it is apparent
why Brazil would be anxious to avoi d any meaningful assessment thereof.
5 Although voluminous,
this evidence and argument offer little support for Brazi l's claims. In fact, much of the data newly
submitted by Brazil confirms the U.S. arguments that the United States has complied with its
obligations to implement the DSB's recommendations and rulings.

II. T
HE EXPORT CREDIT GUARANTEE PROGRAMS MEET THE TESTS IN THE
SCM AGREEMENT FOR NOT BEING EXPORT SUBSIDIES

4. In the case of the export credit guarantees, the fact remains that:

• the United States has provided no GSM 103 guarantees since 1 July 2005;

1 See Supplementary Statement of Daniel Sumner, para. 1 (Exhibit BRA-659).
2 See United States – Subsidies on Upland Cotton (DS267), Working Procedures for the Panel, para. 4
(8 November 2006).
3 See United States – Subsidies on Upland Cotton (DS267), Working Procedures for the Panel, para. 4
(8 November 2006).
4 See Supplementary Statement of Daniel Sumner, para. 1 (Exhibit BRA-659).
5 In this regard, the United States recalls Brazil's ef forts at the Panel meeting and thereafter to preclude
or limit any opportunity for the United States to respond in writing to Brazil's "oral" presentation.

• the United States has provided no Supplier Credit Guarantee Program (or "SCGP")
guarantees since 1 October 2005 and there are, presently, no longer any guarantees
even "outstanding" under that program;

• following carefully the guidance provided by the original panel, the United States
imposed a new fee schedule with respec t to GSM-102 guarantees under which higher
fees are assessed for obligations in higher-risk countries;

• the United States reclassified into an ineligible risk category twenty-two countries
posing a higher risk of default that had been eligible for GSM-102 guarantees before
1 July 2005;

• as a result of the changes in the fee sche dule, fees have increased 46 percent on
average over fiscal year 2004, the last year in which the old fee schedule applied;

• all of the U.S. changes, together, increased the premiums and decreased the likelihood
of incurring substantial operating costs a nd losses over the long-term of the portfolio
of programs examined by the original panel; and

• according to the U.S. budget data, premiums under the three U.S. export credit
guarantee programs were more than adequate to cover their long-term operating costs
and losses even before the United States took steps to implement the DSB's
recommendations and rulings and are even mo re assured of doing so in the future
given all of the changes made by the United States.

5. The substantial evidence before the Panel thus shows that the United States is not providing
any export subsidies within the mean ing of item (j) in Annex I of the Agreement on Subsidies and
Countervailing Measures ("SCM Agreement"). Under the proper interpretation of the
SCM Agreement, the assessment of whether or not expor t credit guarantees constitute prohibited
export subsidies can – indeed should – begin and end with that assessment under item (j).

6. Nothing in Brazil's oral presentation – nor in any of its submissions prior to that – undermine
the evidence of profitability before the Panel or the fact that the U.S. export credit guarantee programs
are entirely consistent with item (j) of the Illustrative List.
6 Rather, Brazil seeks to invent new
obligations not provided for in the SCM Agreement, in particular, by asserting a separate standard for
"export subsidy" under the general de finitional elements of Articles 1.1 and 3.1(a). Even leaving
aside that Brazil's approach is unsupported by the text, that approach fails even on its own terms.

A. There Is No Difference Between the Amount Paid On Loans Subject to a
GSM-102 Guarantee and Other Comparable Commercial Loans

7. The substantial evidence before the Panel, t hus, shows that the United States is not providing
any export subsidies within the meaning of item (j). In the view of the United States, under a proper

6 The United States does not address here Brazil's arguments attempting to undermine the substantial
evidence showing that the U.S. export credit guarantee programs have historically been profitable even without
the recent changes made to implement the recommendations and rulings of the DSB. Nor does the United States
address Brazil's arguments about export credit guarantees issued prior to 1 July 2005 and rescheduled debt.
Brazil's oral presentation contain nothing new in respect of those arguments and the United States has them in
its submissions already before the Panel. The U.S. ar guments can be found in the U.S. first written submission
at paragraphs 71-104, the U.S. Rebuttal Submission at paragraphs 84-133, and the U.S. oral statement at
paragraphs 16-49.

interpretation of SCM Agreement, the assessment of whether or not export credit guarantees constitute
prohibited export subsidies begins and ends with that assessment under item (j).

8. Nothing in Brazil's oral presentation – nor in any of its prior submissions – undermine the
evidence of profitability before the Panel or the fact that the United States export credit guarantee
programs are entirely consistent with item (j) of the Illustrative List. Rather, Brazil seeks to invent
new obligations not provided for in the SCM Agreement, in particular, by asserting a separate standard
for "export subsidy" under the genera l definitional elements of Articles 1.1 and 3.1(a). Even leaving
aside that Brazil's approach is unsupported by the text, that approach fails even on its own terms.

B. Brazil Fails to Show That There Is a Difference Between the Amount Paid on
Loans Subject to a GSM-102 Guarantee and Other Comparable Commercial
Loans, and Fails to Rebut the U.S. Evidence in this Regard

9. Article 14 of the SCM Agreement sets out the conditions under which a "benefit" may be
considered to be "conferred" for countervailing duty purposes and defines how to measure "benefit" in
such a case. While Article 14 does not apply dir ectly in the case of actions under Part II of the
SCM Agreement, it interprets and applies the definition of "b enefit" set out in Article 1.1. Thus, the
Appellate Body has relied upon Article 14 as important contextual guidance in interpreting "benefit."7
Indeed, its was Brazil that originally invoked Ar ticle 14 to justify its prohibited export subsidy
arguments against the export credit guarantees in the present proceeding.8

10. Paragraph (c) of Article 14 provides that a government-provided loan guarantee confers a
benefit for countervailing duty purposes only where there is "a difference between the amount that the
firm receiving the guarantee pays on a loan guarant eed by the government and the amount that the
firm would pay on a comparable commercial loan absent the government guarantee." The "benefit" is
measured as "the difference between these two amounts adjusted for any differences in fees."

11. Even by this standard, however, Brazil fails to show that the U.S. GSM-102 guarantees
constitute prohibited export subsidies. In fact, Brazil does not submit a single piece of evidence to
show – with respect to any loans subject to a GSM-102 guarantee – that there is "a difference between
the amount that the firm receiving the guarantee pays on a loan guaranteed by the government and the
amount that the firm would pay on a comparable commercial loan absent the government guarantee."

12. Moreover, Brazil has failed to rebut the U. S. evidence showing that commercial lenders
regularly involved in both the GSM-102 program and other lending in the foreign agricultural sector,
in fact, do provide – and have provided – uns ecured financing to foreign banks that are
CCC-approved obligors on terms the annualized cost of which was less than that available under the
GSM-102 program.
9 In fact, Mr. Sundaram, the consultant retained by Brazil for purposes of this
proceeding, acknowledged that the examples the United States provided, as supplied by [[ ]], show
"lower annualized costs than under GSM-102."10
13. While Mr. Sundaram went on to criticize the U.S. examples, his criticism is without basis.
According to Mr. Sundaram, the "average life" is allegedly insufficient to capture some hypothesized
riskiness that is greater in a three-year term GSM transaction than in a two year bullet payment. 11
However, in each of the examples provided by the Un ited States, the short-term and long-term ratings

7 Canada – Aircraft (AB), para. 155.
8 Brazil First Written Submission, paras. 371-375
9 U.S. First Written Submission, paras. 119-130 and Exhibit US-22; U.S. Rebuttal Submission,
paras. 145-170.
10 Brazil Oral Statement, para. 214
11 Brazil Oral Statement, para. 219

for each of the banks are comparable. 12 Indeed, Mr. Sundaram acknowledged that the Panamanian
and Mexican banks are both "investment grade." 13 Thus, the theoretical difficulty that Brazil tries to
create is inapplicable to those comparisons as a matt er of fact. Despite Brazil's allegations to the
contrary14, the comparisons offered by the United States are fully "apples-to-apples" comparisons.

14. Moreover, Brazil appears to ignore the pricing of risk inherent in the transactions. While it
emphasizes that "fully one-third of the pr incipal remains at risk after two years" 15 in a GSM-
guaranteed transaction, Brazil fails to acknowledge that fully one-third of the principal has been paid
after one year in the same transaction. In contrast, the entire bullet payment remains outstanding for
the first two years. As a matter of commercial logic, the risk inherent in an obligor's capacity to
service debt increases with the amount of debt outstanding. The repayment term of the GSM
transaction compels an early payment of principal reducing the outstanding debt.16

15. Finally, the United States notes Brazil's assertion that "the examples provided by the United
States do not appear to prove anything about the ability of GSM-102's target foreign obligors
[allegedly non-investment grade] to secure foreign credit."
17 However, this assertion serves to
undermine what has been Brazil's own – entirely unfounded – argument in this proceeding; namely,
that the United States allegedly "targets" and services only non-investment grade foreign obligors.
The United States welcomes Brazil's acknowledgment that GSM credit guarantees are offered in
many markets where other financing is readily obtained, including in Mexico and Panama – two of the
countries involved in the examples provided by the United States. And the U.S. examples are not the
only ones involving investment grade participan ts in the GSM program; scores of CCC-approved
foreign bank obligors enjoy an investment grade rating.
18 Brazil's sweeping assertions that GSM-102
guarantees are provided only where there is no financ ing available to foreig n obligors is undermined
not only by the particular examples provided by the United States, but also by this evidence of the
large number of investment-grade participants.

C. There is No Basis to Ignore All of Textual Provisions Dealing With Export
Credit Guarantees and Loan Guarantees and to Use Instead a "Severable
Benefit" Approach Specifically Precluded Under the SCM Agreement With
Respect to Such Measures

16. Unable to make its case under any provision of the SCM Agreement dealing either with export
credit guarantees or loan guarantees, Brazil essentially asks the Panel to ignore the SCM Agreement
altogether and to create and impose obligations not found anywhere in the text. Towards this end,
Brazil argues that other panels have disregarded th e text as well. Brazil's arguments are simply not
tenable.
17. Brazil asserts, for example, that the panel in EC-DRAMs "agreed that a government guarantee
confers a 'benefit' per se if without the guarantee, commercial lending would not have been available.
Where commercial lending would not have been available without the government guarantee, the
panel in EC-DRAMs did not require the type of quantitativ e assessment on which the United States
here insists."
19 As a threshold matter, however, that panel did not – indeed, could not – "undo" the
disciplines agreed upon in Article 14(c) of the SCM Agreement. To the contrary, the EC-DRAMs

13 Brazil Oral Statement, para. 223.
14 Brazil Oral Statement, para. 222.
15 Brazil Oral Statement, para. 221.
16 In fact, GSM-102 guarantees often require semi-annual payments of principal.
17 Brazil Oral Statement, para. 223. Brazil appears to make the same incorrect and irrelevant point in
paragraph 177 of its oral statement.
18 U.S. First Written Submission, para. 110.
19 Brazil Oral Statement, para. 194.

panel expressly acknowledged the proper approach for the determination of "benefit" in the context of
a government guaranteed loan in Article 14(c) of the SCM Agreement: "[I]t appears that the
examination is to focus on the difference between the amount paid on a loan guaranteed by the
government, compared to the amount that would have to be paid on a comparable commercial loan,
absent the government guarantee."
20 The panel's ultimate finding – that the EC could properly find a
"benefit" where there was no "evidence on the record . . . to contradict the EC's conclusion that,
absent the government guarantee, the banks would not ha ve been willing to agree to the [financing] at
all"21 – is entirely consistent with the standard in Article 14(c) of the SCM Agreement. But the facts
of that dispute are not the same as the facts before this Panel. As the United States has shown, this is
not a situation where "absent the government guarant ee" banks "would not have been willing to agree
to . . . [financing] at all."

18. Brazil also cites the panel report in Canada-Aircraft II for the proposition that "even in
assessing 'benefit' under Article 14(c), the legal sta ndard boiled down to an assessment whether fees
for the government guarantee were consis tent with fees for commercial guarantees."
22 There, too,
however, the panel expressly acknowledged that the a ppropriate standard was set out in Article 14(c)
of the SCM Agreement. The panel found that under the circumstances of that dispute, it was "safe to
assume" that it the fees charged for the loan gu arantee were not "market based," the test in
Article 14(c) would be met. Moreover, even while it asserted that it was "safe" to make such an
assumption, the panel actually required Brazil, as the complaining party, to provide "arguments or
information regarding what the [airline] might have had to pay on a comparable commercial loan
absent the IQ loan guarantee."23 The panel noted that:

Brazil has made no arguments to the effect that 'there is a difference between the
amount that the [Mesa Air Group] pays on a loan guaranteed by [IQ] and the amount
that the [Mesa Air Group] would pay on a comparable commercial loan absent the
[IQ] guarantee', adjusted for any differen ce in fees. In particular, although Brazil
does not deny that loan guarantees are av ailable on a commercial basis, Brazil has
failed to adduce any arguments or inform ation regarding what Mesa Air Group might
have had to pay on a comparable commercial loan absent the IQ loan guarantee.
24
19. On the basis of that failure on the part of Brazil – as well as Brazil's failure to "make any
other argument to the effect that IQ's fee for its loan guarantee to Mesa Air Group is not market
based" – the panel "reject[ed] Brazil's claim that the IQ loan guarantee to Mesa Air Group confers a
'benefit.'"25

20. Brazil has, thus, failed to provide any basis for the panel to disregard all of the textual
provisions relating to export credit guarantees and loan guarantees and to use, instead, its "severable
benefit" approach. As the United States explained in the meeting with the Panel, Brazil's approach
fundamentally undermines the drafters' acknowle dgment, expressed in Article 14(c), that the
provision of a loan guarantee is fundamentally different from the provision of other government
services. While a comparison of fees for a government service against the fees charged in the market
for a comparable service is the proper approach in the case of other government services – as provided
in Article 14(d) – Article 14(c) specifically precludes such an approach for loan guarantees. Instead,
it recognizes that a loan guarantee is made for the sole purpose of supporting a loan transaction ; the
guarantee becomes an integral part of that transac tion and has no value beyond it. An assessment of
the total costs of the transaction is necessary to asse ss whether a "benefit" is actually conferred by the

20 EC-DRAMs, para. 7.190.
21 EC-DRAMs, para. 7.190.
23 Canada-Aircraft II, para. 7.399 (emphasis added).
24 Canada-Aircraft II, para. 7.399.
25 Canada-Aircraft II, para. 7.399.

guarantee. A simple comparison of the fee charged for the issuance of one loan guarantee to the fee
charged for another may provide an incomplete and distorted picture in this regard.

D. Brazil's Argument That GSM-102 Guar antees Necessarily Provide a Benefit
Because They Constitute a "Unique Financial Instrument" Is Legally and
Factually Unfounded

21. In its oral presentation, Brazil once again asser ts that the GSM-102 export credit guarantee is
"a unique financial instrument without any parallel at market." 26 In Brazil's view, "that is the
beginning and end of the analysis" and demonstr ates that the GSM-102 program confers benefits
per se.27 Brazil has not shown any textual basis for this kind of per se test.

22. Indeed, the United States wonders if Brazil has thought through fully the consequences of its
argument. If the SCM Agreement were found to actually contain the standard advocated by Brazil,
one would have expected Brazil – Aircraft (Article 21.5 II) to have been decide d differently. There,
Canada challenged certain "PROEX" interest rate equalization paymen ts made "in support of export
credits extended to the purchaser, and not to the producer, of Brazilian regional aircraft."
28 The panel
noted that, in those circumstances, Canada could make a prima facie showing of "benefit" if it
established that "PROEX III payments allow the purchasers of a product to obtain export credits on
terms more favourable than those available to them in the market, this will, at a minimum, represent a
prima facie case that the payments confer a bene fit on the producers of that product as well, as it
lowers the cost of the product to their purchasers a nd thus makes their product more attractive relative
to competing products." 29 The panel did not consider whether PROEX payments were a "unique
financial instrument." Brazil did not argue there, as it has attempted to do here, that "the beginning
and end of the analysis" was the question of whet her PROEX III payments were "a unique financial
instrument without any parallel at market." 30 Indeed, that question could presumably have been
answered fairly easily, because un like PROEX, commercial actors are not in the business of making
payments for nothing.

23. In any event, the United States has provide d examples of other in ternational financial
institutions – such as such as the European Bank for Reconstruction and Development ("EBRD"), the
International Finance Corporation ("IFC"), and th e Inter-American Development Bank ("IDB") – that
provide similar guarantees to the GSM-102. While Brazil attempts to di smiss these examples by
arguing that these entities cannot, by definition, pr ovide commercial products, Brazil's argument is
without merit.
31 As the principal basis for this argument, Brazil continues to fo cus on the ability of
such entities to "borrow from government treasuries," asserting that "as a result, public entities tend to
enjoy a lower cost of funds than their market-based counterparts."32 Brazil further suggests that these
entities cannot provide commercial products because they "enjoy a guarantee flowing from the full
faith and credit of governments."33

24. However, Brazil has not show n that the entities identified by the United States rely on such
borrowing for their operations or that they enjoy such guarantees from governments. The IFC, for
example, receives no sovereign guarantee.
34 Furthermore, the IFC indicates that "the major source of
IFC's borrowings is the international capital mark ets. Under the Articles of Agreement, the

28 Brazil – Aircraft (Article 21.5 II), para. 5.28, n. 42.
29 Brazil – Aircraft (Article 21.5 II), para. 5.28, n. 42.
31 Brazil Oral Statement, para. 187.
32 Brazil Oral Statement, para. 188.
33 Brazil Oral Statement, para. 188.

Corporation may borrow in the public markets of a member country only with approvals from that
member and also the member in whose currency is denominated."
35 Further, "market borrowings are
generally swapped into floating-rate obligations denominated in US dollars."36 EBRD issues medium
and long-term debt obligations on the market.37

25. Moreover, the ability of an entity to borro w from a government does not necessarily preclude
an entity from providing products on commercial terms. 38 For example, the panel recognized in
Korea – Commercial Vessels that:

The fact that KEXIM may receive subsidized government funding does not mean that
it will inevitably provide subsidized financi ng to its customers. It is possible that
KEXIM might charge market rates and increase its profit margin instead."39
26. Brazil also asserts that a former U.S. official – specifically, a former Secretary of the U.S.
Treasury – has recognized that international fina ncial institutions cannot offer commercial products.40
However, Brazil's own exhibit shows that the statement referenced by Brazil did not relate to any of
the international financial instituti ons noted above, but, rather, to st ate-owned or controlled "market
window" institutions of individual OECD members th at restrict financing to national exporters.
International financial institutions such as IFC, ID B, and EBRD are fundamentally different entities.
They do not operate at the behest of any single go vernment. Indeed, Brazil itself has noted that the
IDB is owned by 47 member countries 41; EBRD by 60 governments 42; and IFC by 178 member
countries.43 Rather, they operate commercially without benefitting any particular government or
citizen constituency. Brazil has provided no le gitimate basis for asserting that such financial
institutions can never provide commercial products.

27. In short, Brazil fails to show either that its "unique financial instrument" test is required under
the SCM Agreement or that the measures it challenges are in fact "unique financial instruments."

E. Brazil's Argument Would Effectively Re nder Most, If Not Al l, Export Credit
Guarantees Prohibited Export Subsidies

28. Brazil's ultimate argument appears to be that export credit guarantees are prohibited export
subsidies unless there is a purely private bank (like a Citibank, for example) already providing the
same export credit guarantees and, even in that case, the guarantees are prohibited subsidies unless the
fees charged by the private bank for the export credit guarantees are lower than the fees charged by
the government entity. These assertions are without basis in the SCM Agreement and, given the
nature of the market for export credit guarantees, would effectively render all export credit guarantees
provided by any Member anywhere in the world to be prohibited subsidies.

35 Exhibit US-79, p. 13.
36 Exhibit US-79, p. 13.
37 Exhibit US-77, p.10.
39 Korea – Commercial Vessels, para. 7.84.
40 Brazil Oral Statement, para. 186 and Exhibit Bra-654.
43 Rebuttal Submission of Brazil, para. 440. Brazil also criticizes the United States for finding
"significance in that fact that public entities like the EBRD, IDB and IFC are 'profitable'."Brazil Oral Statement,
para. 189. The United States, however, was merely responding to the significance that Brazil had ascribed to its
assertion that such institutions are incapable of provid ing commercial products because they are "not a private
sector actor motivated by profit." Rebuttal Submission of Brazil, para. 441.

29. As Brazil is well aware, export credit guar antees and other similar loan guarantees are now
and have always been instruments provided predomin antly – if not exclusively – by governments and
international financial institutions, as opposed to pu rely private banking institutions. It is hardly
surprising then that Members would have agreed to a standard for "prohibited export subsidy" in
item (j) that imposes disciplines based on the net costs of a program. 44 Nor is it surprising that, in the
context of countervailing duty investigations, Members would have agreed to a standard that looks to
the effect of a guarantee on the underlying loan. Brazil's efforts to have the Panel ignore the text itself
– what Members actually agreed to given the particul ar nature of the measure and the market – and to
impose instead a fee-based comparison to some theoretical purely private bank is untenable.

30. This would effectively render most if not all export credit guarantees to be prohibited export
subsidies, in contravention of the express intent of the drafters in item (j) and Article 14(c) of the
SCM Agreement. Furthermore, Brazil's approach is contradicted by Article 10.2 of the Agreement on
Agriculture. If the test for being a prohibited export s ubsidy were as simple as Brazil claims, then
there would have been no need for the negotiators of the WTO agreements to have specifically called
for the development of international disciplines on export credit guarantees. Indeed, by calling for the
development of additional disciplines on e xport credit guarantees, Article 10.2 of the Agreement on
Agriculture supports the fact that at present the analysis can – indeed should – begin and end with the
disciplines currently in item (j).

31. The ramifications of such an impermissible interpretation are significant. The compliance
panel will recall India provides similar services th rough the Export Credit Guarantee Corporation of
India, Ltd. Further examples include the following:

• The Export Finance and Insurance Corpora tion of Australia, which offers export
credit insurance (also subject to item(j)) "when the private market lacks capacity or
willingness, filling the market gap." 45 EFIC operates "primarily in that part of the
market that is not served by the private market."46

• Euler Hermes, the provider of export cred it guarantees for the Federal Republic of
Germany, provides such products "to support German enterprises to open difficult
markets."47

• The Korea Export Insurance Corporation – an official export credit agency of Korea –
provides "agro-fishery" export insurance th at "compensates the losses arising from
export transactions and overseas investments that cannot be handled by the general
insurance systems."48

44 The United States notes in this regard that in the Illustrative List to the Tokyo Round Subsidies
Code, item (j) provided that premium rates could not be "manifestly inadequate operating costs and losses of the
programs." (Emphasis added). In the Uruguay Round, the negotiators deleted the word "manifestly" from
item (j). It is difficult to accept that the negotiators w ould have gone to the trouble of modifying the standard in
item (j) if, as argued by Brazil, that standard could readily be ignored in favour of a different standard.
45 Export Finance and Insurance Corporation (Australia) - Mission and Objectives;
http://www.efic.gov.au/static/efi/corporateinfo/mission.htm (Exhibit US-131).
46 Export Finance and Insurance Corporation (Australia) - Mission and Objectives;
http://www.efic.gov.au/static/efi/corporateinfo/mission.htm (Exhibit US-131).
47 AuslandsGeschaftsAbsicherung der Budesrepublik Deutschland, Federal Export Credit Guarantees,
Basics: Main Features of Export Credit Cover;
http://www.agaportal.de/en/aga/grundzuege/grundzuege_exportkredit.html (Exhibit US-132).
48 Korea Export Insurance Corpor ation, preface (emphasis added);
http://www.keic.or.kr/homepage2/english/main.html. (Exhibit US-133); see also East-West Debt: "about the
Korea Export Insurance Corporation" http://www.eastwest.be/east_west/keic.htm (Exhibit US-133).

• Banco Nacional de Comercio Exterior of Mexico, a bank "owned by the Mexican
government, offers "export credit insurance to cover Mexican firms against default of
credit sales to foreign [] customers."49

32. Are each of these Members, as well as scores of other Members, breaching their WTO
obligations simply because purely private banks do not now, and have not historically, operated in this
particular segment of the market? Brazil has utte rly failed to show anything in the text of the
SCM Agreement indicating that Members agreed upon such an absurd result.

33. The text confirms, instead, that the standards reflected in item (j) provide the exclusive test
for whether export credit guarantees provide prohibit ed export subsidies. As discussed above, in the
U.S. submissions, and in the meeting with the Panel, the U.S. budget data show – definitively – that
premiums collected under the U.S. export credit guarantee program are more than adequate to cover
the long-term operating costs and losses of the program s. In short, the United States is fully in
compliance with the standard in item (j).

III. B
RAZIL HAS FAILED TO ESTABLISH ITS CLAIMS REGARDING THE STEP 2, MARKETING
LOAN, AND COUNTER-CYCLICAL PAYMENT PROGRAMS AND ALL PAYMENTS
THEREUNDER

34. Brazil's "oral" presentation also fails to reme dy the fact that Brazil has provided virtually no
empirical evidence to support its claims that (a) termination of the Step 2 program "will likely have no
impact on the level of U.S. production or exports" and " little positive impact on the world price for
cotton in the long term;"50 or (b) that "the effect" of U.S. marketing loan and counter-cyclical payment
programs is "present" significant price suppression within the meaning of Article 5(c) and 6.3(c) of
the SCM Agreement.

A. Brazil's Arguments About the Effects of the Step 2 Program and World Market
Price Effects Continue to Shift

35. Although Brazil has argued thro ughout the original panel proceedings and in this proceeding
that allegedly high levels of U.S. exports ar e the cause of significantly suppressed world market
prices51, Brazil attempts now to change its basic theory of significant price suppression. Indeed, it
does so after having attempted to simply dism iss the evidence of dec lining U.S. exports as a
temporary phenomenon that was simply a function of U. S. producers "cleaning out the stocks in their
warehouses" prior to the termination of the Step 2 program. 52 In the face of the substantial
countervailing evidence, Brazil has been forced to seek a new theory to fit the facts. In its "oral"
presentation, Brazil now argues that it is increasing U. S. stocks of upland cotton – not the export of
U.S. cotton – that is suppressing world market prices.

36. Brazil has submitted no evidence – or even fully laid out the arguments – to support its
11
th hour theory of significant price suppression. And Brazil cannot simply transpose its earlier
arguments regarding the effects of exports. While stocks of any commodity are an important factor
influencing the world supply and demand balance and, therefore, prices, there is no basis – and Brazil
has not provided any – for sugges ting that an increase in stocks can have the same impact on world

49 Bancomext 2005 Annual Report, pp. 2, 26;
http://www.bancomext.com/Bancomext/publicasecciones/secciones/7304/AnnualReportBancomext2005.pdf
(Exhibit US-134).
50 Brazil First Written Submission, para. 206 (quo ting Brazil First Written Submission, Annex II,
paras. 41-43).
51 See, e.g., Brazil First Written Submission, para. 2.
52 Brazil Rebuttal Submission, para. 82.

market prices as actual exports. When stocks are held – i.e., are removed from trade on the world
market – any possible impact on prices is necessarily substantially less than if they were being traded.

37. Moreover, the price impact of existing U.S. stocks is necessarily greater within the
United States than it is in the worl d market. And, consistent with th is, U.S. prices have been lower
than normal in relation to the A index almost throughout the entire 2006 marketing year.
53 Between
August 2001 and July 2005, the A Index averaged 4.69 cents above the nearby NY futures. Since
August 2006, the "A" has averaged between 5 and 10 cents above NY futures.
54 As a result of this
and other market signals, U.S. producers are reduc ing plantings. Returns to cotton producers are
below expectations and plantings in the United Stat es are expected to decline 14 percent or more
in 2007.55 In short, the evidence concerning the effects of stocks on U.S. prices and the corresponding
response of U.S. farmers is not consistent with Brazil's new theo ry that U.S. stocks are suppressing
world market prices.

38. This conclusion is reinforced when one cons iders other factors in the world market. For
example, total world stocks are expected to decline in 2006 from 2005 levels.
56 Moreover, the world
stocks-to-use ratio for cotton has declined for the second year in a row, meaning that the world is
using more cotton than is being produced. 57 This is consistent with the fact that world market prices
are rising and are expected to continue to do so . While Brazil asserts these prices should be even
higher, it has offered no evidence – other than unf ounded allegations by its hired economist – to
support that assertion.

39. Similarly, the behaviour of other market pa rticipants – including Brazil – does not evidence
any perception of significant price suppression as a resu lt of U.S. stocks. To the contrary, Brazil and
India are expected to increase production in 2007, with recent reports from Brazil anticipating a near-
record crop in 2007. 58 By planting and producing more cotton in 2007, India's and Brazil's farmers
would appear to be receiving positive signals from current world prices. U.S. production, meanwhile,
decreased in 2006, exports are declining in 20 06, and U.S. planting is expected to decline
substantially in 2007. Again, these are not facts indicative of significant price suppression as a result
of U.S. stocks.

40. Thus, Brazil's last minute theory that U.S. stocks – not exports – are causing significant price
suppression is unsupported by evidence.

B. Brazil's Arguments About the Alleged Effects of the Marketing Loan and
Counter-Cyclical Payment Programs Are Misleading, and the Evidence Brazil
Submits Actually Confirms the U.S. Position Regarding the Marketing Loan and
Counter-Cyclical Payment Program

41. Brazil's "oral" statement seeks to respond to the U.S. observation that Brazil has failed to
provide an evidentiary basis for its claims that the marketing lo an and counter-cyclical payment
programs are presently causing significant price suppression. Brazil asserts that certain allegedly

53 Daily A-Index and NY Futures Price Data (Exhibit US-135).
54 Daily A-Index and NY Futures Price Data (Exhibit US-135).
55 National Cotton Council 2007 Acreage Survey available at
http://www.cotton.org/econ/reports/intentions.cfm.
56 USDA Foreign Agricultural Service, Cotton: Worl d Markets and Trade, February 2007 (available at
http://www.fas.usda.gov/currwmt.asp).
57 USDA Foreign Agricultural Service, Cotton: Worl d Markets and Trade, February 2007 (available at
http://www.fas.usda.gov/currwmt.asp).
58 ICAC Cotton This Month (1 March 2007) (Exhibit US -136).

"key" pieces of evidence support its claims of a breach of Articles 5(c) and 6.3(c) of the
SCM Agreement.
59 None of this evidence withstands scrutiny, however.

1. None of the Evidence Submitted By Brazil Regarding the Nature,
Magnitude and Effects of the Marketing Loan and Counter-Cyclical
Payments Indicates That the Payments Are Having Significant Price
Suppressive Effects

42. Counter-cyclical Payments: Brazil's "oral" presentation contains no empirical evidence to
support Brazil's claims that counter-cyclical paym ents are having significant production- or export-
inducing effects, or that they are significantly suppressing world market prices. Indeed, Brazil's
"empirical evidence" appears to consist of little more than the naked assertion that counter-cyclical
payments "restrict planting flexibility," "reduce the risk associated with producing the base crop"
"increase the ability of farmers to invest in pro duction-enhancing equipmen t" and "smooth revenue
flow. . . and ease access to credit." 60 While all these things may well be true to some extent, Brazil
has not explained why they support a finding that the payments cause significant price suppression.
Indeed, almost all of these consequences asserted by Brazil also can be attributed to direct payments
and, indeed, to any payment to a producer of a crop. The exact same planting flexibility restrictions
apply in the case of both direct and counter-cyclical payments. Moreover, any payment to producers
will "increase the ability of farmers to invest in production-enhancing equi pment," "smooth revenue
flow. . . and ease access to credit."
61 However, those factors did not support any finding of significant
price suppression with respect to direct payments in the original proceeding. And, in indeed, the
negotiators of the WTO agreement expressly found that Members could provide a whole range of
payments to agricultural producers, all of which presumably would have the general effects Brazil
attributes to counter-cyclical payments, and yet still have "no, or at most minimal, trade-distorting
effects or effects on production."62

43. Indeed, from a structural standpoint, Brazil r ecognizes that the "cruci al difference" between
the direct and counter-cyclical payments is that the farmer is assured of receiving the former each year
but not the latter, because counter-cyclical paymen ts are provided only if the season-average farm
price ends up being below the threshold set out in the statute. 63 As the United States has explained in
response to questions from the Panel, some analysts have examined whether this difference results in
any substantial differences in the effects of the two programs, and they have concluded that it likely
does not .64 For example, Westcott et. al. determined that the link to prices may, in some
circumstances, result in indirect production effects stemming primarily from lowered risk of price
volatility. However, they concluded that the degr ee of any such production effects is likely to be
minimal and mitigated by a number of factors including that:

(a) where prices are expected to be above maximum threshold – counter-cyclical
payments behave just like the fixed direct payments
65;

(b) "cross-commodity effect[s] suggest[] th at CCPs may provide a general reduction in
revenue risks rather than a crop-specific effect. Net returns among alternative crops
would remain the primary consideration underlying production choices;"
66

59 Brazil Oral Statement, para. 25.
60 Brazil Oral Statement, para. 41.
61 Brazil Oral Statement, para. 41.
62 See Annex 2 of the Agreement on Agriculture.
63 Brazil Oral Statement, para. 50.
64 See U.S. Answers to Parts D-E of the First Set of Panel Questions, para. 27 (6 March 2007).
65 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely
to be Limited" at 203 (Exhibit US-35).

(c) "while a number of studies indicate that farmers are risk averse (Chavas and Holt,
1990, 1996, for example), other risk reducti on instruments already exist to manage
risks. Thus, with revenue risk reduction now provided by CCPs as part of farm
programs, farmers may adjust their use of these other farm and nonfarm risk
management strategies;"
67 and

(d) "a large portion of output in the U.S. agri cultural sector is produced by a small share
of large producers. . . . Evidence that risk aversion decreases as income rises (Chavas
and Holt, 1990, 1996) suggests that risk av ersion may also tend to decline as the size
of farms increases. Thus, with larger fa rms that account for most production being
less averse to facing risk, this lowers potential production effects of CCPs due to risk
reduction. And while smaller fa rms may be more risk averse in their farm enterprise,
off-farm income may reduce the overall level of household income risk."68

44. Studies looking to the actual effects of counter-cyclical payments confirm their minimal
impacts on planted acreage and production. For exam ple, as the United States has explained, a 2007
study by Lin & Dismukes found that "[t]he effect of CCPs on producers' planting decisions . . .
appears to be very negligible – an increase in the acreage of major field crops of less than 1% ... ."
69
The United States has submitted this and other studies examining the empirical evidence regarding the
actual effects of counter-cyclical payments on corn, wheat, and soybean producers in recent years,
including MY 2005, the marketing year on which Brazil has placed special emphasis. The United
States also has provided studies taking a more qualitative assessment of the question at hand. 70 These
studies support a finding that counter-cyclical payments have – at best – minimal effects on plantings
and production (and, thus, are likely to have negligible effects on world market prices).

45. In its unsolicited third wr itten submission – BRA-659 – Braz il asks the Panel simply to
disregard all of these studies.
71 For the reasons discussed above, Brazil's submission was made in
breach of the Panel's working procedures and is not properly part of the reco rd before the Panel.
Nonetheless, the United States would make the fo llowing points as to why the arguments made by
Brazil therein are unavailing. Braz il complains that the studies do not relate specifically to counter-
cyclical payments made in respect of upland cott on. However, as the United States has explained,
there is no reason why that should preclude the Pa nel from considering the studies as being highly
relevant.72 Indeed, Brazil has not submitted any eviden ce – save for the unsupported assertions of its

66 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely
to be Limited" at 204 (Exhibit US-35).
67 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely
to be Limited" at 204 (Exhibit US-35).
68 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely
to be Limited" at 204 (Exhibit US-35).
69 Lin, William and Dismukes, Robert. "Supply Re sponse Under Risk: Implications for Counter-
cyclical Payments' Production Impacts ," Review of Agricultural Econ omics–Volume 29, Number 1–
Pages 64-86, forthcoming, p. 83 (Exhibit US-85) (emphasis added).
71 Supplementary Statement of Daniel Sumner, paras. 18-38.
72 Brazil also makes the inexplicable argument that a number of the studies submitted by the United
States are not relevant because they allegedly do "not examine whether CCPs are decoupled from production.
Rather, [they] examine whether CCPs increase acreage." Supplementary Statement of Daniel Sumner, para. 21.
Brazil applies this criticism, for example, to the 2007 study by Lin & Dismukes finding "very negligible"
increases in the acreage of major field crops. Brazil appears to be confused about its own claims and arguments
in this proceeding. As the United States understands it, Brazil's claim here is that marketing loan and counter-
cyclical payments are presently significantly suppressing world market prices. Brazil's theory to support this
claim has been that these payments a ffect the planting decision, causing U.S. producers to plant more than they
otherwise would and that this ultimately leads to ove rsupply and suppressed world market prices. It is
remarkable, therefore, that Brazil would attempt to dismiss studies because they look at effects of payments on

hired economist – to show that the effects woul d be substantially different in the case of upland
cotton, especially given that no base acre holder has to produce anything, let alone the base crop, in
order to receive any payments under the program . More importantly, Brazil appears to forget that it
is Brazil that bears the burden of pr oving its claims in this proceeding . Indeed, while Brazil insists
that only cotton-specific studies may be considered as relevant, Brazil has not itself provided a single
study that examines the actual effects of counte r-cyclical payments made specifically in respect of
upland cotton production. Moreover, what studi es Brazil has provided do not detract from the
substantial evidence showing that – as a matter of fact – counter-cyclical payments have minimal
acreage and production effects.
73 Therefore, Brazil's allegations of significant planting effects are just
that – allegations. They are supported neither by the empirical evidence nor any studies conducted in
light of such evidence.

46. Brazil has no answer either to the studies findi ng that a substantial part of counter-cyclical
payments are capitalized into land values and land rents. Although Brazil argues that the Panel should
simply disregard this evidence, Brazil has not explained why the following conclusion of the OECD is
not valid and entirely relevant to the question at hand:

Empirical work suggests that PFC and MLA payments had a significant effect on
land values and rental rates. Given the importance of the rental market for land in the
United States, it appears that there was a relatively high "pass-through" of the
additional income generated by the payments to landowners, many of whom are not
the actual operators of the land . It appears that the payments primarily had the effect
of increasing the value of the principal fixed asset in agriculture—land.
74
47. Indeed, the United States recalls that Brazil h as argued that the more certainty there is about
whether payments will be received, the more likely they are to be capitalized into land values and

acreage and suggest that what is relevant is some undefined inquiry into whether payments are "coupled" to
production (an inquiry, incidentally, that has no basis in the text of Articles 5(c) and 6.3(c)).
73 Indeed, the study that Brazil has touted as "m ore recent and more relevant" than the numerous
studies submitted by the United States does not even examine the behaviour of actual farmers – let alone upland
cotton farmers. See McIntosh, Christopher R, Jason F. Shogren and Erik Dohlman,"Supply Response to
Counter-Cyclical Payments and Base Updating under Uncertainty: An Experimental Study,: forthcoming paper
in the American Journal of Agricultural Economics , November 2006, page 18 (Exhibit BRA-565). Rather, it
looks to the results of a laboratory experiment conducted using University students as "laboratory decision-
makers." Brazil criticizes the United States for allege dly "attempt[ing] to discredit research findings in
economics simply because they deri ve from controlled experiments." Supplementary Stat ement of Daniel
Sumner, para. 38. According to Brazil, this is "30 years out of date." Supplementary Statement of Daniel
Sumner, para. 38. However, Brazil makes no effort to re concile this view with its own arguments that U.S.
studies should be dismissed if they do not examine the precise acreage responses of upland cotton farmers. Nor
does Brazil address the fundamental limitations noted by authors themselves in respect of the laboratory
experiment. See McIntosh, Christopher R, Jason F. Shogren and Erik Dohlman,"Supply Response to Counter-
Cyclical Payments and Base Updating under Uncertainty: An Experimental Study,: forthcoming paper in the
American Journal of Agricultural Economics , November 2006, page 18 (Exhibit BRA-565) ("Our design did
not address two features of the 2002 Ac t which could affect the interpretation of our results. First, there are no
adjustments made in our bonuses for the fact that direct and counter-cy clical payments are made only on a
percentage (85 percent) of base acres. If these adju stments were incorporated, the lump sum bonuses would
have been lower, implying our results could overstate the effects of CCPs. Second, we excluded the marketing
loan program to focus on the basic CCP structure—target price, market price, and direct rate. Adding the
marketing loan program into our design would temper the basic effects of CCPs by providing an additional price
support mechanism.")
74 Abler, David, and David Blandford. A Review Of Empirical Studies Of The Acreage And
Production Response To US Production Flexibility C ontract Payments Under The Fair Act And Related
Payments Under Supplementary Legislation, Directorat e For Food, Agriculture And Fisheries Committee For
Agriculture, OECD, Paris, AGR/CA/APM(2004)21/FINAL, p.17 (25 March 2005) (Exhibit US-32) (emphasis
added).

rents.75 Given that MLA payments were provided as part of ad hoc legislation – unlike counter-
cyclical payments which have been established well ahead of time as a part of the FSRI Act of 2002 –
farmers were presumably even less likely to have anticipated MLA payments than counter-cyclical
payments. Thus, the degree of capitalization into land values and rents is presumably even greater
than that found in the OECD study for MLA payments. And, as the OECD study concluded:

If PFC and MLA payments were captured larg ely by landowners through higher land
values and land rents, then the scope for these payments to influence agricultural
production would be narrowed. Farmers re nting land would not be able to use
payments associated with their rented land to cover fixed or variable costs. These
farmers would be no more able to secure capital from traditional lenders than in the
absence of the payments. They would see no increase in wealth, at least on the land
that they rent, ruling out a risk-related wealth effect. Expectations of future payments
associated with rented land would not affect decisions by renters because they would
not capture these payments. The payments would not affect a renter's decision to
remain in or to exit from agriculture, although they could affect a landlord's decision
to keep land in agriculture.
76
48. Brazil's only response to this evidence is that it is "mathematically impossible" that direct and
counter-cyclical payments "are capitalized into land rents and captured by the land owner." 77 Brazil
has not explained why – if this were so – the OE CD could have come to such a fatally flawed
conclusion (especially given that the OECD conc lusions cited above were actually reached after
reviewing a number of different studies all examining th e pass-through effects of PFC and MLA
payments).

49. In fact, the flaw is in the data that Brazil uses to allege its "mathema tical impossibility." As
the United States explained in its rebuttal submissi on, instead of examining actual land rents – as
Brazil purports to do – Brazil actually considers an imputed economic cost to land that the USDA
calculates by valuing the alternative uses of the ass et (for example, renting it to another producer).
78
To make matters worse, Brazil looks at av erage imputed rental values for land on farms with payment
base acres and without payments base acres, despite the fact that the former would have a
substantially higher rental value precisely because of the payments associated with them. Brazil's
response that different levels of payments are made on different base acres because of differences in
historical yields misses the point entirely, and is no justification for comparing farmland linked to
payment base with farmland not linked to payment base acres as Brazil attempts to do.

75 Brazil Rebuttal Submission, para. 146.
76 Abler, David, and David Blandford. A Review Of Empirical Studies Of The Acreage And
Production Response To US Production Flexibility C ontract Payments Under The Fair Act And Related
Payments Under Supplementary Legislation, Directorat e For Food, Agriculture And Fisheries Committee For
Agriculture, OECD, Paris, AGR/CA/APM(2004)21/FINAL, p.17 (25 March 2005) (Exhibit US-32).
77 Brazil Oral Statement, para. 46.

50. While it is sparse, it is also instructive to consider the type of evidence that Brazil actually
does rely upon to support its claims regarding count er-cyclical payments. Brazil invokes as evidence
of "present" significant price suppression resulting from counter-cyclical payments, a statement made
in February 2001 – i.e., before either the 2002 FSRI Act or the counter-cyclical payments authorized
thereunder went into effect – by a National Cotton Council representative about emergency relief
provided under the FAIR Act of 1996 as to whether that relief helped cotton farmers "avoid
bankruptcy" in the period MY 1999-2001.
79 This statement – quoted out of context – about
emergency relief under the FAIR Act of 1996 including production flexibility contract payments,
marketing loss assistance payments, and disaster pa yments, offers no insight regarding the role of
counter-cyclical payments in production decisions or about U.S. farmers' costs and revenues today.
Certainly it does nothing to detract from the actual da ta regarding "present" costs and revenue, which,
as discussed below, flatly contradict Brazil's cl aims that U.S. upland cotton farmers would be
bankrupt without the marketing loan and counter-cyclical payment programs. In fact, while this
"evidence" makes no substantive contribution to the issu es before the Panel, the fact that this is the
type and quality of "empirical evidence" upon wh ich Brazil must rely speaks volumes about the lack
of an evidentiary basis for Brazil's claims.

51. Marketing Loan Payments: Brazil's arguments regarding marketing loan payments are no
more availing than its arguments about the counter-c yclical payments. Indeed, rather than providing
actual evidence regarding the effects of the marke ting loan payments, Brazil attempts to simply
sidestep the issue by, again, (a) asserting that the matter has already been r esolved by the original
panel while at the same time (b) mischaracterizing th e U.S. arguments to avoid engaging on the real
issues at hand. Brazil's approach lacks merit.

52. First, the United States reiterates that the qu estion of whether or not marketing loan payments
are causing "present" significant price suppression today was not considered by the original panel. To
the contrary, that panel expressly declined to consid er the effects of any future payments allegedly
"mandated" to be made under the Step 2, marke ting loan, and counter-cyclical payment programs.
The original panel also declined to consider whet her the marketing loan and counter-cyclical payment
programs would necessarily have adverse effects in th e future; a finding that – by Brazil's own
admission – would have been required for the original panel to have made a finding against the
programs as such.
80 Moreover, as Brazil has conceded, the ma rket conditions that existed at the time
of the original proceeding are very different from those that prevail at present.81
53. Indeed, the market conditions are even more different now than Brazil cares to admit. The
Step 2 program is no longer in effect, and since the termination of the program, U.S. exports in

79 Brazil Oral Statement, para. 43.
80 For example, in the case of its claims against the challenged programs, per se, Brazil asked the Panel
"to find that the mandatory provisions of the 2002 FSRI Act and the 2000 ARP Act together with their
implementing regulations, as listed above, cannot be applied in a WTO consistent manner ." Brazil's
9 September 2003 Further Submission, para. 435-436. Explaining what this would mean in the context of this
dispute, Brazil argued "[f]irst, the Panel needs to evaluate whether the U.S. subsidies will necessarily threaten to
cause serious prejudice at price levels below the trigger pr ices of the U.S. subsidies. Second, the Panel needs to
consider whether the U.S. subsidies threaten to cause serious prejudice even at price levels at which only crop
insurance subsidies and direct payments are made ." Brazil's 9 September 2003 Further Submission, para. 426
(emphasis added). The original panel did not conduct the requested evaluation and did not make the requested
findings.
81 See Brazil Rebuttal Submission, paras. 235-236 (In an effort to excuse itself from having even to
show any coincidence of U.S. payments and price suppression, Brazil argued that "the underlying statutory and
regulatory bases for U.S. upland cotton subsidies and market conditions provided the original panel with a fairly
dynamic environment in which to examine temporal coincidences. The period MY 2001-2005 (principally
under the FSRI Act of 2002) was more stable. After MY 2001, it did not involve the same extreme declines in
the world market prices for upland cotton or signific ant additional increases in the U.S. share of world
production and exports, compared to the period MY 1998-2002.")

MY 2006 are sharply lower than in recent years. U.S. exports for MY 2006 are down 30 percent from
the levels observed at the same time last year. 82 Weekly cotton sales are 31 percent below the 5-year
average.83 And total U.S. export commitments are currently approximately 40 percent below last
year's level and 27 percent below the 5-year average.84 Forecasts for the future are similarly gloomy.
As the United States explained in the panel mee ting, in February, USDA lowered the U.S. cotton
export forecast for MY 2006 by nearly 8 per cent, following a 2 percent downward revision in
January.85 These downward revisions are taking place at the same time that USDA estimates record
high foreign cotton mill use, which means that U.S. shar e of foreign consumption is expected to drop
from 16 percent in MY 2005 to 12 percent in MY 2006 . Moreover, U.S. share of world exports is
expected to drop from 40 percent in MY 2005 to 36 percent in MY 2006. U.S. domestic mill use for
MY 2006 is projected at just 5 million bales, the lowest since MY 1931. The declining demand for
U.S. upland cotton is also being reflected in plan ting and production decisions. The annual survey of
planting intentions conducted by the National Cotton Council indicates that U.S. upland cotton
plantings are likely to be down an average of 14 percent in MY 2007 from 2006 levels.
86

54. To the extent that Brazil asserts that the or iginal panel already examined and resolved the
question of what effects the marketing loan has under such market circumst ances as prevail now, the
United States submits that Brazil's argument is wholly without merit.

55. Second, it is astonishing that Brazil yet again asserts that "the United States never explains
how marketing loan subsidies could have no effect on producers' decision to plant cotton ... ."
87 Not
only has the United States never alleged that " marketing loan subsidies could have no effect on
producers' decision to plant cotton," 88 but the United States and Brazil's own economist appear to
agree on precisely the conditions under which mark eting loan payments might affect producers'
decision to plant cotton. Specifically, to determine whether marketing loan payments have effects in
any given year, it is necessary to examine the plan ting decisions made by U.S. producers in light of
the conditions as they existed as of the time of planting for each marketing year (i.e., January-
March).89 A producer's expectations at that time about market revenue and/or revenue from
government payments, costs and other factors will determine whether cotton or some other crop is
planted, or if the land is put to other use. Brazil conceded this point both in this proceeding 90, and in
the original proceeding.91

82 Weekly Export Performance Report for week ending February 15, 2007 (Exhibit US-113).
83 Weekly Export Performance Report for week ending February 15, 2007 (Exhibit US-113).
84 Weekly Export Performance Report for week ending February 15, 2007 (Exhibit US-113).
85 February 2007 World Agricultural Supply and Demand Estimates (WASDE) Report
(Exhibit US-114).
86 National Cotton Council Planting Intentions Survey MY 2007 (Exhibit US-115).
87 Brazil Oral Statement, para. 35.
88 This is the second time that the United States has addressed the same mischaracterization of the U.S.
position. See e.g., U.S. Rebuttal Submission, para. 268 ("Brazil's rebuttal arguments about the structure, design,
and operation of the marketing loan program are, yet again, premised on a mischa racterization of the U.S.
arguments. Brazil asserts that 'the United States argues that upland cotton producers do not expect to receive
marketing loan payments. . . .The United States argues that marketing loan payments . . . have no effect on
planted acreage, no effect on production, no effect on exports, and no effect on the world price of cotton.' Brazil
Rebuttal Submission, para.101. This is not what the United States has argued and the United States respectfully
refers the Panel to the U.S. first written submission at paragraphs 203-225 where the actual U.S. arguments are
set out in detail.")
89 See e.g., Cotton Percent Planted, 15 Selected States (Exhibit US-44).
90 See Brazil First Written Submission, Annex I, para. 36 ("U.S. cotton producers respond to the
expected prices and expected rates of subsidy that apply at the time planting and other key decisions are made in
the production cycle") (emphasis added) and Brazil First Written Submission, Annex I, para. 58 ("[t]he
magnitude of the impact on incentives to produce cotton is equal to the expected difference between the loan
rate, which is known at planting time, and the grower's expectations at the time of planting about the AWP for

56. Nonetheless, while Brazil agrees with the Un ited States as to the correct analysis, Brazil
continues to present evidence that directly contradi cts this analysis. For example, in its "oral"
presentation, Brazil alleges that marketing loan paym ents in MY 2005 were 29 percent higher than in
MY 2002 and, according to Brazil, this " alone strongly suggests that its effects on U.S. production
and exports as well as on world market prices are much greater [than in the period before the original
panel]."
92 Yet Brazil concedes that the effects of the marketing loan payments are a function of
expectations regarding payments, not actual paymen ts received. Indeed, in its modeling exercise
purporting to examine the effects of marketing loan s, Brazil's economist does not even include actual
payments, explaining:

U.S. producers respond to revenue they exp ect to receive from market prices and
expected government subsidies, where releva nt expectations are those that are held
around the time that planting and other key production decisions are made. U.S.
producers do not know with certainty what actual prices and subsidies will turn out to
be as they unfold during the marketing year. Therefore, as in reality, the model
assumes that actual prices or subsidies in a marketing year do not affect cotton
growers' behaviour in that marketing year.
93
57. It is telling that Brazil repeatedly misstates the U.S. position and continues to offer evidence
that is fundamentally at odds with the correct anal ysis of possible price effects (which it has expressly
acknowledged). The fact is that Brazil has not – indeed, cannot – show that U.S. cotton producers'
expectations regarding marketing loan payments in have actually led to "present" significant shifts in
planting. Indeed, as discussed next, the data submitted by Brazil regarding producers' expected
revenues and costs show that producing upland co tton was both economically viable and rational in
every year under the FSRI Act, including MY 2006 (the relevant year for purposes of Brazil's
"present" serious prejudice claims).

2. The Cost of Production Analysis Submitted By Brazil Is Fundamentally
Flawed and the Proper Assessment of the Data Supports the U.S. Argument
That Marketing Loan and Counter-Cyclical Payments Are Not Having Any
Significant Price Suppressive Effects

58. The centerpiece of Brazil's oral presentation regarding serious prejudice is a series of six
charts
94 and accompanying discussion that Brazil presen ts to show the allegedly "economically
irrational business of growing cotton in the United States within marketing loan and CCP subsidies."95
Brazil submits that this evidence establishes that U.S. upland cotton producers would not plant upland
cotton and could not survive without marketing loan and counter-cyclical payments. As the United
States shows below, however, Brazil's analysis is in consistent with the econom ic literature regarding
the role of costs in planting decisions, the findings of the Appellate Body regarding the relevance of
variable versus total costs, and the approach ta ken in all econometric models of which the United
States is aware that look to costs as a factor in pl anting decisions (including Brazil's own model in the
original proceeding). Indeed, viewed consistently with the principles recognized therein, the data
show that (a) upland cotton producers expected and we re able to meet their variable costs in every

cotton that will apply when the grower makes that ma rketing loan transaction.") (emphasis added). Brazil
91 US – Upland Cotton (AB) , para. 440 ("Brazil counters that farmers decide what to plant based on
expected market prices as well as expected payments under the challenged subsidy programs, such that planted
acreage responds to both these factors.")
92 Brazil Oral Statement, para. 31.
93 Brazil First Written Submission, Annex I, para. 4 (emphasis added).
94 In fact, there are only three charts, with a second associated ch art for each that isolates one of the
columns therein.
95 Brazil Oral Statement, para. 57 and paras. 57-91.

year under the FSRI Act solely with market revenue ; (b) that upland cotton was the most attractive
crop from a cost/revenue perspective in most y ears; (c) upland cotton producers met and exceeded
even their total cash costs in almost every year under the FSRI Act of 2002.

59. What Brazil's analysis lays bare is not th e "economically irrational business of growing cotton
in the United States within marketing loan and CCP subsidies,"
96 as Brazil alleges, but rather the
distortive and unfounded nature of Brazil's cost analysis.

a. Variable costs – not total co sts – are the relevant measure in
assessing year-to-year planting decisions

60. It is useful to begin with a summary of what Brazil purports to show. Specifically, Brazil
asserts that it is providing: (a) a chart showing expected market revenue net of total costs of
production for corn, soybeans, and cotton in MY 2005; (b) a chart showing expected market revenue
net of total costs of production for corn, soybeans, and cotton in MY 2007; and (c) a chart showing
average market revenue net of total costs of production for corn, soybeans, and cotton in MY 2002-
2006. Brazil argues that in each of these time periods, U.S. farmers would have lost money across the
board producing any of these crops (or would have expected to do so) "but for" marketing loan and
counter-cyclical payments. According to Brazil, this analysis shows that U.S. farmers producing
cotton, soybeans, or corn can only survive because of those payments. Brazil further alleges that it is
only when those payments are taken into account that upland cotton becomes an attractive crop
relative to the others. Brazil is wrong.

61. Even before addressing the numerous technical fl aws in Brazil's analysis, it is useful to put
Brazil's argument in perspective; in particular, th e remarkable assertion that U.S. farmers could not
produce soybeans, corn, or cotton in the United States in any of the periods examined absent
marketing loan and counter-cyclical payments. Indeed, although the United States has almost one
billion acres of farmland, and although corn and soyb eans were two of the top five top agricultural
commodities in MY 2005, Brazil would have the Pane l believe that producing those crops and cotton
– indeed, perhaps even agriculture itself – is an ""economically irrational business" in the United
States. This premise is simply untenable. In fact , it demonstrates precisely the flaws in the analysis
presented by Brazil – that total costs in each year are not
 the proper considerations in assessing the
viability of farmer's year-to-year planting decisions.

62. Rather, for a farmer, the relevant costs in d eciding what to plant in each year are variable
costs of production. Recall the simplified example ex amined in the first U.S. submission of a farmer
deciding in January of a particular year whethe r to plant all soybeans, some soybeans and some
cotton, all cotton, or to allow the land to sit idle. This farmer will consider, inter alia, the expected
price of cotton at harvest, the expected price of so ybeans at harvest, as well as the anticipated costs of
growing each crop. In so doing, he does not need to consider fixed asset and overhead costs. He has
already incurred those costs; they will not differ based on whether the farmer plants soybeans, cotton,
a mix, or nothing. Rather, the farmer will consid er projected net revenues taking into account costs
for such items as seed, fertilizer, chemicals, and othe r expenses that are directly related to planting,
harvesting, and marketing each crop. The economica lly rational decision for him will be to plant the
crop, or mix of crops, that both covers his variable costs and maximizes his net revenue. In other
words, the farmer will choose the option that gives hi m the largest margin above variable costs. This
will not only allow him to cover his variable expen ses but will also give him the most revenue to pay
down total costs.

63. That variable costs are the relevant consider ation in year-to-year planting decisions is well-
accepted in agricultural economics. The United States di scussed the extensive literature in this regard

96 Brazil Oral Statement, para. 57 and paras. 57-91.

in its submissions to the panel in the original proceeding.
97 To supplement that discussion, the United
States submits two other studies that confirm that va riable costs are the appropriate consideration in
assessing year-to-year planting decisions.98 Considering the evidence submitted earlier in the dispute,
the Appellate Body expressly recognized that:

We agree with the general propos ition of the United States that variable costs may
play a role in farmers' decision-making as to whether to plant upland cotton or some
alternative crop, and how much of each crop to plant. From a short-term perspective,
variable costs may be particularly important.
99
64. Moreover, the fact that variable costs – not total costs – is the appropriate measure is also
evidenced by the fact that there is no economic model of which the United States is aware that uses
total costs in its supply response equations (that is , to examine the planting decision). Indeed, FAPRI
uses variable costs in its modeling framework. And even Brazil's model in the original proceeding –
purportedly based on the FAPRI model – used vari able costs in the net revenue equation that
determined the planting decision of farmers.

65. Thus, there is no basis whatsoever for Brazil's use of total costs to examine planting decisions
in any particular year.

b. U.S. farmers expected to meet and exceed variable costs in each
year, and in most years upland cotton was the most attractive
option

66. When a proper examination is undertaken rega rding the expected returns and variable costs,
the data show that U.S. farmers expected to cove r their variable costs regardless of whether they
decided to grown cotton, corn, or soybeans. Braz il has acknowledged that if a "farmer would not be
able to cover even variable costs, he or she would not plant anything at all to minimize losses."
100
Conversely, where, as here, the farmer is covering his variable costs, it is economically rational for
him to plant something. The question is then what to plant. On that question, the assessment depends
on a number of factors including the relative ne t revenue, considerations of weather, and
considerations of other factors affecting yields (s uch as pests and disease). As shown below, in most
years, upland cotton was the most attractive option from the standpoint of costs and revenues.

97 See e.g. , U.S. Further Rebuttal Su bmission in the Original Proceeding, paras. 117-122
(18 November 2003).
98 See Cecil Davison and Brad Crowder, "Northeast Soybean Acreage Response Using Expected Net
Returns" Northeastern Journal of Agriculture and Resource Economics, April 1991, pp. 33-41 (Exhibit US-137)
and Duncan M. Chembezi and Abner W. Womack, "Regional Acreage Response for U.S. Corn and Wheat: The
Effects of Government Programs", Southern Journal of Agricultural Economics , July 1992, pp 187-198
(Exhibit US-138).
100 Brazil Oral Statement, para. 67.

67. The U.S. analysis above seeks to replicate th e revenue expected and variable costs faced by
actual U.S. cotton farmers. Each aspect of the calculation is described in Annex I.
101 As discussed
therein, the United States has examined relative costs and revenue of growing upland cotton, corn,
and soybeans in the 17 U.S. cotton-producing states.102

68. The analysis shows that for the entire peri od MY 2002-2007, U.S. cotton farmers expected to
meet or exceed their variable costs of planting cotton, corn, or soybeans. Therefore, it was
economically rational for those farmers to plant something, rather than leaving the land idle. In terms
of what to plant, upland cotton was the most attrac tive option – from the standpoint of costs and
revenue – in at least three of the years (MY 2003, MY 2004, and MY 2006). In MY 2002, 2005, and
2007, cotton was not the most attractive option. It is instructive to examine more closely shifts in
upland cotton acreage in those years because that s hows precisely that, contrary to Brazil's assertions,
U.S. farmers' planting decisions correspond to market signals.

69. In MY 2002, upland cotton was least attractive of the three options, and U.S. planted acreage
declined correspondingly from 15.5 million acres in MY 2001 to 13.7 million acres in MY 2002.

70. In MY 2005, soybeans appeared to be the most attractive crop, followed by cotton. In this
circumstance, the expectation was that cotton acr eage would fall slightly. In fact, however, it
increased slightly – by approximately 600,000 acres. What explains this increase? Brazil has
attempted repeatedly to attribute this to the alle ged effects of marketing loans and counter-cyclical
payments. However, the data point fairly preci sely to the reason for the slight increase in cotton
acreage in MY 2005 – a shift away from soybean acreage due to concerns about an outbreak of Asian
soybean rust at the end of MY 2004. Soybean ru st, a recurrent problem for soybean producers in
much of the southern hemisphere, was first detect ed in the United States in the Fall of 2004, late
enough in the season that it posed no threat to that year's soybean crop. After overwintering in the
South, soybean rust posed a new, uncertain, and pot entially large threat at the beginning of the 2005

101 The back-up data is also provided in Exhibit US-139.
102 In other states, cotton does is not a competitor crop and, therefore, corn and soybean costs from
those states would distort the picture.
Expected Market Returns Above Variable Costs
$0
$50
$100
$150
$200
$250
$300
2002 2003 2004 2005 2006 2007Cotton Soybeans Corn

U.S. soybean season.
103 Soybean rust has been detected in eight states in the Delta and Southeast
regions since late 2004.104 It was in these regions that the shift from soybean acreage to upland cotton
acreage occurred in MY 2005. Of the 600,000 acre increase from MY 2004 to MY 2005, almost the
entire shift occurred in the Delta region, where an increase in 530,000 acres of cotton was offset
precisely by a decrease of 530,000 acres of soybeans. Thus, it was soybean rust, and not marketing
loan or counter-cyclical payments, that was responsible for increased acreage in MY 2005.

Changes in planted acreage, 2004 to 2005

Cotton Soybeans State/
Region Change in
acres
% change Change in
acres
% change
DELTA 530 15.6 -530 -4.4
Arkansas 140 15.4 -170 -5.3
 Louisiana 110 22.0 -220 -20.0
 Mississippi 110 10.0 -60 -3.6
 Missouri 60 15.8 0 0
 Tennessee 110 20.6 -80 -6.6

SOUTHEAST 74 2.5 -330 -10.6
 Alabama 0 0 -60 -28.6
 Florida -3 -3.3 -10 -52.6
 Georgia -70 -5.4 -100 -35.7
 North Carolina 85 11.6 -40 -2.6
 South Carolina 51 23.7 -110 -20.3
 Virginia 11 13.4 -110 -1.9

SOUTHWEST 94 1.5 75 2.2
 Kansas -11 -12.9 100 3.6
 Oklahoma 50 2.2 5 1.6
 Texas 100 1.7 -30 -10.3
 Source: Crop Production, October 2006, Agricultural Statistics Board, NASS, USDA.

71. In MY 2007, corn is expected to provide great er net revenue than either cotton or soybeans.
Cotton acreage is shifting consistent with these, and other, market signals. As the United States noted
in the meeting with the Panel, the annual survey of planting intentions conducted by the National
Cotton Council indicates that U.S. upland cotton pl antings are likely to be down an average of
14 percent in MY 2007 from 2006 levels. 105 While Brazil attempts to dismiss this data – arguing that
acreage shifts should be even higher – it provides no basis for this assertion. Indeed, a 14 percent shift
in acreage would be substantial, amounting to more than a 2 million acre drop in planted acreage and

103 The Value of Plant Disease Early-Warning Syst ems: A Case Study of USDA's Soybean Rust
Coordinated Framework/ERR-18. Econ. Res. Ser., USDA., pg. 1.
http://www.ers.usda.gov/publications/err18/err18.pdf
104 As of October 3, 2006, National Soybean Rust Commentary, South Carolina officials reported a
new county with soybean rust, Saluda County. Soybean rust was found in Washington and Sampson Counties in
North Carolina on soybeans. Currently rust has been found infecting this year's soybeans in 68 different counties
in eight states: AL, FL, GA, LA, MS, SC, TX, and NC. Including reports on kudzu, there are a total of 88
counties in eight states with rust this year, including 7 in Alabama; 15 in Florida; 18 in Louisiana and South
Carolina; 13 in Georgia; 3 in Texas; 2 in Mississippi; and 12 in North Carolina. http://www.sbrusa.net/
105 National Cotton Council Planting Intentions Survey MY 2007 (Exhibit US-115).

– applying MY 2006 yields – a 3.7 million bale decline in production. 106 Brazil has not explained
why this Panel should ignore this important evidence.

72. In any event, what the data show is quite different from what Brazil has asserted about the
allegedly "economically irrational business of grow ing cotton in the United States within marketing
loan and CCP subsidies."
107 Even without considering those payments, it is clear that U.S. farmers
can – and do – meet their variable costs of produc tion. Moreover, under the circumstances, upland
cotton is often the most economically rational choi ce among the available competing crops. Where it
has not been, declines in acreage have ordinarily resulted.

c. U.S. farmers actually met a nd exceeded variable costs and even
total cash costs in most years under the FSRI Act of 2002

73. Finally, the United States recalls that total co sts may be a relevant consideration in more long-
term decisions such as whether or not to exit farming altogether ( i.e., not year-to-year planting
decisions).108 However, Brazil's consideration of total costs of growing upland cotton suffers from a
number of flaws.

74. First, Brazil considers total costs of growing upland cotton as the only consideration for a
farmer in deciding whether to continue to exit farming altogether. This is not accurate. Indeed, as the
economic literature confirms, w hole-farm costs and revenues – including off-farm revenue and
revenue from other sources – are also important cons iderations in making those kinds of decisions.
109
Brazil's attempts to show that U.S. producers would have exited upland cotton production in the long-
term solely on the basis of a comparison of costs and revenues for cotton are, thus, not sound. Brazil
has never been able to submit any literature, study, report, or empirical evidence to contradict the
evidence submitted by the United States regarding the consideration of whole-farm costs and
revenues. Nor has Brazil provided any evidence that takes into account whole-farm costs and
revenues, and that shows that, absent the marke ting loan and counter-cyclical payment programs,
U.S. upland cotton producers would have exited upland cotton farming.

75. Second, Brazil includes in its assessment imput ed opportunity costs. These are not actual
expenditures, but instead are an economic concept u sed to capture the altern ative uses of the land,
unpaid family labour and capital; for example, how much a farmer would pay himself for his own
labour. These are not like year-to-year cash cost s without which a farmer would be unable to
continue on in business. It is only through the incl usion of such imputed costs that Brazil seeks to
show returns less than total costs.

76. The fact is that even if one includes addition al fixed cash costs, which are not part of
variable costs, the outcome remains much the same as for variable costs; that is, in most years
the market revenues from cotton cover variable plus fixed cash costs. As shown below, in most
years, U.S. farmers are able to meet and exceed their total cash costs. Therefore, Brazil's claims of

106 February 2007 World Agricultural Supply and Demand Estimates (WASDE) Report
(Exhibit US-114).
107 Brazil Oral Statement, para. 57 and paras. 57-91.
108 U.S. First Written Submission, paras. 295-297.
109 See e.g., Hoppe, Robert A. and Korb, Penni. Understanding U.S. Farm Exits. Economic Research
Report 21. June 2006, p. 20 (Exhibit US-46) ("Off-farm work has become important to farm operators. About
one-third of farmers have worked off the farm at least 200 days per year—essentially full-time—since 1978.
Off-farm work could hypothetically affect exits in two wa ys. First, off-farm work may be the first step in an
exit from farming, which would be reflected in higher exits for farms the operators of which work off-farm.
Second, off-farm work might lower the probability of ex it by providing farm operator households with another
source of income.")

widespread bankruptcies in the absence of market ing loan and counter-cyclical payments are not
realistic.
110

77. Moreover, Brazil has claimed on several occasi ons that a large cost-revenue gap exists for
U.S. cotton producers, such that except for U.S. subsidies, farmers would not plant cotton. Examining
the cost data properly for the period 2000-2005, instead of the cumulative $663 deficit per acre
asserted by Brazil, the cumulative returns over the same period were a positive return of $161 per
acre. Moreover, for MY 2000-2006, instead of the $837 deficit per acre alleged by Brazil, the
cumulative net returns were a positive $133 per acre.

d. Conclusion

78. Notwithstanding Brazil attempts to skew the co st data, that data show clearly that U.S.
producers actually meet – and, in fact, exceed – their variable costs of producing upland cotton.
Moreover, in most years, a relative consideration of variable costs and expected returns shows upland
cotton to be the most attractive among competing cr ops. Where it is not, U.S. farmers behave in
exactly the way they would be expected to behave gi ven the particular market signals – they pull back
on production except where other considerations (for ex ample, concerns regarding weather, pests or
disease) suggest a different approach.

3. The Sumner II Model Is Oversimplified and Relies on Arbitrary
Parameters and Assumptions That Have No Basis in the Economic
Literature

79. The third piece of allegedly "key evidence" re ferenced by Brazil in support of its claims of
present significant price suppression are the results of the Sumner II model that Brazil commissioned
for purposes of this proceeding. As the United States has explained, that model suffers from
substantial flaws, both in its structure and opera tion and in the parameters and assumptions used
therein.
111 As a result, the model is overly simplified and produces grossly biased results.

110 The United States notes that this chart and the back-up spreadsheets were submitted to the Panel and
Brazil during the meeting with the Panel. See Exhibit US-124.
111 See e.g., U.S. First Written Submission, Annex I and U.S. Rebuttal Submission, Annex I.

80. Indeed, despite Brazil's efforts to explain it away, Dr. Sumner's own critical assessment of the
model – made outside this proceeding – stands. "The simple model" laid out in the 2005 CATO paper
– which is virtually identical to the one Brazil h as presented in this proceeding – "does not represent
the depth of analysis that would be appropriate to support a trade remedy proceeding or a serious
prejudice claim before a WTO panel." 112 As Dr. Sumner acknowledged, much of the fault lies with
the oversimplifications in the model itself, whic h "abstract from many complexities that would be
important to get more precise estimates." 113 Unfortunately, Dr. Sumner substantially compounded
these flaws through his deliberate selection of mode ling assumptions and parameters that exaggerate
any possible effects of the counter-cyclical and ma rketing loan programs. As the United States
demonstrated at the meeting with the Panel and as shown in the table below, between the original
panel proceeding and this Article 21.5 panel proceeding, Dr. Sumner changed every single elasticity
estimate in his modeling exercise, except one (U.S. mill demand elasticity). And, in each one of these
cases, he substituted an elasticity th at would produce even greater impacts on production and prices
than would even the elasticities used for purposes of the original modeling exercise.114

Supply and Demand Elasticities Used in Sumner I and II

Parameter Effects of change to Sumner II
elasticity (impact on world price due
to removal of marketing loans and
counter-cyclical payments)
Sumner I(FAPRI) Sumner II(CATO)
U.S. cotton supply elasticity INCREASED IMPACT 0.361 - 0.466 0.80
ROW cotton supply elasticity INCREASED IMPACT 0.30 0.20
US mill demand elasticity no change -0.20 -0.20
US stocks demand elasticity INCREASED IMPACT -1.40* no
ROW mill demand elasticity INCREASED IMPACT -0.25 -0.20
ROW stocks demand elasticity INCREASED IMPACT -0.463* no
* Parameter estimate not presented in original Sumner model; estimates drawn from FAPRI model
documentation discussed in Annex I to the US Rebutal Submission, paras 23-25. (Exhibit US-56,
Exhibit US-109, Exhibit US-65)

81. In Brazil's "oral" presentation, it offers no jus tification for the flaws in the Sumner II model's
structure or its arbitrary and unfounded elasticity assumptions. Nonetheless, the United States
addresses below a few of the key aspects of Brazi l's "oral" presentation regarding its modeling
exercise.

82. First, the United States notes that Brazil con tinues to attempt to discredit the FAPRI model
that it relied upon in the original proceedi ng (and that Brazil goes as far as to assert the original panel
relied upon).
115 Now, for example, Brazil derides the years of research embodied in the FAPRI
framework and parameters by characterizing it as "piece-mill development." This is presumably
intended to establish the superiority of Brazil's model, which was developed by Dr. Sumner alone

112 Daniel A. Sumner. "Boxed In: Conflicts Betw een U.S. Farm Policies and WTO Obligations."
Center for Trade Policy Studies, The Cato Institute, December 2005. (Exhibit US-108)
113 Daniel A. Sumner. "Boxed In: Conflicts Betw een U.S. Farm Policies and WTO Obligations."
Center for Trade Policy Studies, The Cato Institute, December 2005. (Exhibit US-108)
114 Of course, many of the elasticities in the model us ed for purposes of the original proceeding were
already overstated.
115 See e.g., Brazil Rebuttal Submission, para. 292. Brazil neglects to mention, however, that the
original panel expressly stated that "[w]e have taken note of the outcomes of the simulations submitted by
Brazil1, and the parties' exchanges of views thereon. We have not relied upon the quantitative results of the
modelling exercise – in terms of estimating any numerical value for the effects of th e United States subsidies,
nor, indirectly, in our examination of the causal link required under Articles 5 and 6.3(c) of the
SCM Agreement."

after the original panel proceeding and which has never been subjected to any peer review or
examination. Brazil's criticisms are remarkable given that – in an effort to have the original panel
accept its allegedly FAPRI-based model in the origin al proceeding – Brazil specifically lauded the
fact that FAPRI "continually update[d] [its] anal ytical capabilities and . . . market intelligence."
116
Thus, the fact that Brazil's new Sumner II model h as not been subjected to the same kind of peer
review and development renders it less – not more – reliable than the FAPRI framework.

83. Second, Brazil now claims that FAPRI para meters are inappropriate for analyzing the
"permanent" removal of payments such as the marketing loan and counter-cyclical payments.
117
However, in the original proceeding Brazil asserted that "FAPRI is the most influential organization
in the United States analyzing farm policy and its e ffects on U.S. and world commodity markets, i.e.,
that has the highest reputation and experience in answering the kind of "but for" questions faced by
this Panel,"118 Indeed, as Brazil expressly acknowledged in the original proceeding:

The FAPRI model has been widely used fo r policy analysis in the United States and
elsewhere for almost 20 years. U.S. commodity groups, including the U.S. cotton
industry, have regularly used the FAPRI model to analyze farm commodity program
options. The FAPRI model is also the key model used by the U.S. Congress in
considering farm program options. For almost two decades the U.S. Congress has
provided special appropriations to support th e continued use and development of the
FAPRI model. In both the 1996 and the 2002 Farm Bill processes, the FAPRI model
provided the most influential projections of likely program impacts. FAPRI received
the USDA highest honour for its analysis of certain proposals leading to the adoption
of the 2002 FSRI Act.
119
84. FAPRI has used their modeling system to analyze the removal of domestic subsidies under
trade liberalization scenarios and the reduction of farm subsidies under various farm bill scenarios,
including the "permanent" removal of payments. I ndeed, in attempting to argue that elimination of
the Step 2 program has had no effects on exports or prices, Brazil itself submitted and repeatedly cites
to a FAPRI assessment of the effects of eliminating that program.
120 FAPRI economists did not find it
necessary to change their model or modeling parame ters to address that question (involving a total
and permanent removal of payments). And Brazil did not complain that the FAPRI assessment of
eliminating the Step 2 program was "biased downwards ." To the contrary, in that context, Brazil
wants the Panel to accept that FAPRI allegedly shows "r elatively modest effects from the removal of
the Step 2 subsidy." Brazil argues that the Panel should rely on FAPRI's analysis of that scenario in
assessing the effects of eliminating the Step 2 program. Yet Brazil asserts that the same FAPRI
analysis is somehow inappropriate for analyzing th e counterfactual situation without marketing loan
and counter-cyclical payments.
121 Brazil's arguments in this regard are internally inconsistent and
lack credibility.
85. Third, the United States notes that Brazil h as applied a long-run elasticity for U.S. supply
response while imposing very conservative short-r un elasticities for international supply and demand
response. If the analysis is to be performed in the long run – and the United States considers that it
must for the reasons explained at the meeting w ith the Panel – then long-run elasticities must be

116 Answers of Brazil to Questions from the Panel After 2nd Meeting, para 21 (22 December 2003).
117 Brazil Oral Statement, para. 103.
118 Answers of Brazil to Questions from the Panel After 2nd Meeting, para 24 (22 December 2003)
(emphasis added).
120 See Brazil First Written Submission, para. 203 (a ddressing FAPRI, "Impacts of Commodity and
Conservation Reserve Program Provisions in Hous e and Senate Reconciliation Bills," FAPRI-UMC
Report #15-05, December 2005(Exhibit Bra-484).)
121 Brazil Oral Statement, para. 103.

assumed throughout the model. In that time, fore ign cotton producers will make full adjustments and
respond as well. Similarly, over the long-term , U.S. and foreign mill demand become more
responsive to permanent price changes. There is no basis whatsoever for the kind of mix-and-match
approach that Brazil has adopted in an effort to ex aggerate any possible effects of the marketing loan
and counter-cyclical payments.

86. Fourth, another key source of bias in Dr. Su mner's analysis is the fact that it does not
incorporate, either explicitly or implicitly, any stock behaviour. 122 Yet, stock adjustments may have
important effects on overall price movements in the short-run. As future prices increase relative to
current prices, warehouses will tend to carry more i nventory, choosing to sell their cotton in future
periods when prices are higher. Likewise, if current prices are high relative to futures prices, sellers
find it more attractive to market their cotton rather th an holding it for sale in the future. In this way,
stocks act to buffer prices. If prices fall, potential sellers will sell less and hold more in stock, thus
bolstering prices. If prices rise, inventory holders will sell stocks, thus dampening prices. Ignoring
stockholding behaviour in the kind of predominantly short-run assessment that Brazil attempts to
conduct exacerbates any possible effects of rem oval of marketing loans and counter-cyclical
payments on world price.

87. Fifth, the United States contests Brazil's effort s to explain away the fact that it uses counter-
cyclical payments rates that are in excess of the statutory maximum. According to Dr. Sumner, this
results from calculation of counter-cyclical pa yment rates on a per-pound of production basis
123:
"[The Sumner II model] uses the CCP rate per pound of production for each year. Since cotton
production is smaller than cotton base, the CCP rate per pound of production can exceed 13.73 cents
per pound when the CCP rate per pound of base remains at the maximum." 124 In other words, Brazil
admits that it attempts to attribute to upland cotton production all counter-cyclical payments made in
respect of upland cotton base acres regardless of whether upland cotton or some other crop was
grown. More precisely, Brazil attempts to attribute cotton production-inducing effects in respect of
payments even when the payments were made on farms that did not produce upland cotton or on
farms where other crops were grown, instead of upland cotton, on acres historically planted to cotton.
This is an illogical approach that serves no purpose other than to inflate the results of the modeling
exercise.

88. In sum, the evidence and arguments before th e Panel show that the Sumner II model lacks the
rigor or detail to address the complexities of the glob al fiber market. Moreover, the model's choice of
elasticities introduces biased results. Even ignoring the structural i ssues with the model, the United
States has demonstrated that the use of more reasonable, independent elasticities produce dramatically
smaller impacts on world price.

IV. C
ONCLUSION

89. The United States has implemented the DSB's recommendations and rulings in this dispute
and that it has done so consistently with its WTO obligations. The United States has eliminated two
export credit guarantee programs entirely. And th e United States has substantially overhauled the
third, lowest-risk program. The United States h as also eliminated a third program, the Step 2
program, payments under which were claimed by Braz il to be prohibited export subsidies, among the
most distortive of subsidy measures.

90. Moreover, substantial evidence confirms that payments under the marketing loan and counter-
cyclical payment programs are not causing present significant price suppression, as Brazil alleges.

122 The absence of such an analysis is especially remarkable given Brazil's new theory that it is stocks –
not exports – that are suppressing world market prices.
123 Brazil Oral Statement, para. 120.
124 Brazil Oral Statement, para. 120.

Brazil has not been able to rebut this evidence. Rather, it continues to rely on the heavily biased
results of the modeling exercise commissioned for pu rposes of this dispute. The United States has
shown that exercise to be unreliable and, as its author has noted in another context, not "appropriate to
support [Brazil's] serious prejudice claim before [this] WTO panel."
125

91. Finally, the United States again would like to thank the Panel for providing this opportunity to
comment on Brazil's "oral" statement. While we recognize that such an opportunity is unusual in
WTO panel proceedings, the approach taken by Braz il to the Panel meeting was, itself, unusual.
Brazil's approach had the unfortunate consequence of limiting the chance for an oral dialogue with the
Panel to a single afternoon. Fortunately, by a llowing this opportunity for comment, the Panel has
allowed the dialogue to take place, albeit in written form.

125 Daniel A. Sumner. "Boxed In: Conflicts Betw een U.S. Farm Policies and WTO Obligations."
Center for Trade Policy Studies, The Cato Institute, December 2005. (Exhibit US-108)

ANNEX

CALCULATION OF EXPECTED MARKET NET RETURNS ABOVE VARIABLE COSTS

1. Expected Market Prices:

For upland cotton, soybeans and corn, the expected market price is based on the January-March
average of the relevant harvest-time (futures) contract . This is the expected market price most likely
to be relied upon by a producer. For 2007, since da ta are not available for the full month of March,
the average reflects January 1 through March 2. The source for those prices is the New York Board
of Trade for cotton futures; Chicago Board of Trade for corn and soybeans.

Using the relevant harvest-time contract, the expect ed market price is derived by subtracting an
average basis from the futures pri ce. In the case of cotton, the basis used is $0.05 per pound. For
soybeans and corn, a basis of $0.14 is used for each. The basis was taken from analysis by
USDA/ERS that projects market prices and counte r-cyclical payment rates from futures prices.
Models can be found at http://www.ers.usda.gov/Data/PriceForecast/

For cottonseed, in the absence of a futures market to determine price expectations, expected market
prices are set at lagged prices.

2. Expected Yields

For all crops, expected yields are determined based on a linear trend equation applied to USDA/NASS
data for actual yields for the period 1995-2006. Fo r upland cotton and cottonseed, the expected yield
represents an average yield across the 17 cotton-pr oducing states. For soybeans and corn, average
yields across the Cotton Belt are also used, with th e exception of data for Missouri and Kansas. Both
states are relatively small producers of cotton and large producers of corn and soybeans. However, the
majority of corn and soybeans are grown in parts of the states too far north to be suitable for cotton
production. Corn and soybean yields in those regions , therefore, are not directly applicable to corn
and soybean yields that would be expected in the cotton producing regions of those states.

3. Variable Costs

Data for variable costs are taken from USDA/ERS co sts of production data. For each crop, operating
costs and hired labor are included as variable costs. For cotton, the costs represent the average across
the Cotton Belt. In the case of competing crops, re gional data are used to calculate average costs
across the cotton-producing states to most clo sely match the costs faced by U.S. farmers.
1 Projected
cotton-belt costs for corn and soybeans are derived from USDA/ERS projections of national costs.

4. Expected Market Net Returns

For 2002 through 2007, expected market returns above variable costs are calculated as follows:

(a) For cotton, variable costs (including USDA- designated costs assigned to ginning that exceed
revenue from cottonseed and hired labor) are subtracted from market returns for cotton lint.
(b) For soybeans and corn, variable costs are s ubtracted from market returns for each of the
crops.

1 The United States does not use national average co sts for corn and soybeans since those costs are
heavily influenced by the Midwestern United States. Although the majority of corn and soybean production
occurs there, it is an area that is not suitable for cotton production. Therefore, the costs for those regions are not
the costs ordinarily faced by U.S. cotton farmers.

TABLE OF CASES
Short Title Full Case Title and Citation
Australia – Leather
(21.5)
Panel Report, Australia – Subsidies Provided to Producers and Exporters of
Automotive Leather, WT/DS126/RW, adopted 11 February 2000, DSR 2000:III,
1189.
Australia – Salmon
(Article 21.5 – Canada)
Panel Report, Australia – Measures Affecting Importation of Salmon – Recourse to
Article 21.5 of the DSU by Canada , WT/DS18/RW, adopted 20 March 2000,
DSR 2000:IV, 2031.
Canada – Aircraft (21.5) Appellate Body Report, Canada – Measures Affecting the Export of Civilian
Aircraft – Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/AB/RW,
adopted 4 August 2000, DSR 2000:IX, 4299.
Canada – Dairy (21.5) Appellate Body Report, Canada – Measures Affecting the Importation of Milk and
the Exportation of Dairy Products – Recourse to Article 21.5 of the DSU by New
Zealand and the United States, WT/DS103/AB/RW, WT/DS113/AB/RW, adopted
18 December 2001, DSR 2001:XIII, 6829.
Chile – PBS (21.5) Panel Report, Chile – Price Band System and Safeguard Measures Relating to
Certain Agricultural Products – Recourse to Article 21.5 of the DSU by Argentina,
WT/DS207/RW, circulated to WTO Members 8 December 2006.
EC – Bed Linen (21.5) Appellate Body Report, European Communities – Anti-Dumping Duties on Imports
of Cotton-Type Bed Linen from India – Recourse to Article 21.5 of the DSU by
India, WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965.
EC – Bed Linen (21.5) Panel Report, European Communities – Anti-Dumping Duties on Imports of Cotton-
Type Bed Linen from India – Recourse to Article 21.5 of the DSU by India ,
WT/DS141/RW, adopted 24 April 2003, modified by Appellate Body Report,
WT/DS141/AB/RW, DSR 2003:IV, 1269.
EC – Selected Customs
Matters
 Appellate Body Report, European Communities – Selected Customs Matters ,
WT/DS315/AB/R, adopted 11 December 2006.
Mexico – Corn Syrup
(21.5)
Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose
Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSU
by the United States , WT/DS132/AB/RW, adopted 21 November 2001,
DSR 2001:XIII, 6675.
U.S. – Certain EC
Products (21.5)
Panel Report, United States – Import Measures on Certain Products from the
European Communities , WT/DS165/R and Add.1, adopted 10 January 2001,
modified by Appellate Body Report, WT/DS165/AB/R, DSR 2001:II, 413.
U.S. – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619.
U.S. – FSC (21.5 II) Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" – Second Recourse to Arti cle 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW2, adopted 14 March 2006.
U.S. – FSC (21.5 II) Panel Report, United States – Tax Treatment for "Foreign Sales Corporations"
 – Second Recourse to Article 21.5 of the DSU by the European Communities ,
WT/DS108/RW2, adopted 14 March 2006, upheld by Appellate Body Report,

U.S. – Shrimp (21.5) Appellate Body Report, United States – Import Prohibition of Certain Shrimp
 and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia ,
WT/DS58/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6481.
U.S. – Softwood
Lumber IV (21.5)
Appellate Body Report, United States – Final Countervailing Duty Determination
with Respect to Certain Softwood Lumber from Canada – Recourse by Canada to
Article 21.5 of the DSU, WT/DS257/AB/RW, adopted 20 December 2005.

Short Title Full Case Title and Citation
U.S. – Softwood
Lumber IV (Article 21.5)
Panel Report, United States – Final Countervailing Duty Determination with
Respect to Certain Softwood Lumber from Canada – Recourse by Canada to
Article 21.5 [of the DSU], WT/DS257/RW, adopted 20 December 2005, upheld by
Appellate Body Report, WT/DS257/AB/RW.
US – Softwood Lumber V Appellate Body Report, United States – Final Dumping Determination on Softwood
Lumber from Canada, WT/DS264/AB/R, adopted 31 August 2004, DSR 2004:V,
1875.
US – Softwood
Lumber VI (21.5)
Appellate Body Report, United States – Investigation of the International Trade
Commission in Softwood Lumber from Canada – Recourse to Article 21.5 of the
DSU by Canada, WT/DS277/AB/RW, adopted 9 May 2006.
U.S. – OCTG Sunset
Reviews (21.5)
Panel Report, United States – Sunset Reviews of Anti-Dumping Measures on Oil
Country Tubular Goods from Argentina – Recourse to Article 21.5 of the DSU by
Argentina, WT/DS268/RW, circulated to WTO Members 30 November 2006.
US – OCTG Sunset
Reviews (Argentina)
Appellate Body Report, United States – Sunset Reviews of Anti-Dumping Measures
on Oil Country Tubular Goods from Argentina , WT/DS268/AB/R, adopted
17 December 2004, DSR 2004:VII, 3257.
U.S. – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton ,
WT/DS267/AB/R, adopted 21 March 2005.
U.S. – Upland Cotton Panel Report, United States – Subsidies on Upland Cotton , WT/DS267/R, and
Corr.1, adopted 21 March 2005, modified by Appellate Body Report,

A. G ENERAL QUESTIONS

Questions to both parties

1. Is Brazil/US of the view that a party to a dispute referred to a panel established under
Article 21.5 of the DSU (a party in a compliance pan el) can make the same legal argument as it did
in the original Panel proceedings?

1. Brazil notes that a party's arguments in WTO dispute settlement are distinct from the claims
identified by the complaining Member in the request for the establishment of a panel.
1 Although there
are certain limitations on the claims that can be brought by the complainant in Article 21.5
proceedings, the complaining and respondent Members are free to make whatever legal arguments
they wish.

2. Could each party explain its view on the ques tion of whether, and to what extent, this Panel
must rely on the legal and factual analysis underlyi ng the original panel's findings? What are the
relevant provisions of the DSU in this regard?

2. According to Article 3.2 of the DSU, dis pute settlement is a central element in providing
"security and predictability to the multilateral trading system". In developing a dispute settlement
system that contributes to securing this objective, pa nels and the Appellate Body have taken care to
ensure that disputes involving the same or similar f actual and legal questions are resolved in the same
way. The Appellate Body has articulated principles in this regard that seek to further the goals of
security and predictability.
2

3. First, prior adopted panel and Appellate Body re ports create "legitimate expectations" among
WTO Members, and should be taken into account by panels when they are relevant to the resolution
of a dispute.
3 Second, where the issues before a panel are the same as those previously examined by
the Appellate Body, it is "not only appropriate," but to "be expected," that the panel would follow the
Appellate Body's earlier conclusions.4

4. The Appellate Body has also clarified that the objective of "security and predictability"
applies with particular force in Article 21.5 proceedings. As Brazil noted in previous submissions, the
Appellate Body has stated that "Article 21.5 procee dings do not occur in isolation but are part of a
'continuum of events .'"
5 The Appellate Body observed that "doubts could arise about the objective
nature of an Article 21.5 panel's assessment if, on a specific issue, that panel were to deviate from the
reasoning in the original panel report in the absence of any change in the underlying evidence."6

5. In this passage, the Appella te Body linked the need for consistent decision-making by a
compliance panel to that panel's duty to make an "objective assessment" of the matter under
Article 11 of the DSU. If a compliance panel "deviate[d]" from the original panel's findings on a
"specific issue", without a fundamental change in the domestic legal fr amework and/or facts
warranting this deviation, it would suggest that th e compliance panel is acting in an arbitrary fashion
that does not meet the requirements of an "objectiv e assessment". Accordingly, in the progression of

1 See, e.g., Appellate Body Report, EC – Selected Customs Matters, para. 153.
2 See Appellate Body Report, US – Softwood Lumber V, para. 111, where the Appellate Body expressly
relied on Article 3.2 of the DSU.
3 Appellate Body Report, US – Softwood Lumber V, para. 111.
4 Appellate Body Report, US – OCTG Sunset Reviews (Argentina), para. 188.
5 Appellate Body Report, U.S. – Softwood Lumber IV (21.5) , para. 103 (emphasis added) citing
Appellate Body Report, Mexico – Corn Syrup (21.5) , para. 121. See Brazil's First Written Submission,
para. 28.
6 Appellate Body Report, US – Softwood Lumber VI (21.5), para. 103 (emphasis added).

"events" within a single dispute, it is especially important for the compliance panel to respect the
findings of the panel and the Appellate Body in the original proceedings.

6. In this compliance dispute, with respect to Brazil's claims of adverse effects, many of the
legal questions have already been addressed by th e original panel and the Appellate Body. The
structure, design and operation of the contested subs idy programs has not altered, nor has the general
order of the magnitude of these subsidies. Indeed, the magnitude of the subsidies has increased.
Further, the evidence relating to the effect of the contested subsidies in the marketplace is also very
much the same. In these circum stances, the requirements of "security and predictability," and an
"objective assessment", require the compliance Panel to follow the relevant findings of the original
panel and the Appellate Body.

7. Although a compliance panel should follow the findings of the original panel and Appellate
Body when the factual and legal questions are th e same, the questions that arise in compliance
proceedings may differ. This is because a comp liance panel "is not confined to examining the
'measures taken to comply' from the perspective of the claims, arguments and factual circumstances
that related to the measure that was the subject of the original proceedings."
7

8. With respect to the claims regarding export credit guarantees, the factual and legal questions
relating to the existence of a "benefit" under Article 1.1(b) of the SCM Agreement were not addressed
by the panel in the original proceedings. Thus , there are no findings on these questions that the
compliance panel should follow. Brazil notes, however, that prior panel reports address how to assess
the "benefit" from loan guarantees
8; those reports create "legitimate expectations" among
WTO Members on this specific issue, and should be taken into account by the compliance panel. 9
The factual and legal questions relating to item (j) of the Illustrative List of Export Subsidies have
been thoroughly explored in the original proceedings. To ensure "security and predictability", the
compliance panel should follow the earlier findings in its interpretation of item (j) and in its treatment
of the evidence.

B. Q
UESTIONS WITH RESPECT TO BRAZIL'S REQUEST UNDER ARTICLE 13.1 DSU

Questions to the US

3. Is the United States arguing that Brazil must identify the subsidized product for each of the
types of subsidies from which it claims serious p rejudice? Is the United States arguing that payments
which permit planting flexibility are not tied to the production of upland cotton, so that they must be
allocated by Brazil across the total value of production of each recipient?

4. Does the United States contest the accura cy of the figures for 2003 – 2005 cited in
"Table 6"
10 of Brazil's first submission and "Table 5" 11 of Brazil's rebuttal submission? If so, please
provide the accurate figures, or the figures the US deems to be more accurate.

7 Appellate Body Report, Canada – Aircraft (21.5) , para. 41. See also Panel Report, Chile –
PBS (21.5), paras. 7.129, 7.136-7.137. The Appellate Body la ter confirmed that this statement applied in the
context of "a new claim challenging a new component of the measure taken to comply which was not part of the
original measure." Appellate Body Report, EC – Bed Linen (21.5), para. 88.
8 See Panel Report, EC – CVDs on DRAMs , paras. 7.189, 7.190; Panel Report, Canada – Aircraft
Credits and Guarantees, para. 7.345.
9 Appellate Body Report, US – Softwood Lumber V, para. 111.
10 Immediately preceding para. 112 of Brazil's First Written Submission.
11 Immediately following para. 173 of Brazil's Rebuttal Submission.

Question to Brazil

5. The Panel refers to Brazil's communica tion dated 22 January 2007 concerning its request
in relation to Article 13.1 of the DSU. Is it correct for the Panel to understand that as far as data
for 2005 is concerned, data included in Exhibit US -64 satisfies all of the requests Brazil made in
Part A of Annex 1 of its 1 November communication?

9. The Panel is correct in understanding that the data included in Exhibit US-64, as far as
marketing year 2005 is concerned, satisfies Part A of Brazil's 1 November 2006 request. The data
enables Brazil to calculate the amount of counte r-cyclical payments allocated to upland cotton under
the "Cotton-to-Cotton Methodology" and under "Brazil's Methodology." Brazil presents the results of
its calculation as part of its Opening Statement to the compliance Panel.

C. Q
UESTIONS CONCERNING THE PRELIMINARY OBJECTIONS RAISED BY THE UNITED STATES

1. Preliminary objections of the United States in respect of claims of Brazil regarding
export credit guarantees in respect of pig meat and poultry meat

Question to both parties

6. The parties disagree with respect to whether in a proceeding under Article 21.5 of the DSU
a party may present a claim that was raised in the original proceeding but on which no finding of
WTO-inconsistency was made due to the fact that the Appellate Body was unable to complete the
analysis.

a) Could the parties explain the legal basis in the text of Article 21.5 of the DSU and
other relevant provisions of the DSU for their position on this question?

b) Could the parties explain whether and how their position on this issue is consistent
with prior panel and Appellate Body reports?

 A. Introduction

10. Brazil claims that the amended GSM 102 program has been applied to circumvent U.S. export
subsidy commitments on pig meat and poultry meat, in contravention of Articles 10.1 and 8 of the
Agreement on Agriculture (and in consequence, of Articles 3.1(a) and 3.2 of the SCM Agreement). In
its response to this question, Brazil will demonstr ate that under the relevant provisions of the DSU
and the jurisprudence, its claims are properly wi thin the scope of these Article 21.5 proceedings.
Brazil will address the limits placed by the DSU and prior jurisprudence on both the measures that
may be challenged in Article 21.5 proceedings, and the claims that can be raised against those
measures. Brazil will then demonstrate that its claims, and the measure subject to those claims,
observe those limits.

 B. Background

11. The treatment of Brazil's claims in the orig inal proceedings is important to the compliance
Panel's assessment of the United States' preliminar y objection. In the original proceedings, the
measure at issue was the original GSM 102 progra m, which had general te rms and conditions that
applied on a non-product-specific basis to many ag ricultural products. Brazil claimed that this
measure involved export subsidies applied in a ma nner that circumvented the United States' export
subsidy commitments for all thirteen of its sche duled products and for unscheduled products, under
Article 10.1 of the Agreement on Agriculture.

12. The original panel found that Brazil had dem onstrated application by the United States of
GSM 102 to circumvent U.S. export subsidy comm itments for "unscheduled" products and for one
"scheduled" product – rice. On appeal, Brazil challe nged the original panel's failure to find that the
export credit guarantees ("ECG") programs were applie d in a manner which results in circumvention
of U.S. export subsidy commitments for three othe r scheduled products – pig meat, poultry meat and
vegetable oil.
12 At the oral hearing, Brazil withdrew its appeal with respect to vegetable oil.13

13. On review, the Appellate Body reversed the original panel's finding that Brazil had failed to
demonstrate actual circumvention with respect to pig meat and poultry meat.

14. However, the Appellate Body concluded that there were insufficient uncontested facts of
record to enable it to complete the analysis.
14 Because the Appellate Body was unable to complete the
analysis, there is no adopted finding that the orig inal GSM 102 program is applied in a manner that
circumvents the United States' commitments with resp ect to pig meat and poultry meat. At the same
time, however, there is also no adopted finding that the original GSM 102 program, again with respect
to pig meat and poultry meat, is not inconsistent with Article 10.1 of the Agreement on Agriculture.

15. During implementation, the United States c ould have taken steps to amend the GSM 102
program exclusively with respect to the terms a nd conditions applicable to rice and unscheduled
products. However, it did not do so. Instead, it revised the general terms and conditions of the
program, including the guarantee fee schedule, adopting an amended GSM 102 program that still
applies on a non-product-specific basis. In adopting an amended GSM 102 program, the United
States was obliged to ensure that this new measur e respected all of the United States' obligations
under the covered agreements.

16. In these compliance proceedings, Brazil claims that the amended GSM 102 program is not
consistent with the United States' obligati ons under, among others, Article 10.1 of the Agreement on
Agriculture because this new measure is applied in a ma nner that circumvents U.S. obligations with
respect to three scheduled products – pig meat, poultry meat and rice – and unscheduled products.

17. There is no dispute between the Parties that this claim is included in Brazil's request for
establishment, which states, in relevant part, as follows:

... [S]ubsequent to 1 July 2005, ECGs [export credit guarantees] under the GSM 102
and SCGP [Supplier Credit Guarantee] programs have been applied to circumvent US
export subsidy commitments, within the meaning of Article 10.1 of the Agreement on
Agriculture. Brazil is concerned that ECGs under the GSM 102 and SCGP programs
have been provided subsequent to 1 July 2005 to support the export of: upland cotton
and other unscheduled products; and, rice, pigmeat and poultry meat
, in excess of
US reduction commitment levels for those products.15
18. Brazil now turns to consider whether th ere are any limitations in these compliance
proceedings on its right (1) to challenge the am ended GSM 102 program in these proceedings as a
"measure taken to comply" or (2) to claim that this new measure circumvents the United States' export
subsidy commitments for pig meat and poultry meat.

19. The DSU contains limits on: (i) the measures
 that may properly be subject to review in
Article 21.5 proceedings; and, (ii) the claims that may properly be subject to review in Article 21.5
proceedings. Brazil will address these two limits – on measures, and on claims – separately.

12 Appellate Body Report, U.S. – Upland Cotton, para. 683.
13 Appellate Body Report, U.S. – Upland Cotton, para. 683.
14 Appellate Body Report, U.S. – Upland Cotton, paras. 689-694.
15 WT/DS267/30, para. 27 (emphasis added).

20. The distinction between measures
 and claims is important, given the basis for the
United States' objection.
C. Measures

 1. Limits on measures subject to Article 21.5 review

21. Article 21.5 enables a compliance panel to re view claims regarding the existence, or the
consistency with the covered agre ements, of "measures taken to comply" with the recommendations
and rulings of the DSB. Measures that are not "taken to comply" with the DSB's recommendations
and rulings may not be pursued in Article 21.5 proceedings.
16

22. According to the Appellate Body, the phrase "measure taken to comply" in Article 21.5
includes a new measure "in its totality".
17 Exactly what constitutes the bounds of a "measure taken to
comply" varies according to the circumstances of the dispute, however.

2. Erroneous basis for U.S. objection and the relevance of that objection for
assessment of "measures"

23. In these proceedings, Brazil has fully obser ved the limits on the measures subject to
Article 21.5 review.

24. In its Rebuttal Submission, the United States clarifies that Brazil's claim is not properly
within the scope of these Article 21.5 proceedings because it relates to a measure that is not a
"measure taken to comply". The United States desc ribes the "measure" subject to Brazil's claim as
"pig meat and poultry meat GSM 102 guarantees".
18 The United States argu es that such a "measure"
could not be a "measure taken to comply", because there was no recommendation compelling action
with respect to "pig meat and poultry meat GSM 102 guarantees".19

25. With these statements, the United States confounds Brazil's claim
, and the measure that is the
subject of that claim.

26. As noted above, Brazil's claims
 of inconsistency are product-specific with respect to
scheduled products, as they must be. 20 Article 10.1 prohibits the use of export subsidies not listed in

16 Appellate Body Report, Canada – Aircraft (21.5) , para. 36 ("Proceedings under Article 21.5 do not
concern just any measure of a Member of the WTO; rather, Article 21.5 proceedings are limited to those
'measures taken to comply with the recommendations and rulings' of the DSB. In our view, the phrase 'measures
taken to comply' refers to measures which have been, or which should be, adopted by a Member to bring about
compliance with the recommendations and rulings of the DSB. In principle, a measure which has been 'taken to
comply with the recommendations and rulings' of the DSB will not be the same measure as the measure which was
the subject of the original dispute, so that, in principle, there would be two separate and distinct measures: the
original measure which gave rise to the recommendations and rulings of the DSB, and the 'measures taken to
comply' which are – or should be – adopted to implement those recommendations and rulings.").
17 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 67; Appellate Body Report, U.S. –
Shrimp (21.5), para. 87.
18 U.S. Rebuttal Submission, para. 10 ("In other words, as Brazil expressly concedes, there have never
been any findings of WTO inconsistency against the pig meat and poultry meat GSM 102 guarantees , and
consequently there were no DSB recommenda tions and rulings against these measures with which the
United States was obligated to comply.") (emphasis added). See also Id., paras. 14, 15.
20 See also Brazil's Rebuttal Submission, para. 378. Consistent with its request for establishment,
Brazil's claims concerning GSM 102 ECGs for unscheduled products are also produc t-specific, since they are
limited to any unscheduled product that has received GSM 102 support subsequent to 1 July 2005.

Article 9.1 of the Agreement to circumvent (or threaten to circumvent) "export subsidy
commitments". The first clause of Article 3.3 of the Agreement on Agriculture specifies that with
respect to scheduled products, those "export subs idy commitments" include the commitment not to
provide export subsidies "in excess of the budge tary outlay and quantity commitments levels
specified" in its Schedule.
21

27. To establish its product-specific claims of circ umvention with respect to scheduled products,
Brazil has established: (i) that in FY 2006, th e United States provided GSM 102 ECGs to support the
export of rice, pig meat and poultry meat in excess of its annual quantity commitment levels for those
products; and, (ii) that during the period 1 Ju ly – 30 September 2005, the United States provided
GSM 102 ECGs to support the export of rice and poultry meat in excess of its annual quantity
commitment levels for those products.22

28. In contrast, the measure
 subject to Brazil's claims of inconsistency with the covered
agreements is not product-specific, as the United States asserts. The measure subject to
Brazil's claims of inconsistency, "in its totality" 23, is the GSM 102 program as amended by the
United States' "measures taken to comply" – the modification of the GSM 102 fee schedule (including
the removal of certain risk categories from eligibility).24

29. There is no factual basis for the United States to characterize the measure
 subject to Brazil's
claims of inconsistency as "the pig meat and poultry meat GSM 102 guarantees". 25 No such
"measure" exists. Neither the amended GSM 1 02 program in its totality, nor the individual
amendments, set out terms or conditions that differ as between different eligible products:

• Fees under the amended GSM 102 schedule eff ective 1 July 2005 differ according to
country risk, repayment term a nd repayment frequency, but not according to the
eligible products involved.26

• The regulations relating to the GSM 102 program do not set out differing terms and
conditions for GSM 102 ECGs depending on the specific eligible product at issue.27
• The USDA FAS press release announcing amendments to the ECG programs
effective 1 July 2005 does not indicate that those amendments apply differently to
different eligible products28;

21 See Appellate Body Report, U.S. – FSC, para. 145. In an export subsidy dispute involving products
listed in Annex I to the Agreement on Agriculture, Article 3 of the SCM Agreement also applies on a product-
specific basis. The chapeau to Article 3.1 prohibits export subsidies "[e]xcept as provided in the Agreement on
Agriculture". If export subsidies are provided for products listed in Annex I to the Agreement on Agriculture
within the limits of a Member's "export subsidy commitments" – meaning, for scheduled products, below the
Member's budgetary outlay and quantity commitments levels specified in its Schedule – the safe harbour in the
chapeau to Article 3.1 applies.
22 Exhibits Bra-552, Bra-553 and Bra-554. See also Brazil's First Written Submission, para. 452.
23 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 67; Appellate Body Report, U.S. –
Shrimp (21.5), para. 87.
24 See WT/DS267/30, paras. 8 ((ii) and (iii)), 26. Throughout its response, Brazil will refer to the
measure subject to its claims as "the GSM 102 program as amended by the modified GSM 102 fee schedule".
26 Exhibit Bra-504 ("USDA changes its fees to risk-based method for the GSM-102 and Supplier Credit
Guarantee programs," USDA FAS Online News Re lease, 30 June 2005, acce ssed November 2006 at
http://www.fas.usda.gov/scriptsw/PressRelease/pressrel_dout.asp?PrNum=0093-05); Exhibit Bra-505
(GSM-102 Guarantee Fee Rate Schedule, US DA FAS Online, accessed September 2006 at
www.fas.usda.gov/excredits/gsm102fees.html).
27 Exhibit Bra-519 (7 C.F.R. Part 1493, Subparts A and B, GPO Access Online, January 2006, accessed
July 2006 at http://www.gpoaccess.gov/cfr/index.html).

• USDA FAS "FAQs" issued with the announcem ent of the amendments to the ECG
programs effective 1 July 2005 does not indicate that those amendments apply
differently to different eligible products29;

• The USDA FAS "fact sheet" describing the amendments to the ECG programs
effective 1 July 2005 does not indicate that those amendments apply differently to
different eligible products.30

30. The measure subject to Brazil's claims in this di spute, and the GSM 102-related "measures
taken to comply", are identical – namely, the GSM 102 program as amended by the modified
GSM 102 fee schedule. The measure does not apply on a product-specific basis; the terms and
conditions for ECGs under the GSM 102 program as amended by the modified GSM 102 fee schedule
are the same for pig meat, poultry meat, and all other eligible scheduled as well as unscheduled
products. While Brazil's claims
 regarding the consistency of the GSM 102 program as amended by
the modified GSM 102 fee schedule are product-specific, the measure at issue is not.

31. The United States' objection to the inclusion of Brazil's Article 10.1 claims concerning pig
meat and poultry meat within the scope of these Artic le 21.5 proceedings, is that those claims identify
a product-specific measure
. That objection is misplaced and should be rejected.31 By challenging the
amended GSM 102 program, Brazil is in full complia nce with the limits imposed by Article 21.5 on
the measures that may properly be subject to Article 21.5 review.

 D. Claims

1. Erroneous basis for U.S. objection and the relevance of that objection for
assessment of "claims"

32. As noted, the contested measure taken to comply – the GSM 102 program as amended by the
modified GSM 102 fee schedule – applies uniformly and without variation to all eligible products. In
these Article 21.5 proceedings, Brazil's claims a pply to GSM 102 support for only some of those
eligible products – unscheduled products and th ree scheduled products – rice, pig meat and poultry
meat.

33. Given the Appellate Body's inability to comple te the analysis with respect to Brazil's product-
specific claims concerning support for exports of pig meat and poultry meat
32, there is no final
resolution to Brazil's claims regarding the original GSM 102 program. Specifically, there are no
adopted findings that the ECG programs, with respect to pig meat and poultry meat, are inconsistent
with Article 10.1 of the Agreement on Agriculture , and there are no adopted findings that the ECG
programs, again with respect to pig meat and poultry meat, are not inconsistent with Article 10.1.

28 Exhibit Bra-502 ("USDA announces changes to export credit guarantee programs to comply with
WTO Findings," USDA FAS Online News Releas e, 30 June 2005, accessed November 2006 at
http://www.fas.usda.gov/scriptsw/PressRelease/pressrel_dout.asp?PrNum=0092-05).
29 Exhibit Bra-501 ("FAQs: Risk-Based Fees," Foreign Agriculture Service, USDA, accessed
November 2006 at www.fas.usda.gov/excredits/faqs.html).
30 Exhibit Bra-520 ("Export Credit Guarantee Program," USDA FAS Fact Sheet, March 2006, accessed
November 2006 at http://www.fas.usda.gov/info/factsheets/gsm102-03.asp).
31 As a result, the manifestations of "potential procedural unfairness" identified by the compliance
Panel in U.S. – Certain EC Products (21.5) , which arose from the fact that the EC was bringing a new claim
against an aspect of the original measure that remained unchanged following adoption by the United States of its
"measures taken to comply", do not arise in th e current compliance proceedings. Panel Report, U.S. – Certain
EC Products (21.5), para. 7.75 (note 294).
32 Appellate Body Report, U.S. – Upland Cotton, paras. 689-694.

34. The United States does not appear to ch allenge the "final resolution" standard per se. That is,
the basis for the United States' objection is not
 that Brazil is prohibited from pursuing the same claims
that it maintained in the original proceedings, wh ere there has not been final resolution of those
claims. Rather, as discussed above, the United Stat es argues that Brazil is prohibited from pursuing
those same claims in these Article 21.5 pro ceedings, because the claims concern a measure that is not
a "measure taken to comply".

35. Brazil has demonstrated above that its claims concern a new "measure taken to comply" that
replaces the original measure. That is, the or iginal GSM 102 program has been replaced by the
amended GSM 102 program, including a modified guara ntee fee schedule. In the situation where the
Article 21.5 proceedings concern a new aspect of a new measure, there are no limits on the scope of
Brazil's claims in these proceedings. The text of Article 21.5 allows claims regarding both the
existence
 of measures taken to comply, and the consistency of those measures with all of the
United States' obligations under the covered agreements.

36. The situation in these Article 21.5 proceedings is very similar to the situation that arose in the
Article 21.5 proceedings in Canada – Aircraft . In that dispute, Canada amended the terms and
conditions of an e xport subsidy program. 33 The Appellate Body held th at the "measure taken to
comply" was "a new measure, the revised TPC program", which was "separate and distinct " from the
original TPC program.34 In this dispute, the United States al so amended the terms and conditions of
an export subsidy program. The "measure taken to comply" is, therefore, "a new measure, the revised
[GSM 102] program".

37. With respect to a new measure, the Appellate Body held that a compliance panel operating
under the authority of Article 21.5 "is not confined to examining the 'measures taken to comply' from
the perspective of the claims, arguments and factua l circumstances that related to the measure that
was the subject of the original proceedings."
35 Thus, a compliance panel can assess any claims made
with respect to the new measure. The Appella te Body expressly endorsed the view that the
complaining Member can make the "same" claims that were made in the original proceedings.36

38. Thus, in these compliance proceedings, Brazil is entitled to claim that the amended GSM 102
program is applied in a manner that circumvents the United States' commitments for pig meat and
poultry meat.

39. The compliance Panel's asks Brazil to justify its position – that it may pursue, in Article 21.5
proceedings, the same claim that it maintained in the original proceedings, where there has not been
final resolution of that claim – under the DSU, as interpreted by panels and the Appellate Body.
Brazil explores the limits on claims that can be made in compliance proceedings in the paragraphs
that follow.

33 Appellate Body Report, Canada – Aircraft (21.5), para. 34.
34 Appellate Body Report, Canada – Aircraft (21.5), para. 36 (italics in original, underlining added).
35 Appellate Body Report, Canada – Aircraft (21.5), para. 41.
36 Appellate Body Report, Canada – Aircraft (21.5), footnote 35 (emphasis in original) ("We note that
the claim made by Brazil relating to the revised TP C program, in this Article 21.5 dispute, is the same as the
claim made by Brazil in the original proceedings in rela tion to the TPC program as previously constituted. In
both cases, Brazil complained that the measure at i ssue was inconsistent with Article 3.1(a) of the
SCM Agreement. These proceedings do not, therefore, involve a claim under a provision of the
SCM Agreement, or, even, a claim under a covered agreement, that was not examined in the original
proceedings in Canada - Aircraft.") (emphasis in original).

2. Limits on claims subject to Article 21.5 review

a. Limits concerning "new" claims

40. Several disputes have explor ed limits on the ability in Article 21.5 proceedings to pursue new

claims regarding unchanged components of the original measure that were not pursued in the original
proceedings. Panels have determined that a complaining Member may not, in Article 21.5
proceedings, pursue a new claim on an aspect of the original measure that remains unchanged from
the original proceedings, and that was not challenged in the original proceedings.37

41. This line of jurisprudence is not relevant to the issue currently before the compliance Panel.
The United States' objection does not relate to a new claim made by Brazil in these Article 21.5
proceedings, but instead relates to the same Brazilian claim made first in the original proceedings, and
again in these Article 21.5 proceedings. This line of case-law is also irrelevant in this proceeding
because Brazil's claims relate to the changed guarantee fee schedule of the amended GSM 102
program, and not to an unchanged aspect of the original measure.

b. Limits concerning the "same" claims: "final resolution" standard

42. Another line of disputes addresses limits on a complaining Member's ability to pursue the
same
 claim, in Article 21.5 proceedings, that it had pr eviously pursued in the original proceedings.
On several occasions, the Appellate Body and comp liance panels have explored the limits on the
ability in Article 21.5 proceedings to pursue the same claims previously pursued in the original
proceedings regarding an unchanged aspect of the original measure.

43. In EC – Bed Linen (21.5), the Appellate Body concluded that
38

an unappealed finding included in a panel report that is adopted by the DSB must be
treated as a final resolution to a dispute between the parties in respect of the
particular claim and the specific component of a measure that is the subject of that
claim.39
44. As noted in Brazil's 16 January submission 40, the situation posed by the Appellate Body is
different from the circumstances in the present dis pute. To recap, the original panel limited its
findings regarding circumvention to unscheduled products and one sch eduled product – rice. Brazil

37 Panel Report, Chile – PBS (21.5) , paras. 7.141, 7.147, 7.152; Panel Report, U.S. – Certain EC
38 In U.S. – Softwood Lumber VI (21.5) , the Appellate Body concisely described this aspect of its
conclusion in EC – Bed Linen (21.5) in the following terms: "a party cannot make the same claim of
inconsistency against the same measure (or component of a measure) in an Article 21.5 proceeding if … the
original panel found that the complaining party had not made out its claim with respect to the measure (or
component of a measure (Appellate Body Report, EC – Bed Linen (Article 21.5 – India) , paras. 92-93 and 99)."
Appellate Body Report, U.S. – Softwood Lumber VI (21.5), para. 102 (note 150).
39 Appellate Body Report, EC – Bed Linen (21.5) , para. 93 (emphasis in original). The original panel
in that dispute stated that: "The issue before us is whether India should be allowed to raise, in this Article 21.5
proceeding, claims with respect to Article 3.5 which it could and did raise before the original panel, but which
it did not pursue, and which the Panel dismissed for failure to present a prima facie case of violation." Panel
Report, EC – Bed Linen (21.5), para. 6.48 (emphasis in original). On review, the Appellate Body held that "the
effect, for the parties, of findings adopted by the DSB as part of a panel report is the same, regardless of whether
a panel found that the complainant failed to establish a prima facie case that the measure is inconsistent with
WTO obligations, that the Panel found that the measure is fully consistent with WTO obligations, or that the
Panel found that the measure is not consistent with WTO obligations." Appellate Body Report, EC – Bed
Linen (21.5), para. 96.

did not, as was the case for India in EC – Bed Linen , leave this finding unappealed. Rather, Brazil
successfully appealed the original panel's finding. The Appellate Body reversed the original panel's
finding that Brazil had failed to demonstrate actua l circumvention with respect to pig meat and
poultry meat, but was unable to complete the analysis given insufficient uncontested facts of record.
41

45. The Appellate Body's reversal of the origin al panel's ruling, joined with its inability to
complete the analysis, left the parties without final resolution of Brazil's claims regarding the
provision of ECGs for exports of pig meat and poultry meat in excess of U.S. reduction commitments
for those two products. This situation constitutes th e effective equivalent of the exercise of false
judicial economy, to which the Appellate Body also spoke in EC – Bed Linen (21.5):

The issue raised in this appeal is diffe rent from a situation where a panel, on its own
initiative, exercises "judicial economy" by not ruling on the substance of a claim. …
We believe that in a situation where a panel, in declining to rule on a certain claim,
has provided only a partial resolution of the matter at issue, a complainant should not
be held responsible for the panel's false exercise of judicial economy, such that a
complainant would not be prevented fro m raising the claim in a subsequent
proceeding.
42
46. The circumstances in the present dispute are sim ilar. The original panel erroneously excluded
ECGs for pig meat and poultry meat from its findi ngs regarding Brazil's circumvention claims. As a
result of the original panel's failure to make the necessary factual findings, the Appellate Body, while
reversing the original panel's conclusion as a matter of law, was unable to complete the analysis and
offer Brazil satisfaction on its claims, through no fa ult of Brazil. In these circumstances, Brazil
"should not be held responsible" for the lack of final resolution of its claims 43, and should be
permitted, in these Article 21.5 proceedings, to re new its claims that the amended GSM 102 program
has been applied to circumvent U.S. export subsidy commitments on pig meat and poultry meat.

47. In short, the circumstances that prevented I ndia from renewing, in Article 21.5 proceedings in
EC – Bed Linen , the same claim it had pursued in the original proceedings, are not present in the
current dispute. Moreover, circumstances highlight ed by the Appellate Body as not indicating final
resolution of a claim are present in the current dispute.

41 Appellate Body Report, U.S. – Upland Cotton, paras. 689-694.
42 Appellate Body Report, EC – Bed Linen (21.5) , para. 96 (note 115) (emphasis in original). In the
past, the Appellate Body's use of the term "false judici al economy" has only been a ttached to an exercise of
judicial economy that has been reversed on appeal. Thus, the Appellate Body's use of the phrase "false judicial
economy" in EC – Bed Linen (21.5) suggests that in the circumstances it envisions, the complaining party will,
in the original proceedings, have successfully appealed a nd secured reversal of that exercise of false judicial
economy, therefore preserving its rights in the Article 21.5 proceedings. The compliance panel in U.S. – OCTG
Sunset Reviews (21.5) faced a slightly different situation. In the Article 21.5 proceedings in that dispute, the
compliance panel was asked whether an unappealed exercise of judicial economy in the original proceedings
precludes review in Article 21.5 proceedings of the same claim raised with respect to a changed element of the
measure. The compliance panel concluded that it did not:
The fact that a panel, in an original dispute settlement pr oceeding, did not make findings
[due to judicial economy] regarding certain issues relating to the investigating authorities'
determination that were raised and argued before the panel, can not preclude a
compliance panel, in its assessment under Article 21.5 of the DSU of the measures taken
to comply with the DSB recommendations an d rulings, from reviewing those aspects
which have been incorporated by the authorities in the measure taken to comply."
Panel Report, U.S. – OCTG Sunset Reviews (21.5) , para. 7.92. This issue is currently on appeal.
WT/DS268/19, para. 2.
43 Appellate Body Report, EC – Bed Linen (21.5), para. 96 (note 115) (emphasis in original).

48. In U.S. – Shrimp (21.5), the Appellate Body similarly addressed limitations on the ability of a
complaining Member to seek review, at the Article 21.5 phase, of the same claim addressed in the
original proceedings. The Appellate Body concluded that a complaining Member can not pursue such
a claim if it involved an unchanged aspect of the original measure th at, in the original proceedings,
had been found to be WTO-consistent.44

49. The situation confronted by the Appellate Body in U.S. – Shrimp (21.5) is different from the
circumstances in the present dispute, for at least two reasons.45

50. First, in the original proceedings in the present dispute, the Appellate Body reversed the
original panel's finding that Brazil had failed to demo nstrate actual circumvention with respect to pig
meat and poultry meat, but was unable to complete the analysis given insufficient uncontested facts of
record.
46 There is, therefore, no finding of WTO-consistency with respect to Brazil's circumvention
claims on pig meat and poultry meat, in stark contr ast to the situation faced by the compliance panel
and Appellate Body in U.S. – Shrimp (21.5).

51. Second, as explained above, Brazil's claims of circumvention with respect to pig meat and
poultry meat are not against an unchanged aspect of the same measure reviewed in the original
proceedings. The measure subject to Brazil's cl aims, and the GSM 102-related "measures taken to
comply" in this dispute, are the amendments to the GSM 102 fee schedule, and the amended
GSM 102 program in its totality. Those measures ta ken to comply do not apply on a product-specific
basis; in other words, the amended GSM 102 f ee schedule makes no distin ction between pig meat,
poultry meat, other scheduled products, or unscheduled products.

52. The United States' attempt to distinguish the situation in the current Article 21.5 proceedings
from relevant aspects of the second Article 21.5 proceedings in Canada – Dairy confirms the
similarity between the two cases. As the United Stat es notes, the United States and New Zealand
requested a second Article 21.5 proceeding in Canada – Dairy "where the Appellate Body was unable
to reach a decision in [an earlier proceeding] rega rding the WTO-consistency of certain Canadian
measure taken to comply because of a lack of sufficient facts."
47 That is precisely the situation in
which Brazil finds itself. In the original proceedings , the Appellate Body reversed the original panel's
finding that Brazil had failed to demonstrate actua l circumvention with respect to pig meat and
poultry meat, but was unable to complete the analysis given a lack of sufficient facts.48

53. While the United States possibly means to di stinguish the two disputes with its observation
that in Canada – Dairy (21.5) , the complaining Members' claims concerned "measures taken to
comply", while in the present dispute, Brazil's clai ms do not, Brazil has already demonstrated that its
claims are indeed with respect to a "measure taken to comply".

44 Appellate Body Report, U.S. – Shrimp (21.5) , paras. 89, 96 ("89. ... Ma laysia seems to suggest ...
that a panel must re-examine, for WTO-consistency, even those aspects of a new measure that were part of a
previous measure that was the subject of a dispute, and were found by the Appellate Body to be WTO-consistent
in that dispute, and that remain unc hanged as a part of the new measure. .... 96. [T]he Panel ... rightly
concluded that our ruling in United States – Shrimp with respect to the consistency of [the unchanged aspect of
the measure], therefore, still stands").
45 In U.S. – Softwood Lumber VI (21.5) , the Appellate Body concisely described this aspect of its
conclusion in U.S. – Shrimp (21.5) in the following terms: "a party cannot make the same claim of
inconsistency against the same measure (or component of a measure) in an Article 21.5 proceeding if the
original panel and Appellate Body found the measure to be consistent with the obligation at issue (Appellate
Body Report, U.S. – Shrimp (Article 21.5 – Malaysia) , paras. 89-99) ...." Appellate Body Report, U.S. –
46 Appellate Body Report, U.S. – Upland Cotton, paras. 689-694.
47 U.S. Rebuttal Submission, para. 13 (note 19).
48 Appellate Body Report, U.S. – Upland Cotton, paras. 689-694.

54. Finally, a further reason that the circum stances of this dispute differ from those in EC – Bed
Linen (21.5) and U.S. – Shrimp (21.5) is that Brazil's claims do not concern an unchanged aspect of
the original measure. Rather, as noted, Brazil's claims concern the changed guarantee fee schedule of
the amended GSM 102 program.

c. Interpretive bases for limits on claims

55. Based on the jurisprudence, Brazil has demonstrated that its claims of circumvention with
respect to pig meat and poultry meat are legiti mately within the scope of these Article 21.5
proceedings. To respond to part (a) of the co mpliance Panel's question, Brazil now reviews the
interpretive basis for the various limitations on the right of a complaining Member to assert particular
claims in Article 21.5 proceedings.

56. First, Brazil addresses the interpretive basis for the limits on new
 claims discussed above.
According to panels, allowing any and all new claims in expedited compliance proceedings, without
imposition of the limits discussed above in respect of an unchanged aspect of the original measure,
would jeopardize the "security and predictabilit y" of the WTO dispute settlement system, in
contravention of Article 3.2 of the DSU 49, and the principles of fundamental fairness and due process
inherent to dispute settlement50, as well as the object and purpose of Article 21.5.51

57. Second, Brazil addresses the interpretive basis for the limits discussed above on the ability of
a complaining Member to bring the same
 claim it had pursued in the original proceedings regarding
an unchanged aspect of the original measure. Th e interpretive basis for these limits is somewhat
richer, and is based on reading Article 21.5 in the context of Articles 16.4, 19.1, 21.1, 21.3 and 22.1 of
the DSU. The Appellate Body's interpreta tion is best developed in its report in EC – Bed
Linen (21.5):

Where a panel concludes that a measure is inconsistent with a covered agreement,
that panel shall recommend, according to Article 19.1, that the Member concerned
bring that measure into conformity with that agreement. A panel report, including the
recommendations contained therein, shall be adopted by the DSB within the time
period specified in Article 16.4 – unless appealed. Members are to comply with
recommendations and rulings adopted by the DSB promptly, or within a reasonable
period of time, in accordance with paragraphs 1 and 3 of Article 21 of the DSU. A
Member that does not comply with the r ecommendations and rulings adopted by the
DSB within these time periods must face th e consequences set out in Article 22.1,
relating to compensation and suspension of concessions. Thus, a reading of
Articles 16.4 and 19.1, paragraphs 1 and 3 of Article 21, and Article 22.1, taken
together, makes it abundantly clear that a panel finding which is not appealed, and
which is included in a panel report adopted by the DSB, must be accepted by the
parties as a final resolution to the dispute between them, in the same way and with the
same finality as a finding included in an A ppellate Body Report adopted by the DSB
– with respect to the particular claim and the specific component of the measure that
is the subject of the claim.
52
58. These interpretive elements do not bar the compliance Panel from considering Brazil's claims
of circumvention with respect to pig meat and poultry meat. As observed above, Brazil's claims relate
to the changed guarantee fee schedule of the ame nded GSM 102 program, which is not an unchanged
aspect of the original measure. Brazil's claims al so do not involve a panel finding that was "not

50 Panel Report, U.S. – Certain EC Products (21.5), para. 7.75
51 Panel Report, EC – Bed Linen (21.5), para. 6.43.
52 Appellate Body Report, EC – Bed Linen (21.5), para. 93 (emphasis in original).

appealed", that was "included in a panel report adopted by the DSB", and that must therefore, as a
result of Articles 16.4, 19.1, 21.1, 21.3 and 22.1 of the DSU, be accepted by Brazil "as a final
resolution" of the claim.

59. As support for its conclu sion on the limits announced in EC – Bed Linen (21.5), the Appellate
Body also referred to the object and purpose of the DSU, noting that

Article 3.3 provides that the prompt settlement of disputes is "essential to the
effective functioning of the WTO". Article 21.5 advances the purpose of achieving a
prompt settlement of disputes by providing an expeditious procedure to establish
whether a Member has fully complied with the recommendations and rulings of the
DSB.
 For that purpose, an Article 21.5 panel is to complete its work within 90 days,
whereas a panel in an original dispute is to complete its work within 9 months of its
establishment, or within 6 months of its co mposition. It would be incompatible with
the function and purpose of the WTO dispute settlement system if a claim could be
reasserted in Article 21.5 proceedings after the original panel or the Appellate Body
has made a finding that the challenged aspect of the original measure is not
inconsistent with WTO obligations, and that report has been adopted by the DSB. At
some point, disputes must be viewed as definitely settled by the WTO dispute
settlement system.53
60. These interpretive elements do not bar the compliance Panel from considering Brazil's claims
of circumvention with respect to pig meat and pou ltry meat. As observed above, Brazil's claims do
not involve reassertion of the same claim in Artic le 21.5 proceedings regarding an unchanged aspect
of the original measure, following a finding by the original panel or the Appellate Body "that the
challenged aspect of the original measure is not inconsistent with WTO obligations"; indeed, the
Appellate Body reversed the original panel's findi ng that the ECG programs with respect to pig meat
and poultry meat were not inconsistent w ith the export subsidy provisions of the Agreement on
Agriculture and the SCM Agreement.

 E. Conclusion

61. In its response to this question, Brazil has de monstrated that the measures and claims subject
to the United States' ECG-related request for pre liminary ruling pertain to a "measure taken to
comply". Specifically, Brazil has demonstrated that its challenge relates to a new
 aspect of a new
measure – the modified fee schedule that is part of the amended GSM 102 program. Brazil's answer
demonstrates that in these circumstances, its challenge adheres to the textual and jurisprudential limits
on the measures that may properly be challenged in Article 21.5 proceedings.

62. Separately, Brazil has demonstrated that in these proceedings, it is raising the same claims
that it raised in the original pro ceedings, with respect to this new aspect of a new measure.
Specifically, Brazil has demonstrated that its claims relate to the application of the amended GSM 102
to circumvent U.S. export subsidy commitments on pig meat and poultry meat; in the original
proceedings, Brazil similarly claimed that the old GSM 102 was applied to circumvent U.S. export
subsidy commitments on these two products. No final resolution was achieved, even with respect to
this now-changed aspect of the old measure. Brazil's answer demonstrates that in these
circumstances, its challenge adheres to the te xtual and jurisprudential limits on the claims that may
properly be subject to review under Article 21.5.

53 Appellate Body Report, EC – Bed Linen (21.5) , para. 98 (emphasis in original). See also Panel
Report, Chile – PBS (21.5), para. 7.135.

Questions to Brazil

7. Is Brazil of the view that it is only in the circumstances identified by the Appellate Body in
EC – Bed Linen (Article 21.5 – India) that the scope of Article 21.5 proceedings is limited by the
scope of the original proceedings? [Paragraph s 11-15 of Submission of Brazil to the Panel
Regarding US Requests for Preliminary Ruling]

63. No. As discussed in Brazil's response to qu estion 6, panels and the Appellate Body have
addressed a number of circumstances in which the sc ope of Article 21.5 proceedings is limited by the
scope of the original proceedings. None of these apply to Brazil's claims regarding the modified
guarantee fee schedule of the amended GSM 102 program.

8. How does Brazil respond to the arguments of the United States that Brazil "incorrectly
assumes that the standard is one of whether there has been a 'final resolution' of the issue in the
original proceeding" and that Brazil misreads the Appellate Body report in EC – Bed Linen
(Article 21.5 – India) and confuses the issue of "the scope of a compliance proceeding pursuant to
Article 21.5 of the DSU" and the distinct issue of "when a claim against a specific measure or
aspect of a measure can be considered to be 'finally resolved' for purposes of WTO dispute
settlement"? [Paragraphs 8 and 12 of the Rebuttal Submission of the United States]

64. Brazil agrees that assessing the proper scope of an Article 21.5 proceeding requires separate
determinations that (i) the measure
 at issue is a "measure taken to comply", and (ii) the claims levied
by the complaining Member with respect to that measure are subject to review in compliance
proceedings.

65. In its submissions to the compliance Panel, the United States does not appear to challenge the
"final resolution" standard per se, as a means of assessing the question in part (ii). That is, the basis
for the United States' preliminary objection is not
 that Brazil is prohibited from pursuing the same
claims that it maintained in the original proceedings, where there has not been final resolution of those
claims.

66. Rather, as discussed in Brazil's response to qu estion 6, the United States' ECG-related request
for preliminary ruling concerns solely part (i) of the assessment. Specifically, the United States
argues that Brazil is prohibited from pursuing those same claims in these Article 21.5 proceedings,
because the claims concern a measure
 that is allegedly not a "measu re taken to comply". In its
response to question 6, Brazil has demonstrated that its claims do indeed concern a "measure taken to
comply".

9. What are the comments of Brazil on the arguments in footnote 22 of the United States'
rebuttal submission?

67. Brazil's first comment is that the United St ates has never addressed the fact that Brazil's
claims in this dispute pertain to the modified guarantee fee schedule of the amended GSM 102
program. Thus, the limitations in Article 21.5 on ra ising claims in compliance proceedings regarding
an unchanged aspect of the original measure do not apply.

68. There are several arguments raised by the United States in footnote 22 of its Rebuttal
Submission.
69. The United States appears to argue, first, that where the Appellate Body has reversed an
original panel's finding of WTO-inconsistency with respect to a particular claim, but found itself

unable to complete the analysis given a lack of suffi cient facts, that claim can not be considered by a
compliance panel in subsequent proceedings.54

70. The U.S. argument is inconsistent with EC – Bed Linen (21.5)
55, in which the Appellate Body
concluded that the exercise of judicial economy w ith respect to a claim ra ised in the original
proceedings does not bar a complaining Member from reasserting that same claim in Article 21.5
proceedings.56

71. In some respects, the situation in the current di spute is the effective equivalent of the exercise
of judicial economy described by the Appellate B ody as presenting no bar to consideration of a claim
in subsequent Article 21.5 proceedings. The origin al panel erroneously excluded ECGs for pig meat
and poultry meat from its findings regarding Brazil's circumvention claims. As a result of the original
panel's failure to make the necessary factual findings, the Appellate Body, while reversing the original
panel's conclusion as a matter of law, was unable to complete the analysis and offer Brazil satisfaction
on its claims, through no fault of Brazil. In these circumstances, Brazil "should not be held
responsible" for the lack of final resolution of its claims regarding the original measure
57, and should
be permitted, in these Article 21.5 proceed ings, to renew its claims that the amended GSM 102
program has been applied to circumvent U.S. export subsidy commitments on pig meat and poultry
meat.

72. Second, implicit in the United States' argument is an assertion that "the measures" subject to
Brazil's claims remain unchanged from the original proceedings. As demonstrated in response to
questions 6 and 8, however, Braz il's ECG-related claims of in consistency with the covered
agreements do indeed involve a new "measure taken to comply" a nd, in particular, the modified
guarantee fee schedule in that new measure. The m easure subject to Brazil's claims is a "measure
taken to comply" – the GSM 102 program as amended by the modified GSM 102 fee schedule.

73. Third, in arguing that "Brazil would have this compliance Panel assume that the Appellate
Body had made a finding of WTO-inconsistency with r espect to the pig meat and poultry meat
GSM 102 guarantees and had made a recommendation that the United States bring these measures
into compliance,"
58 the United States reveals a misunderstandi ng of the compliance Panel's task. The
Appellate Body has clarified that the task of a compliance panel operating un der Article 21.5 is not
limited to the issue whether the defending Memb er has implemented the recommendations of the
DSB.59 Instead, the compliance Pa nel must examine whether the revised measure is consistent with
all of the implementing Member's WTO obligations – including the United States' export subsidy
commitments for pig meat and poultry meat.

54 U.S. Rebuttal Submission, para. 14 (note 22) ("Br azil is effectively asking the Panel to render
meaningless the fact that the Appellate Body declined to make any finding of WTO-inconsistency with respect
to the measures because it did not find uncontested facts showing th at the measures were provided
inconsistently with any U.S. WTO obligations. Brazil w ould have this Panel assume that the Appellate Body
had made a finding of WTO-inconsistency with respect to the pig meat and poultry meat GSM 102 guarantees
and had made a recommendation that the United States bring these measures in to compliance with the
obligations assumed to be breach [sic] (and further to assume that this recommendation was adopted by
the DSB). None of these things happened, and Brazil has no basis for asking the Panel to pretend otherwise.").
55 As described in Brazil's response to question 6, the U.S. argument would similarly have prevented it
from bringing the claims asserted in the second Article 21.5 proceeding in Canada – Dairy.
56 Appellate Body Report, EC – Bed Linen (21.5) , para. 96 (note 115). See also Panel Report, U.S. –
OCTG Sunset Reviews (21.5), para. 7.92 (currently on appeal).
57 Appellate Body Report, EC – Bed Linen (21.5), para. 96 (note 115) (emphasis in original).
58 U.S. Rebuttal Submission, para. 14 (note 22).
59 See, e.g., Appellate Body Report, Canada – Aircraft (21.5) , paras. 40-41. See also Panel Report,
Chile – PBS (21.5), paras. 7.136-7.137.

74. Fourth, and finally, the United States argues that, if Brazil is permitted to pursue its claim
against U.S. use of the amended GSM 102 program to circumvent U.S. export subsidy commitments
for pig meat and poultry meat, in the absence of a fi nding by the original panel or the Appellate Body
of circumvention with respect to pig meat and pou ltry meat, and in the consequent absence of a DSB
recommendation concerning circumvention with respect to pig meat and poultry meat, the
United States could be "deprived of a reasonable period of time to bring any measures found to be
WTO-inconsistent into compliance with its obligat ions", "where a measure (that is not a measure
taken to comply) is found to be WTO-inconsistent for the first time in an Article 21.5 proceeding."60

75. The underlined portion of this statement rev eals the fundamental error in the United States'
reasoning. As demonstrated in response to ques tions 6 and 8, Brazil's ECG-related claims of
inconsistency with the covered ag reements do indeed involve a "measure taken to comply". The
measure subject to Brazil's claims is the "measu re taken to comply" – the GSM 102 program as
amended by the modified GSM 102 fee schedule.

76. For systemic reasons, Brazil would like to a ddress the relevance of the potential "deprivation"
highlighted by the United States, as suming that the measure at issue is
 a "measure taken to comply"
(and, thus, assuming that the underlined parenthetical is stricken from the United States' statement).

77. In that case, the potential "deprivation" not ed by the United States is inherent to the
Article 21.5 process. Where a Member adopts a "measure taken to comply", it is subject to review,
under the expedited procedures of Article 21.5, for "c onsistency with a covered agreement". The text
of Article 21.5 does not specify that consistency must be judged with reference to the particular
provisions of the particular covered agreement und er which a violation was found in the original
proceedings. As noted above, the compliance Panel' s mandate is to review the consistency of the
measure with the covered agreements, and not
 with the specific recommendations made by the DSB.

78. If the Member's "measure taken to comply" is found to be WTO-inconsistent, the Member is
not accorded an additional "reasonable period of time" to bring its measure into compliance. This has
been confirmed by the Appellate Body and the compliance panel in U.S. – FSC (21.5 II) , another
dispute involving recommendations under Article 4.7 of the SCM Agreement. The Appellate Body
noted that if findings of violation in Article 21.5 proceedings "were to result in an extension of the
time period set for" compliance,

compliance proceedings could have the e ffect of extending implementation periods
… in successive Article 21.5 proceedings. This could lead to a potentially
"never-ending cycle" of dispute settlement proceedings and inordi nate delays in the
implementation of recommendations and rulings of the DSB.
61
79. The compliance panel in that dispute in fact noted a problem that the United States ignores –
allowing Members to secure additional time to im plement recommendations through the Article 21.5
process would give them an incentive to adopt non-compliant "measures taken to comply":

Nowhere do we find any indication in the text or context of Article 21.1/21.5 of the
DSU or of Article 4.7 of the SCM Agreement, nor in the object or purpose of the DSU
(nor, for that matter, the SCM Agreement) that would require repeated extensions of
the implementation period in Article 21.5 DSU compliance proceedings. Indeed,
such an interpretation would reduce the textual treaty terms "prompt compliance" and
"without delay" to redundancy and inutility. We are not permitted to adopt such an

60 U.S. Rebuttal Submission, para. 14 (note 22) (emphasis added).
61 Appellate Body Report, U.S. – FSC (21.5 II) , para. 86, quoting Panel Report, U.S. – FSC (21.5 II) ,
para. 7.46.

interpretation. Such an approach migh t lead to a potentially never-ending cycle,
whereby a Member continues to adopt non-compliant measures in order to win more
time to comply with adopted DSB recommendations and rulings . This would entirely
undermine the effective operation of the WTO dispute settlement system.62
80. The potential "deprivation" of which the United States speaks is not unique to the current
Article 21.5 proceeding; it is inherent to Artic le 21.5 proceedings gene rally, and is why it is
incumbent on a defending Member, having already been found to be in violation of its WTO
obligations, to adopt "measures taken to comply" th at are fully WTO-consistent. No more time for
implementation is, or should be, accorded. Having al ready been found to be in violation of its WTO
obligations, the defending Member's curative "measur es taken to comply" viol ate its obligations and
commitments at its peril. As noted by the compliance panel in U.S. – FSC (21.5),

Article 21.5 comes after the "recommendation" provision in Article 19 of the DSU,
and the principle of "prompt compliance" in Article 21.1, as part of the WTO dispute
settlement process. The title of Article 21 – "Surveillance of recommendations and
rulings" – is telling. It informs us that the proceedings are to follow the
implementation of recommendations and rulings that have been made. This finds
further support in the particular nature and purpose of compliance panel
proceedings.
63
81. Using the Article 21.5 process to "add[] to the 'non-implementing' Member's rights under the
covered agreements through an extension of the time-period for implementa tion" would undermine
the object and purpose of compliance proceedings.64

82. The rights and obligations of complaini ng and defending Members in Article 21.5
proceedings are finely balanced. The potential "d eprivation" noted by the United States is a burden a
defending Member in an Article 21.5 proceedings must bear, as a result of the terms of Article 21.5
and the object and purpose of compliance proceedings. Similarly, Brazil has described in detail (in its
response to question 6) the limits imposed on comp laining Members in Article 21.5 disputes – they
may challenge only "measures taken to comply", and they may pursue only those claims not yet
subject to final resolution.

Question to the US

10. Could the United States explain why it cons iders that what it describes as the "final
resolution" standard is not the correct standard to decide whether Brazil's claims regarding export
credit guarantees for pig meat and poultry meat are within the scope of this proceeding?

2. Preliminary objections of the United States with respect to claims of Brazil regarding
marketing loan and counter-cyclical payment programs

Questions to Brazil

11. Is Brazil of the view that a finding under Article 6 of the SCM Agreement that a "subsidy"
is causing serious prejudice necessarily always applies to both the subsidy "payments" and the
subsidy "program"? [Paragraphs 31-35 of Submission of Brazil Regarding US Requests for
Preliminary Ruling and paragraph 38 of the Rebuttal Submission of Brazil]

62 Panel Report, U.S. – FSC (21.5 II), para. 7.46 (emphasis added).
63 Panel Report, U.S. – FSC (21.5 II), para. 7.42.
64 Panel Report, U.S. – FSC (21.5 II), para. 7.45.

83. Brazil considers that the answer to this qu estion depends on the particular facts before a
panel. Brazil recognizes that there might be situa tions where a Member makes subsidy "payments" in
the absence of a subsidy "program". In that case, a finding of serious prejudice could be made
regarding payments alone. However, if a Member challenges "payments" that are mandated by a
program, a finding regarding the payments necessarily implicates the program.

84. There may also be situations where a Member challenges subsidy "programs". In that event,
a finding of serious prejudice necessarily applies to payments mandated under the program. When a
subsidy program mandates cer tain subsidy payments, an examination of the " effects" of the program
necessarily includes an assessment of the circumstan ces in which mandatory payments are made; the
nature of those payments, including their general am ount and the intended reci pients; and the impact
of those payments in the marketplace. In short, the WTO-consistency of a program under Article 6 of
the SCM Agreement cannot be artificially separated from the WTO-consistency of payments
mandated by a program.

85. Turning to the specific facts of this case, in the original proceedings, Brazil challenged both
the subsidy "programs" and the subsidy "payments" mandated under those programs. As a result, the
original panel's findings under Article 6 apply to bo th. This is confirmed by the original panel's
description of the contested measures; its examina tion of those measures; and its conclusion that
those measures cause serious prejudice.

86. The original panel's findings regarding its te rms of reference illustrate that the contested
measures found to be WTO-inconsis tent included the subsidy programs in the FSRI Act of 2002 and
the payments mandated by them. The United States contended that the pane l's terms of reference
excluded payments made after the date of the panel' s establishment. The original panel rejected this
argument, stressing that:

The programs and legislation identified [in Brazil's request for establishment of a
panel] include payments made before the date of establishment of the Panel, and those
made subsequently. All such payments were and are m ade under the same legislative
and regulatory provisions which entered into effect prior to the consultations and have
remained in place throughout th e Panel proceeding. Therefore , the Panel rules that
payments under programs and legislation w ithin the Panel's terms of reference , made
after the date on which the Panel was est ablished … are within its terms of
reference.
65

87. The original panel, therefore, foun d that the contested measures included " programs and
legislation" identified in the panel request, together with " payments" made under the contested
programs at any time during the panel proceedings . Thus, the original panel viewed the mandatory
payments as intrinsic to the contested programs, and as part of its terms of refe rence. Nothing in this
finding suggests that the original panel artificially separated the subsidy programs from mandatory
payments made pursuant to those programs. Further, the original panel stated no temporal limitations
on the subsidy measures examined. The United States did not appeal these findings.

88. In making this finding, the original pane l opined that it would undermine the object and
purpose of the SCM Agreement if a Member were unable to cha llenge subsidies "until they were
actually paid".
66 The panel, therefore, had in mind that a subsidy program mandating payments could
cause adverse effects, even before payments are disbursed. In this regard, the original panel found

65 Panel Report, U.S. – Upland Cotton, para. 7.187.
66 Panel Report, U.S. – Upland Cotton, para. 7.191.

that "it is clear that the existing subsidy programs ar e currently envisaged to re main in effect between
MY 2003-MY 2007."67
89. Having found that its terms of reference en compassed the subsidy programs and past, present
and future payments mandated by those programs, the original panel also stated expressly, in
paragraph 7.1107 of its report, that the measures at issue in Brazil's "present" serious prejudice
included the "legislative and regulatory provisions currently providing" for marketing loan, CCP, and
Step 2 payments, as well as the "payments" mandate d by those legislative and regulatory provisions.68
Again, the original panel stated no general tem poral limitation on the scope of the measures and,
again, these findings were not appealed by the United States.

90. Significantly, the original panel noted that the measures involved in Brazil's present serious
prejudice claims included cottonseed payments limited to the "2000 crop". 69 This is a clear temporal
limitation on a subsidy measure. Thus, any findings by the original panel would have been restricted
to the effects of cottonseed payments made in MY 2000. 70 However, no such temporal limitation is
placed on any of the other measures listed in paragraph 7.1107.71

91. Immediately after listing the "legislative a nd regulatory provisions" as measures that were
part of the present serious prejudice analysis, the original panel cross-referenced to Brazil's "per se"
claims. It used the phrase " see also Brazil's per se actionable subsidy claims in Section VII:I." 72
Contrary to the U.S. argument, this cross-reference, and the use of the word "also", confirms that the
"legislative and regulatory provisions" of the FSRI Act of 2002 were included in the present serious
prejudice analysis and "also" in the per se claims.

92. The original panel then chose a "reference period" for assessing the effects of the contested
subsidy programs and mandatory payments. A lthough the original panel chose MY 2002 as an
appropriate "reference period", it declared that it would be "inappropriate" to focus its analysis on
MY 2002 alone. It found that subsidies have b een provided "over a longer period of time than one
year" and that consideration of developments over a period longer provided a more robust basis for its
conclusion.
73 The original panel, therefore, sought to put the effects of the contested subsidy
programs into "a broader temporal context". 74 This is also consistent with the fact that its terms of
reference extended to mandatory payments made throughout the panel proceedings.

93. Thus, the choice of MY 2002 served as a methodological tool to marshal and examine
evidence relating to the "effects" of the contested subsidy programs. Moreover, the original panel's
use of that tool was not exhaustive, but was comp lemented by an examination of data from other
periods. Also, in selecting a "reference period", th e panel did not make a jurisdictional decision that
the measures at issue were limited to payments within the "reference period". Indeed, any such
finding would have contradicted the panel's conclusion that the measures at issue included the
"legislative and regulatory provisions" establishi ng the subsidy programs, as well as all payments
made under these programs "throughout the Panel proceeding".75

67 Panel Report, U.S. – Upland Cotton, para. 7.1500.
68 Panel Report, U.S. – Upland Cotton, paras, 7.1107.
69 Panel Report, U.S. – Upland Cotton, para. 7.1107(viii).
70 The original panel did not find that cottonseed payments caused significant price suppression.
71 Further, Brazil has explained in its answer to Question 11 that the panel's cross-reference using the
phrase "see also Brazil's per se actionable subsidy claims in S ection VII:1" confirms that the panel examined
both the payments and programs in making its present serious prejudice findings.
72 Panel Report, U.S. – Upland Cotton, para. 7.1107, note 1247.
73 Panel Report, U.S. – Upland Cotton, para. 7.1199.
74 Panel Report, U.S. – Upland Cotton, para. 7.1199.
75 Panel Report, U.S. – Upland Cotton, para. 7.187.

94. The United States' contention that the original panel's findings were confined to "payments" is
further contradicted by that panel's treatment of "p ayments" in its reasoning. The United States tried,
but failed, to demonstrate that Brazil was required to quantify precisely the amount of the payments
made.
76 The original panel dismissed these arguments, holding that there was no duty to quantify the
amount of the payments nor to trace payments to particular recipients and/or products.77

95. Instead, the original panel undertook an analys is of the "effects" of the contested subsidy
programs by focusing on their " structure, design and operation ".78 It stated that this " qualitative"
analysis was to be complemented, "to some extent", by a "quantitative analysis" of the "general order
of magnitude of the subsidies" ( i.e., the general level of payments). 79 The Appellate Body bolstered
this qualitative aspect of the original panel' s approach, noting the importance of the " nature of the
subsidy" to an assessment of the subsidy's effects under Article 6 of the SCM Agreement.80

96. If the original panel's findings had relate d to "payments" alone, and not to the subsidy
programs, its reasoning would have been very di fferent indeed. The panel would have required
precise identification of the contested subsidy payments, including their amount, and the recipients
and products receiving them, because these would have been the measures at issue. A precise
quantitative examination of the magnitude of "payme nts" would have been of central importance and
not merely conducted "to some extent", as a comple ment to the qualitative examination. Moreover,
the qualitative examination of the "structure, design and operation" of the measures would have been
meaningless because the dollar amount of payments do not have "structure", "design" or "operation".

97. The focus by the original pa nel on "programs" in its present serious prejudice analysis is
illustrated in its finding that the price suppression in the world market was "significant." It reasoned
as follows:

During the period under consideration, given the relative magnitude of United States
production and exports, the overall price trends we identified in the world market, and
the nature of the mandatory United States subsidies in question – in particular
, the
market-price contingent, countercyclical, nature of the marketing loan program , the
user marketing (Step 2) program , MLA payments , and CCP payments - and the
readily available evidence of the order of ma gnitude of the subsidies, we are certainly
not, by any means, looking at an insignificant or unimportant world price
phenomenon.81
98. This is a crucial finding because it was the basi s for the determination that the amount of price
suppression in the world market was high enough to cause a violation of Article 6.3(c) ("significant"
price suppression). And the nature of the mandatory, price-contingent marketing loan program was a
vital factor in the original panel's finding. The passage shows, again, that the subsidy measures found
by the original panel to be WTO-inconsistent included " mandatory" subsidy "programs", and not just

76 Panel Report, U.S. – Upland Cotton, paras 7.1159-7.1174.
77 Panel Report, U.S. – Upland Cotton, para. 7.1173.
78 Panel Report, U.S. – Upland Cotton, para 7.1194.
79 Panel Report, U.S. – Upland Cotton , para 7.1173; see also Appellate Body Report, U.S. – Upland
Cotton, para. 467 ("a panel should have regard to the magnitude of the challenged subsidy and its relationship to
prices of the product in the relevant market when analyzing whether the effect of a subsidy is significant price
suppression"; the issue of when prices are low enough to trigger the subsidies is part of the design and operation
of the subsidy program set out in a legislative and regulatory framework).
80 Appellate Body Report, U.S. – Upland Cotton , para. 450 ("The nature of a subsidy plays an
important role in any analysis of whether the effect of the subsidy is significant price suppression under
Article 6.3(c).").
81 Panel Report, U.S. – Upland Cotton, para. 7.1332 (emphasis added).

"payments". These findings were also consistent with extensive evidence of the price suppressing
effects of the price-contingent "programs" presented by Brazil to the original panel.82

99. Given all of these findings, it is of no surp rise that in describing its conclusions on present
serious prejudice, the original panel confirmed th at the WTO-inconsistent measures causing serious
prejudice included the "present statutory and regulatory framework" of the FSRI Act of 2002:

Because the Panel's "present" serious prejudice findings include findings of
inconsistency that deal with the FSRI Act of 2002 and subsidies granted thereunder in
MY 2002, the United States is obliged to take action concerning its present statutory
and regulatory framework as a result of our "present" serious prejudice finding . We
recall that, pursuant to Article 7.8 of the SCM Agreement, the United States is under
an obligation to "take appropriate steps to remove the adverse e ffects or ... withdraw
the subsidy.83
100. In paragraph 7.1503 of its report, the origin al panel confirmed that, during implementation,
the United States was required to " significantly transform[] " the contested subsidy programs such
that, after implementation, any subsidy program s maintained by the United States would be
"manifestly different " from those originally contested. The United States never appealed these
findings.

101. These findings were crucial to the original panel's decision that there was no need for the
original panel to address Brazil's claims of threat of serious prejudice. The original panel noted that
Brazil's threat claims extended throughout "the remaining period of application of the FSRI Act
of 2002"; that is, through MY 2007.
84 Because the United States was obliged by the present serious
prejudice findings to "significantly transform" the "present statutory and regulatory framework" of the
FSRI Act of 2002, there was no need for the panel to consider a threat of serious prejudice through
MY 2007.

102. Thus, the original panel held that the United States was obliged to take action to modify, or
withdraw, the contested subsidy programs to elimin ate present serious prejudice that would otherwise
persist throughout "the remaining period of app lication of the FSRI Act of 2002". 85 On any other
view, the original panel would have examined Brazil's claims of a threat of serious prejudice in
MY 2007.

103. This is also confirmed by paragraph 8.1(g)(i) of the original panel report, in which the panel
concludes that " mandatory price-contingent United States subsidy measures" are inconsistent with
Article 5(c) and 6.3(c) of the SCM Agreement . The reference to "mandatory price-contingent"
measures refers to the contested subsidy programs that mandate payments on price-contingent basis.
This expression does not encompass payments of specific dollar amounts made during a defined
period of time because the payments do not mandate anything.

104. Thus, the original panel's description of the measures, its reasoning regarding present and
threat of serious prejudice, and its conclusions, demonstrate that the measures found to be causing
significant price suppression in the world market included the "statutory and regulatory framework"
establishing the subsidy programs, as well as the continual flow payments mandated under these
programs year after year through until MY 2007.

82 Brazil Submission Regarding the U.S. Request for Preliminary Ruling, para. 38, note 47.
83 Panel Report, U.S. – Upland Cotton, para. 7.1501.
84 Panel Report, U.S. – Upland Cotton, para. 7.1500.
85 Panel Report, U.S. – Upland Cotton, para. 7.1500.

105. Thus, given the original panel's finding in pa ragraph 7.1501, any "appropriate steps" that the
United States was obligated to take must have included changes to its "present statutory and
regulatory framework".

106. Indeed, the United States took one such "statuto ry and regulatory" step (albeit insufficient).
Brazil has observed that statements by the United States on the significance of the repeal of the Step 2
program – itself set forth in the FSRI Act of 2002 – demonstrate that the United States itself
considered that it was required "to take acti on concerning its present statutory and regulatory
framework as a result of our 'present' serious prejudice finding ."86 In August 2006, a USTR
spokeswoman, Gretchen Hamil, stated that "rep eal of the Step 2 program ... addresses [the] ...
actionable subsidy findings in the dispute." 87 The U.S. Department of Agri culture also stated that the
"legislative action" to repeal the Step 2 progr am "addresses a WTO finding regarding suppression of
world cotton prices."88

107. It is only in these compliance proceedings th at the United States has, for the first time,
espoused the view that compliance required it to ta ke no action whatsoever to change the contested
subsidy programs, and instead perm itted it to eliminate the effects of "payments" by payments of
billions more dollars under the very same programs.

108. In conclusion, the compliance Panel inquire d whether a finding under Article 6 of the
SCM Agreement always necessarily applies to subsidy "payments" and subsidy "programs". As
observed in Brazil's response, there might be situations in which a Member makes subsidy
"payments" in the absence of a subsidy "program"; in that case, a finding of serious prejudice could
be made regarding subsidy "payments" alone. Howe ver, Brazil has demonstrated above that in this
dispute, the findings of the original panel applied to both subsidy "payments" and subsidy "programs".

12. In paragraph 44 of its Rebuttal Submission, Brazil states:

"Accordingly, there is no need for Brazil to challenge per se the FSRI Act of 2002.
Nor does it assert an 'as applied' challenge to the FSRI Act of 2002. Rather, Brazil
challenges the counter-cyclical and marketing loan programs in the FSRI Act of
2002 and the payments that such programs require to U.S. upland cotton farmers,
as they cause adverse effects." (emphasis added)
Could Brazil please explain:

a) How its
claims against "programs and payments... as they cause adverse effects"
differ from claims against programs as such?

109. As explained in reply to Question 11, in th e context of claims regarding the "effects" of
subsidy programs that mandate subsidy payments, Brazil does not see any practical difference
between challenging the programs and payments, a nd challenging the programs as such. Nor does
Brazil see any difference in terms of a finding that the United States has not complied with Article 7.8
of the SCM Agreement.

110. Brazil's request for establishment of a panel in this Article 21.5 proceeding identifies the
contested measures as the marketing loan and counter-cyclical "programs" and the marketing loan and
counter-cyclical "payments." The use of the te rms "program" and "payments" describes collectively

86 Panel Report, U.S. – Upland Cotton, para. 7.1501.
87 Exhibit Bra-438 ("U.S. Trade Officials Say Disappointed With Brazil's WTO Request Over Cotton
Flap," Daily Report for Executives, 21 August 2006).
88 Exhibit Bra-436 (Cotton and Wo ol Outlook, USDA, 13 March 2006 , p. 4, accessed October 2006 at
http://usda.mannlib.cornell.edu/usda/ers/CWS//2000s/2006/CWS-03-13-2006.pdf).

the "subsidy" measures involved in this dispute. Braz il's claims relate to the effects of the marketing
loan and counter-cyclical subsidy programs and the payments mandated by those programs.

111. Brazil has demonstrated that these two subs idy programs, and the payments they mandate,
cause significant price suppression in the world market for upland cotton as well as an increase in the
U.S. world market share of upland cotton in MY 2005. The evidence and arguments set forth by
Brazil establishes that the United States has failed to take appropriate steps to either withdraw the
marketing loan and counter-cyclical subsidies or to remove the adverse effects caused by these
subsidies.

112. While Brazil has challenged the marketing lo an and counter-cyclical "programs" and their
mandatory, price-contingent "payments", to the ex tent they cause adverse effects, it has not asserted
an "as such" claim regarding the marketing loan and counter-cyclical payment programs in the FSRI
Act of 2002. As explained in reply to Question 11, if Brazil had made such a claim (which Brazil
believes is unnecessary in view of the original pa nel's findings), the compliance Panel's examination
of the " effects" of the program would necessarily have included an assessment of the terms and
conditions under which payments are mandated; the nature of those payments, including their general
amount, and the intended recipients and/or produc ts benefiting from them; and the impact (or
"effect") of those payments in the marketplace.

113. If Brazil's "as such" claim had been success ful, the result would be a finding by the
compliance Panel that the United States failed to take appropriate steps, pursuant to Article 7.8 of the
SCM Agreement to withdraw the marketing loan and count er-cyclical subsidies, or to remove the
adverse effects caused by these subsidies. Theref ore, the ultimate conclusion of this compliance
Panel would be the same whether the compliance Panel were to find that the "subsidies" cause present
serious prejudice, or whether the marketing loan a nd counter-cyclical payment "program" is "as such"
inconsistent with the SCM Agreement.

114. Finally, Brazil agrees with the United States' observation in EC – Selected Customs Matters
that certain claims under the covered agreements are "not readily classifiable in the categories of 'as
such' and 'as applied.'"
89 An "as such" claim is typically unders tood to involve an examination of a
general rule or norm in the abstract . However, as the original panel found, an examination of the
"effects" of the general statutory and regulatory provisions establishing a subsidy program " cannot be
conducted in the abstract" because they must be considered in li ght of the market-based effects of the
measures.90 Thus, Brazil considers that serious prej udice claims are among those that cannot be
readily classifiable as "as such" and "as applied."

b) How these claims differ from claims against programs as applied?

115. As explained below, there is no practical difference in terms of this compliance Panel's
ultimate finding that the United States has not complied with Article 7.8 of the SCM Agreement.

116. While Brazil's request for the establishment of a panel does not make an explicit "as applied"
claim, that request is broad enough to encompass a claim described in these terms, if this compliance
Panel were to deem it necessary to affix an "as app lied" label to it. As noted above, Brazil's claims
challenge, inter alia , the marketing loan and counter-cyclical subsidies, to the extent they cause
adverse effects. Brazil sets out evidence and argument addressing the effects of the subsidy programs,
including reference to the operation (or applicati on) of the programs in the prior periods. If the
compliance Panel finds that the marketing loan a nd counter-cyclical subsidies cause present serious
prejudice, then the compliance Panel would find that the United States has not taken appropriate steps
to withdraw the subsidies or to remove their adverse effects.

89 Appellate Body Report, EC – Selected Customs Matters, para. 165.
90 Panel Report, U.S. – Upland Cotton, para. 7.1198.

117. If the compliance Panel were to label Brazil's claims as "as applied" adverse effects claims,
then presumably those claims would be cast in terms of whether the application of the marketing loan
and counter-cyclical payment "programs" cause se rious prejudice. Assuming the compliance Panel
were to find that the application of the marketi ng loan and counter-cyclical "programs" (presumably
accomplished through the means of mandatory and price-contingent "payments") causes serious
prejudice, the compliance Panel would find that the United States had failed, pursuant to Article 7.8 of
the SCM Agreement, to take appropriate steps to withdraw the marketing loan and counter-cyclical
program subsidies or to remove their adverse effects.

118. Brazil again expresses its agreement w ith the United States' observation in EC – Selected
Customs Matters that certain claims under the covered agre ements are "not readily classifiable in the
categories of 'as such' and 'as applied.'"
91

13. In paragraph 45 of its Rebuttal Submission, Braz il refers to the failure of the United States
"to implement the original recommendation of the DSB requiring the United States to take actions
concerning its present statutory and regulatory framework providing for marketing loan and
counter-cyclical payments".

a) Does Brazil consider that the statement in paragraph 7.1501 of the original panel
report that "the United States is obliged to take action concerning its present
statutory and regulatory framework..." forms an integral part of the
recommendation made by the original panel in paragraph 8.3(d) of its report?

119. Yes, Brazil considers that the statement in pa ragraph 7.1501 of the original panel report forms
an integral part of the recommendation made by the or iginal panel in paragraph 8.3(d) of its report.
The statement in paragraph 7.1501 is part of the assessment of the matter undertaken by the original
panel and is found in the portion of the origin al panel report dealing with "findings." In
paragraph 8.1, the original panel stated that, "[i]n light of the findings above, we conclude as
follows …." The original panel then listed its c onclusions, including its conclusions regarding present
serious prejudice. In paragraph 8.3, the original panel sets forth its recommendations "[i]n light of
these conclusions." This demonstrates that also th e original panel considered its findings – including
its statement in paragraph 7.1501 – to form an inte gral part of, and basis for, its conclusions and
recommendations. As noted, these findings were never appealed by the United States.

b) Does Brazil consider that the absence of actions by the United States "concerning
its present statutory and regulatory framew ork providing for marketing loan and
counter-cyclical payments" is in itself a suffi cient basis for this Panel to find that
the United States has not complied with the DSB recommendation under Article 7.8
of the SCM Agreement?

120. Yes, Brazil considers that the absence of ac tions by the United States "concerning its present
statutory and regulatory framework providing for mark eting loan and counter-cyclical payments" is in
itself a sufficient basis for the compliance Panel to find that the United States has not complied with
the DSB recommendation under Article 7.8 of the SCM Agreement.

121. However, Brazil also demonstrates that the marketing loan and counter-cyclical payments
programs, as well as payments mandated thereunder, cau se adverse effects in violation of Article 5(c)
and 6.3 of the SCM Agreement. In other words, following the U.S. repeal of the Step 2 subsidy, the
new basket of measures involving these two s ubsidies causes significant price suppression in the
world market for upland cotton and an increase in the U.S. world market share, in violation of
Articles 5(c) and 6.3(c) and (d). In establishi ng these violations, Brazil provides evidence on the
structure, design and operation of the subsidy progr ams, including the nature and magnitude of the

91 Appellate Body Report, EC – Selected Customs Matters, para. 165.

payments mandated by them, as well as the relevant conditions of competition in the world market for
upland cotton.92

122. Should the compliance Panel find that the absence of actions by the United States is a
sufficient basis to conclude that the United Stat es has not complied with the DSB recommendation
under Article 7.8 of the SCM Agreement, Brazil nevertheless requests that the compliance Panel make
factual findings that these subsidies continue to cause significant price suppression and an increase in
the U.S. world market share, in the event that these factual findings prove to be relevant for an appeal.

c) Is there any difference , in Brazil's view , between, on the one hand , the nature of
the action the United States was obliged to take with respect to its statutory and
regulatory framework as a consequence of the recommendation in
paragraph 8.3(d) of the original panel report and , on the other , the nature of the
action the United States would have been obliged to take if the original panel had
found that the relevant provisions of this statutory and regulatory framework were
WTO-inconsistent as such?

123. No, the action required by the United Stat es would have been the same in both cases.

124. The scope of the United States' implementa tion obligations turns on the identity of the
measures that the original panel found to be WTO-inc onsistent. In this dispute, as explained in reply
to Question 11, the entirety of the original panel' s findings demonstrate that the measures found to be
WTO-inconsistent included the "statutory and regulatory framework" establishing the contested
subsidy programs. As a result, the United States' implementation obligations required it to take action
to amend or repeal this statutory and regulatory framework.

125. The original panel expressly stated that the contested measures included " current legislative
and regulatory provisions providing for the payment" of the cont ested subsidies, as well as payments
mandated by the programs through out the panel proceedings.
93 Consistent with this statement, the
original panel's examination of the contested measures "focus[ed]" on the design, structure and
operation of the contested programs, as set forth in the statutory and regulatory framework
establishing the programs.94 In contrast, the original panel found that it was not necessary to quantify
precisely the level of payments made under the contested programs. 95 Instead, as part of a
"quantitative" assessment of the programs, it consid ered, "to some extent", the "general order of
magnitude" of the payments made under the programs.96

126. In keeping with the description of the cont ested measures, and the examination of those
measures, the original panel held , in paragraph 7.1501, that the measures causing "adverse effects"
included the "statutory and regulatory framework" establishing the contested subsidy programs.

127. Immediately after making this statement, in paragraph 7.1503, the original panel also
emphasized that, during implementation, the United States was required to " significantly transform[]"
the contested subsidy programs such that, after im plementation, any subsidy programs maintained by
the United States would be "manifestly different" from those originally contested. For this reason, the
original panel found that there was no need to ex amine whether the contested programs threatened
serious prejudice during "the remaining period of application of the FSRI Act of 2002", that is

92 Brazil's First Written Submission, Sections 7-9; Br azil's Rebuttal Submission, Sections 2.3-2.4. In
its Opening Statement at today's meeting with the compliance Panel, Brazil will present further rebuttal
evidence.
93 Panel Report, U.S. – Upland Cotton, paras. 7.187 and 7.337.
94 Panel Report, U.S. – Upland Cotton, para. 7.1194.
95 Panel Report, U.S. – Upland Cotton, paras. 7.1173 and 7.1194.
96 Panel Report, U.S. – Upland Cotton, paras. 7.1173 and 7.1194.

through MY 2007.
97 In short, the United States was required to make future payments under
"manifestly different" "statutory and regulatory frame w o r k " , o r n o t m a k e t h e m a t a l l . N o r w a s i t
necessary, for the same reasons, to rule on the WTO-inconsistency of th e subsidy programs "as
such".98

128. The findings or the original panel, in paragr aphs 7.1501 and 7.1503 of its report, demonstrate
that the measures found to be WTO-inconsistent included the " statutory and regulatory framework "
establishing the contested subsidy programs.

129. This is also confirmed by paragraph 8.1(g)(i) of the original panel report, in which the Panel
concludes that " mandatory price-contingent United States subsidy measures" are inconsistent with
Article 5(c) and 6.3(c) of the SCM Agreement . As noted in reply to Question 11, the measures
referenced in this paragraph are the subsidy pr ograms, including mandatory payments, and not the
"payments" on their own, because "payments" alone do not mandate anything.

130. The action required by the United States to "significantly transform" – or withdraw – the
"statutory and regulatory framework " establishing the contested subsid y programs is the same as the
action that the United States would have been obliged to take if the measures had been found to be "as
such" WTO-inconsistent.

14. Could Brazil please explain how this Panel should interpret the relationship between the
three categories of measures identified in paragraph 3.1(v),(vii) and (viii) of the original panel
report? Is it the view of Brazil that "subsidies provided" or "subsidies mandated to be provided"
must be interpreted to encompass both payment s of subsidies and the regulatory provisions
pursuant to which such payments were "provided" or "mandated to be provided"?

131. The compliance Panel's question refers to three categories of measure identified in
paragraphs 3.1(v)
, (vii) and (viii). Brazil believes that the Panel's question is intended to refer to
paragraphs 3.1(vi), (vii) and (viii), and answers on that basis.

132. The measures identified in pa ragraphs 3.1(vi) and 3.1(vii) mu st be interpreted to encompass
the statutory and legislative framework establishi ng the contested subsidy programs, as well as
payments mandated by those programs. Under para graph 3.1(viii), the measures encompass simply
the statutory and legislative framework establishing the contested programs. Brazil notes that its goal
in defining these different categories of measures was to be over-inclusive in identifying
comprehensively the range and combination of measu res included in the original panel's terms of
reference.

133. As explained in answers to Questions 11 a nd 13(c), the original panel found "present" serious
prejudice with respect to the measures in paragraph 3.1(vi), that is the statutory and regulatory
framework establishing the contested subsidy pr ograms, as well as payments mandated by those
programs. As the original panel stated in para graphs 7.1501 and 7.1503 of its report, the United
States' implementation obligations required it, therefore, to take action with respect to that framework
to staunch the flow of the mandated payments.

15. Does Brazil agree or disagree with the United States that the listing of certain legislative
and regulatory provisions in paragraph 7.1107 of the original panel report reflects the original
panel's view that "payments under a pr ogram constitute programs 'as applied' "?
[Paragraphs 46-47 of the Rebuttal Submission of the United States]

97 Panel Report, U.S. – Upland Cotton, para. 7.1500.
98 Panel Report, U.S. – Upland Cotton, para. 7.1511.

134. Brazil does not agree with the United States that the listing of certain legislative and
regulatory provisions in paragraph 7.1107 of the original panel report reflects the original panel's view
that "payments under a program constitute programs 'as applied.'" In fact, the original panel report
indicated that the original panel did not make "as applied" findings (either expressly or by
implication).

135. The United States attempts to rewrite the orig inal panel report such that its implementation
obligation would be limited to removing adverse effects of Step 2, marketing loan, and
counter-cyclical payment subsidies for MY 1999-MY 2002. Brazil has set forth in detail its position
regarding the original panel's findings in its Res ponse to U.S. Requests for Preliminary Rulings. It
reiterates those arguments together with its answ ers to the compliance Panel's earlier questions, in
particular question 11, above. Brazil sets out additional explanation for its views below.

136. The United States' "as applied" argument incorr ectly transforms the original panel's decision
to use MY 2002, and the longer period of MY 1 999-MY 2002, as "reference periods", into a period
that circumscribes the measures involved in Brazil's present serious prejudice claims. Yet, as
explained in reply to Question 11, the "reference period"
99 was merely a methodological tool used to
marshal evidence and assess data. Nothing suggests th at the original panel intended to restrict its
conclusions and recommendations to any historical period of "effects".

137. Had the original panel intended to limit the m easures at issue, as a jurisdictional matter, to
payments in a particular historical period, any such finding would have contradicted its ruling that its
terms of reference included mandatory payments made throughout the original panel proceedings.
100
Also, if the original panel's present serious prej udice findings were limited to payments made in
MY 2002, or any other historical period, this would contradict its conclusion, in paragraph 7.1501 of
its report, that changes to statutory framework resulting from its present serious prejudice obviated the
need for examination of a threat of serious prejudice through MY 2007.

138. Moreover, the original panel's serious prejudi ce conclusion, set out in paragraph 8.1(g)(i) of
its report, did not reference any time period. The original panel concluded that:

(g) Concerning serious prejudice to the interests of Brazil:

(i) the effect of the mandatory price-contingent United States subsidy measures –
marketing loan program payments, user marketing (Step 2) payments, MLA
payments and CCP payments – is significant price suppression in the same world
market within the meaning of Article 6.3(c) of the SCM Agreement constituting
serious prejudice to the interests of Brazil within the meaning of Article 5(c) of the
SCM Agreement.
139. The United States claims that this conclusion is limited to the effects caused by mandatory
price-contingent United States subsidy payments made only during MY 2002 , or effects caused by
mandatory price-contingent subsidy payments made only during MY 1999-2002. However, if
applicable, any such temporal limitation would have been set out expressly in both the description of
the measures at issue in paragraph 7.1107, and the pa nel's conclusion in paragraph 8.1(g)(i). Yet, as a
jurisdictional matter, there is no temporal limita tion on the measures at issue in these or any other
paragraph of the original panel report.

140. Further, the final panel report was issued to the parties on 18 June 2004 – 10 ½ months after
MY 2002 ended and only six weeks before MY 2003 ended. By the time the Dispute Settlement
Body adopted the "present" serious prejudice findings, conclusions and recommendations on

99 Panel Report, U.S. – Upland Cotton, para. 7.1195 (heading title for Section VII.G.3(e)).
100 Panel Report, U.S. – Upland Cotton, para. 7.187.

21 March 2005, almost two-thirds of MY 2004 had been completed. If the intention of the original
panel had been to make an "as applied" finding limited to serious prejudice caused only in MY 2002
or only in MY 1999-2002, it would have used the past tense in its conclusions in paragraph 8.1(g)(i)
of its report. Instead, it used the present tense: "the effect of manda tory price-contingent United
States subsidy measures … is
 significant price suppression …."). That conclusion and the
accompanying recommendation in paragraph 8.3 – alo ng with the U.S. obligation under Article 7.8 to
take appropriate steps to remove the adverse effe cts or withdraw the subsidy – continues to be
applicable today.

141. Significantly, the original panel's findings th at the United States was obligated to take action
concerning its "present statutory and regulatory framework" existing in MY 2003 as a result of the
panel's "present" serious prejudice findings also is inconsistent with the U.S. argument that the
original panel made an "as applied" finding. The or iginal panel found that "it is clear that the existing
subsidy programs are currently envisaged to rema in in effect between MY 2003-MY 2007." And
immediately after making this finding, the original panel held:

Because the Panel's "present" serious prejudice findings include findings of
inconsistency that deal with the FSRI Act of 2002 and subsidies granted thereunder in
MY 2002, the United States is obligated to take action concerning its present
statutory and regulatory framework as a result of our "present" serious prejudice
findings. We recall that, pursuant to Article 7.8 of the SCM Agreement, the United
States is under an obligation to "take appropr iate steps to remove the adverse effects
or … withdraw the subsidy.
101
142. If the original panel had made an "as applied" finding limited to only past effects of past
mandatory and price-contingent payments, then ther e would be no reason for the original panel to
state in June of 2004 that " the United States is obligated to take action concerning its present
statutory and regulatory framework as a result of our "present" serious prejudice finding s."
Moreover, there would also have been every reason for the original panel to examine a threat of
serious prejudice through MY 2007.

143. Instead, under the U.S. theory, because the orig inal panel made only "as applied" findings of
present serious prejudice for past payments, and b ecause it neglected to make any "threat" findings,
the United States had every right to continue making massive future mandatory and price-contingent
payments during MY 2003, MY 2004, and MY 2005. On this view, when the United States was
required to "take appropriate steps" in MY 2005 to withdraw the adverse effects of payments made in
MY 1999-MY 2002, the United States could credibly asser t that the $5.4 billion paid out in marketing
loan counter-cyclical subsidies in MY 2003-2005
102 were not subject to any implementation
obligations, and were the intervening cause of significant price suppression in MY 2005.

144. In conclusion, the original panel never described its findings, conclusions or
recommendations as being "as applied." Nor did the original panel conclude that Brazil's present
serious prejudice claims constituted only "as applie d" claims limited to payments made within a
specified period. As demonstrated above, neither the panel's terms of reference, the measures the
original panel found to be applicable to Brazil's ser ious prejudice claims in paragraph 7.1107 of its
report, or the measures the original panel concluded cause significant price suppression were so
limited.

145. Finally, even assuming that the original panel's findings of present serious prejudice were "as
applied" findings limited to marketing loan and co unter-cyclical payments made during a particular

101 Panel Report, U.S. – Upland Cotton, para. 7.1501.
102 Exhibit Bra-471 (Table 6 in Detail).

historical period ( quod non), subsequent payments made under th e same program are also subject to
the United States' implementation obligations.

146. In U.S. – Softwood Lumber IV (21.5) , Canada challenged a periodic review measure that was
not declared by the United States to be a "measure taken to comply". The effect of the periodic
review was to render nugatory the declared measure taken to comply. Following findings in Australia
– Leather (21.5) and EC – Bed Linen (21.5) , the Appellate Body upheld the compliance panel's
finding that the review measure was a WTO-inconsistent "measure taken to comply":

Some measures with a particularly close re lationship to the declared "measure taken
to comply", and to the recommendations and rulings of the DSB , may also be
susceptible to review by a panel acting under Article 21.5.
103
147. In this dispute, subsequent payments made by the United States pursuant to the marketing
loan and counter-cyclical payment programs have such a close relationship to measures subject to the
original proceedings, and to the DSB's recommendati ons and rulings, that they are susceptible to
review by this compliance Panel. In particular , the payments collectively constitute an unbroken
stream of identical subsidies. The payments s ubject to the DSB's recommendations and the payments
subject to these proceedings are mandated by the very same subsidy programs; they are made to the
very same recipients; they support the very same crops; and they are granted on the very same terms
and conditions. The subsequent pa yments are, therefore, "clearly connected" and "inextricably
linked" to the measures found to be WTO-inconsistent in the original proceedings.104

148. Indeed, the connection between the payments is much closer than the connection between the
measures at issue in U.S. – Softwood Lumber IV (21.5) , Australia – Leather (21.5) and EC – Bed
Linen (21.5) . In sum, Brazil's dispute with the Unite d States in these proceedings regarding the
adverse effects of marketing loan and counter-cyclical subsidies is identical to its dispute regarding
precisely the same subsidies in the original proceedi ngs. The only significant change is that the level
of the subsidies has increased with time.

149. Similar to the U.S. arguments in U.S. – Softwood Lumber IV (21.5) , if the U.S. view that
subsequent marketing loan and counter-cyclical payments are not subject to this compliance Panel's
review, the U.S. grant of recurring subsidies become " a moving target that escape from [the WTO
subsidy] disciplines ".
105 Subsequent mandatory payments woul d always have to be subject to new
dispute settlement proceedings, and by the time these proceedings were completed, the effects of the
latest payments would be superseded by yet more payments, which could in turn only be challenged
in yet another original panel process. WTO dispute would dissolve into a "Groundhog Day" situation,
with no remedy available to Members suffering adverse effects.106

150. Thus, even if the United States were correct ( quod non ), that the DSB's recommendations
pertain solely to marketing loan and counter-cyc lical payments made during a defined historical
period, Brazil is entitled to challenge subsequent marketing loan and counte r-cyclical payments in
these compliance proceedings because these payments are "inextricably linked".

16. Could Brazil clarify whether or not its clai m in this Article 21.5 proceeding regarding a
threat of serious prejudice caused by marketing lo an and counter-cyclical payments is a claim with
respect to the marketing loan and count er-cyclical payment programs as such?
[Paragraphs 237-314 of the First Written Submission of Brazil]

103 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 77.
104 Appellate Body Report, U.S. – Softwood Lumber IV (21.5), para. 79.
105 Panel Report, U.S. – Softwood Lumber IV (Article 21.5 – Canada), para. 4.30.
106 Panel Report, U.S. – Softwood Lumber IV (Article 21.5 – Canada), para. 4.30, quoting arguments of
the European Communities.

151. The scope of the compliance Panel's terms of reference in these proceedings is determined by
the Brazil's Request for the Establishment of a Panel.
107 Paragraph 20 of the Panel Request specifies:

Specifically, Brazil believes that the US marketing loan and counter-cyclical payment
programs under the FSRI Act of 2002, as amended, as well as payments mandated to
be made thereunder , threaten to cause significant price suppression in the world
market for upland cotton in marketing years 2006 and until the expiry or repeal of
these programs.
108
Thus, Brazil claims that the contested subsidy prog rams, as well as payments to be made under those
programs, threaten to cause serious prejudice.

152. To examine this claim, following the appro ach of the original panel, as upheld by the
Appellate Body, the compliance Panel must consider the structure, design and operation of the
contested programs, as set forth in the statutory and regulatory framework establishing the
programs.109 In addition, along with other evidence, the compliance Panel may also consider the
general order of the magnitude of payments made un der the contested programs in the past. On this
basis, the compliance Panel may establish whether the effect of the contested programs is to threaten
serious prejudice in the future.110

153. Brazil recalls its agreement with the United States' observation in EC – Selected Customs
Matters that certain claims under the covered agreements are "not readily classifiable in the categories
of 'as such' and 'as applied.'"
111 Brazil considers that serious pr ejudice claims are among those that
cannot be readily classifiable as "as such" and "as applied."

Questions to the United States

17. The United States argues in paragraph 16 of its Rebuttal Submission that "[a]ccording to
Brazil, its claims apply not only to the marketi ng loan and counter-cyclical payment programs, as
such, but to the programs in addition to all pay ments authorized under the programs" (original
emphasis). The United States also argues in this resp ect that "it is abundantly clear that the original
panel did not make any finding under Article 5(c) and 6.3(c) of the SCM Agreement against the
marketing loan and counter-cyclical payment programs, as such, whether alone or in addition to
payments". [Paragraph 43 of Rebuttal Submission of the United States]

a) How does the United States respond to the argument of Brazil that the United States
mischaracterizes Brazil's claims in these proceedings in that Brazil is not challenging
the subsidy programs at issue as such? [P aragraph 31 of Submission of Brazil to the
Panel Regarding US Requests for Prelimi nary Ruling; paragraph 33 of Rebuttal
Submission of Brazil]

b) Could the United States also commen t in this regard on the arguments in
paragraph 31 of the Third Party Submission of Chad? Does the United States agree
or disagree with the propos ition that statutory or regul atory provisions can be
challenged on an as applied basis and that Br azil's claims in the original proceeding
"were as applied claims regarding measures that included legislative and regulatory
provisions"?

107 WT/DS267/30.
108 WT/DS267/30 (footnote omitted).
109 Panel Report, U.S. – Upland Cotton, para. 7.1194.
110 Panel Report, U.S. – Upland Cotton, paras. 7.1173 and 7.1194.
111 Appellate Body Report, EC – Selected Customs Matters, para. 165.

18. The United States submits that the only meas ures subject to the DSB's recommendation under
Article 7.8 of the SCM Agreement are payments m ade under the Step 2, marketing loan, and counter-
cyclical payment programs in 1999-2002. The United St ates also asserts, in this regard, that Brazil
fails to submit evidence "as to the present effects, if any, of the measures that were subject to the
original panel's actionable subsidy finding".

a) Do these statements mean that th e United States considers that the DSB
recommendation under Article 7.8 of the SCM Agreement only obliged the
United States to ensure that payments made in 1999-2002 would no longer have any
adverse effects?

b) Could the United States comment on the argument of New Zealand in paragraph 4.08
of the Third Party Submission of New Zealand?

19. Regarding the argument of the United States that the marketing loan and counter-cyclical
payments programs are not measures "taken to comp ly", is it the view of the United States that
Article 21.5 of the DSU only applies to measures ac tually taken by a party to comply and does not
apply to measures that a Member should have taken to comply?

20. How does the United States respond to the argument in the Third Party Submission of Japan
that the Appellate Body report in EC – Bed Linen (Article 21.5 – India) does not support the argument
of the United States that the marketing loan and counter-cyclical payments programs are not within
the scope of this Article 21.5 proceeding?

3. Claim of Brazil regarding the failure of th e United States to comply with the DSB
recommendations between 21 September 2005 and 1 August 2006

Questions to Brazil

21. Could Brazil please explain whether its request for a finding that the United States failed to
comply with the DSB recommendations between 21 September 2005 an d 1 August 2006 is
supported by prior panel practice in Article 21.5 proceedings? [Paragraph 68 of the Rebuttal
Submission of the United States]

154. In Australia – Salmon( 21.5), Canada made claims similar to those advanced by Brazil in this
dispute on the non-existence of compliance measure during a specified period following the end of the
implementation period. In that dispute, Austra lia adopted certain compliance measures after the
expiry of the reasonable period of time on 6 July 1999. Canada claimed that, during the period
between 6 July 1999 and the adoption of the complia nce measures, no compliance measures existed.
The compliance panel found as follows:

[T]he date of entry into force of the ne w measures varies according to the products
covered. In all cases, the entry into force – and thus the "existence" of the measures
taken to comply – occurred subsequent to 6 July 1999, the date of expiry of the
reasonable period of time given to Australia to implement the DSB recommendations
and rulings. Since, in this case, Australi a was under an obligation to implement the
DSB recommendations and rulings by the end of the reasonable period of time,
154 we
find that for the period of time that the new measures did not and will not apply
subsequent to 6 July 1999, no measures taken to comply existed or will exist in the
sense of Article 21.5.

with DSB recommendations and rulings by the end of the reasonable period of time. If it did
not do so, Australia could face suspension of concessions or other obligations under
Article 22.6 of the DSU.112
155. The findings of the compliance panel in Australia – Salmon (21.5) , therefore, support fully
Brazil's claims.

156. Brazil notes that, in this dispute, there are two arbitrations pending under Article 22.6 of the
DSU and Articles 4.11 and 7.10 of the SCM Agreement respectively. Thus, similarly to the situation
in Australia – Salmon 21.5 , the United States could face countermeasures or suspension of
concessions or other obligations under those provisi ons with respect to non-implementation by the
end of the implementation period.

157. Finally, Brazil notes that no such arbitration was pending in the two cases cited by the
United States: EC – Bed Linen (21.5) and U.S. – Shrimp (21.5).

22. How does Brazil respond to the argument of the European Communities that "the lack of
positive action taken by the United States to comply with the panel and Appellate Body's findings
and recommendations between the implementation date of 21 September 2005 and 31 July 2006 is
not necessarily fatal to its defence"? [Paragraph 48 of the Third Party Submission of the European
Communities]

158. Brazil disagrees that a subsidizing Member implementing pursuant to Article 7.8 of the
SCM Agreement can do nothing and be in compliance with the findings, conclusions, and
recommendations of panels and the Appellate B ody. By 21 September 2005, the United States was
required to take affirmative action under Article 7.8 of the SCM Agreement. But it did nothing.

159. Article 7.8 requires action, not inaction, no la ter than the end of the six-month implementation
period following adoption by the DSB of the pane l or Appellate Body report contemplated by
Article 7.9 of the SCM Agreement. Read together, these two Articles impose an obligation that a
subsidizing Member "shall take appr opriate steps to remove the adverse effects or shall withdraw the
subsidy" during that six-month period.

160. During this period, a Member may choose to withdraw the subsidy. That involves some type
of statutory, regulatory, or executive action to eliminate a subsidy.

161. The second part of Article 7.8 provides that a Member "shall take appropriate steps to remove
the adverse effects." The ordinary meaning of th e term "take" is "to undertake and perform (a
specified function, service, etc.)" or "to perform, make, or do (an act, movement, etc.)".
113 In turn, the
ordinary meaning of "step" is "the action, measure, or proceeding, especially one of a series, which
leads towards a result."
114 Thus, to "take" appropriate "steps" means to undertake action that fully
removes the adverse effects to the interests of another Member. What constitutes the specific
"appropriate" steps to be taken will vary according to the particular facts in a given situation.
Nonetheless, taking steps, or undertaking some affi rmative action, to remove the adverse effects of
"any subsidy" is required by this part of Article 7.8. Doing nothing is not undertaking action.
162. Having taken no action whatsoever by 21 September 2005, the United States had "not taken
appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six
months from the date when the DSB adopts the panel report and the Appellate Body report".

112 Panel Report, Australia – Salmon (Article 21.5 – Canada) , para. 7.30. See, also, para. 8.1(i) of the
Panel's findings and conclusions. Underlining added.
113 New Shorter Oxford English Dictionary, 1993 Edition, Vol. 2, pp. 3207, 3208.
114 New Shorter Oxford English Dictionary, 1993 Edition, Vol. 2, p. 3050.

163. In its responses to questions 24 and 25, du e to the Panel on 6 March, Brazil will explore
further the proper interpretation of Article 7.8, alone and in conjunction with Article 21.5 of the DSU.
Those responses will bear on the matter covered by the Panel in question 22.

Question to the United States

23. Does the United States consider that the text of Article 21.5 of the DSU should be interpreted
to mean that a compliance panel may only review the "existence" or "consistency" with a covered
agreement of measures taken to comp ly as of the date that the matter was referred to the panel and
not as of the date of the end of the implementation period? [Paragraph 68 of the Rebuttal Submission
of the United States]

TABLE OF CASES
Short Title Full Case Title and Citation
Brazil – Aircraft (21.5) Appellate Body Report, Brazil – Export Financing Program for Aircraft
 – Recourse by Canada to Article 21.5 of the DSU, WT/DS46/AB/RW, adopted
4 August 2000, DSR 2000:VIII, 4067.
Brazil – Aircraft (21.5)

Panel Report, Brazil – Export Financing Program for Aircraft – Recourse by
Canada to Article 21.5 of the DSU, WT/DS46/RW, adopted 4 August 2000,
modified by Appellate Body Report, WT/DS46/AB/RW, DSR 2000:IX, 4093.
Brazil – Aircraft (21.5 II) Panel Report, Brazil – Export Financing Program for Aircraft – Second
Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW/2, adopted 23
August 2001, DSR 2001:X, 5481.
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian
Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377.
Canada – Aircraft (21.5) Appellate Body Report, Canada – Measures Affecting the Export of Civilian
Aircraft – Recourse by Brazil to Article 21.5 of the DSU, WT/DS70/AB/RW,
adopted 4 August 2000, DSR 2000:IX, 4299.
Canada – Aircraft Credits
and Guarantees
Panel Report, Canada – Export Credits and Loan Guarantees for Regional
Aircraft, WT/DS222/R and Corr.1, adopted 19 February 2002, DSR 2002:III,
849.
U.S. – FSC (21.5) Appellate Body Report, United States – Tax Treatment for "Foreign Sales
Corporations" – Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55.
U.S. – FSC (21.5 II) Appellate Body Report, United States – Tax Treatment for “Foreign Sales
Corporations” – Second Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW2, adopted 14 March 2006.
U.S. – Shrimp (21.5) Appellate Body Report, United States – Import Prohibition of Certain Shrimp
and Shrimp Products – Recourse to Article 21.5 of the DSU by Malaysia,
WT/DS58/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6481.
U.S. – Softwood Lumber IV Appellate Body Report, United States – Final Countervailing Duty Determination
with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R,
adopted 17 February 2004, DSR 2004:II, 571.
U.S. – Softwood Lumber IV
(21.5)
Appellate Body Report, United States – Final Countervailing Duty
Determination with Respect to Certain Softwood Lumber from Canada –
Recourse by Canada to Article 21.5 of the DSU, WT/DS257/AB/RW, adopted
20 December 2005.
U.S. – Softwood Lumber VI
(21.5)
Appellate Body Report, United States – Investigation of the International Trade
Commission in Softwood Lumber from Canada – Recourse to Article 21.5 of the
DSU by Canada, WT/DS277/AB/RW, adopted 9 May 2006.
U.S. – Upland Cotton Panel Report, United States – Subsidies on Upland Cotton, WT/DS267/R, and
Corr.1, adopted 21 March 2005, modified by Appellate Body Report,
WT/DS/267/AB/R.

D. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE

1. General

Questions to both parties

24. Could the parties explain how they interpret the phrases "take appropriate steps to remove
the adverse effects" and "withdraw the subsidy" in Article 7.8 of the SCM Agreement?

1. The phrases "take appropriate steps to remove the adverse effects" and "withdraw the
subsidy" in Article 7.8 of the SCM Agreement require action that secures the full and complete
removal of any adverse effects, or the full withdrawal of any actionable subsidy found to cause
adverse effects.

2. As Brazil stated in its answer to Questi on 22, the terms used in Article 7.8 require action by a
defending Member, rather than inaction, and that removal of the adver se effects or withdrawal of the
subsidy must be complete, rather than partial.

3. Before addressing this interpretive question, Brazil notes a threshold question that must be
addressed by a compliance Panel confronted with recommendations under Article 7.8 of the
SCM Agreement – what is the "subsidy" to be withdrawn, or the adverse effects of which must be
removed in the present dispute?

4. In its 26 February response to question 11, Br azil explained that the subsidy subject to the
Article 7.8 recommendation includes both the legislative and regulatory subsidy programs in the FSRI
Act of 2002 and the price-contingent and mandatory payments made under those programs. In its
26 February response to question 15, Brazil explained that even if the original panel's findings of
present serious prejudice were limited to marketing loan and counter-cyclical payments ("CCP") made
during a particular historical period ( quod non), subsequent payments made under the same program
are also subject to the United States' implementation obligations.
 1

5. Article 7.8 has two implementation elements set out in the phrases "take appropriate steps to
remove the adverse effects" and "withdraw the subs idy", and demonstrates that action, rather than
inaction, is required of an implementing Member.

6. The ordinary meaning of the term "take" is "to undertake and perform (a specified function,
service, etc.)" or "to perform, make, or do (an act, movement, etc.)".
2 In turn, the ordinary meaning of
"step" is "the action, measure, or proceeding, especially one of a series, which leads towards a
result."
3 Because the object of the action is "adverse effects", the "appropriate" "steps" must involve
action that removes the adverse effects to the interests of another Member.

7. What constitutes the specific "appropriate" step s to take to remove the adverse effects will
vary according to the facts of each case. Fundame ntally, steps can only be "appropriate" if they
achieve full and permanent removal of the adverse eff ects. For example, the original panel identified
the particular appropriate step under Article 7.8 that the United States must take regarding the
"basket" of price-contingent and mandatory subs idies found to cause present significant price
suppression:

1 Appellate Body Report, U.S. – Softwood Lumber IV (21.5) , para. 77 ("Some measures with a
particularly close relationship to the declared 'measure taken to comply', and to the recommendations and
rulings of the DSB, may also be susceptible to review by a panel acting under Article 21.5.").
2 New Shorter Oxford English Dictionary, 1993 Edition, Vol. 2, pp. 3207, 3208.
3 New Shorter Oxford English Dictionary, 1993 Edition, Vol. 2, p. 3050.

[b]ecause the Panel's "present"' serious prejudice findings in clude findings of
inconsistency that deal with the FSRI Act of 2002 and subsidies granted hereunder in
MY 2002, the United States is obliged to take action concerning its present statutory
and regulatory framework as a result of our "present" serious prejudice findings. We
recall that, pursuant to Article 7.8 of the SCM Agreement, the United States is under
an obligation to "take appropriate steps to remove the adverse effects or … withdraw
the subsidy.
4
8. At no time did the original panel suggest that an "appropriate step" to remove the adverse
effects could involve doing nothing other than waiting for the effects of past payments to dissipate.
As Article 7.8 requires action, rather than inacti on, to do so would have rendered both Articles 6.3
and 7.8 of the SCM Agreement inutile. Any objective reading of the original panel's findings
demonstrates that it expected the United States to ta ke action to ensure that present serious prejudice
would not continue during the remaining life of the FSRI Act of 2002.5

9. The second relevant phrase found in Article 7.8 is "withdraw the subsidy." The structure and
placement of the phrase "take appropriate steps," as confirmed by both the French and Spanish
versions of the official texts,
6 indicates that it only qualifies a nd refers to the phrase "remove the
adverse effects" – not "withdraw the subsidy."

10. In examining the meaning of the identical phr ase "withdraw the subsidy" in Article 4.7 of the
SCM Agreement , the Appellate Body, in Brazil – Aircraft (21.5), required affirmative action by the
defending Member:

Turning to the ordinary meaning of "withdraw ", we observe first that this word has
been defined as "remove" or "take away", and as "to take away what has been
enjoyed; to take from." This definition suggests that "withdrawal" of a subsidy, under
Article 4.7 of the SCM Agreement, refers to the "removal" or "taking away" of that
subsidy.
7
11. Given the identity of this aspect of Articles 4.7 and 7.8, the Appellate Body's finding
regarding the meaning and action required to "withdr aw the subsidy" in Article 4.7 applies also to
Article 7.8.

12. A subsidy could be "removed" or "taken away" by the implementing Member enacting new
legislation or taking regulatory steps to cease opera tion or disbursements of payments under the terms
of the subsidy measure. As demons trated above, Article 7.8 requires affirmative action to remove the
adverse effects or withdraw the subsidy. Inaction is not sufficient.

13. Moreover, full removal of the adverse effects or full withdrawal of the subsidy is also
required. As noted by the Appellate Body, "full withdrawal of a prohibited subsidy within the
meaning of Article 4.7 of the SCM Agreement cannot be achieved by a 'measure taken to comply' that
replaces the original subsidy with yet a nother subsidy found to be prohibited."
8 The same reasoning
should apply to Article 7.8. Removing the advers e effects of a subsidy measure or withdrawing a

4 Panel Report, U.S. – Upland Cotton, para. 7.1501.
5 Panel Report, U.S. – Upland Cotton, paras. 7.1499-7.1503, 8.1(g)(i).
medidas apropiadas para eliminar los efectos desfavorables o retirará la subv ención." The French text states:
effets défavorables ou retirera la subvention."
7Appellate Body Report, Brazil – Aircraft (21.5), para. 45 (footnotes omitted).
8 Appellate Body Report, U.S. – FSC (21.5 II), para. 83.

subsidy measure found to cause adve rse effects, and subsequently replacing it with another subsidy
measure that causes adverse effects, is not sufficient.
14. Even assuming, arguendo, that the only finding by the origin al panel was with respect to
adverse effects flowing from MY 1999-2002 payments, it is insufficient for the United States to
satisfy its obligation to remove the adverse effect s or withdraw the subsidy by simply allowing the
effects of MY 1999-2002 payments to wane and die a natural death, only to be replaced by even
higher price-contingent and mandatory payments during the period MY 2003-2005. Brazil has
demonstrated that these "replacement" payments cause similar, if not even greater, significant price
suppression in the world market for upland cotton.

25. How do the parties interpret the relationship between Article 7.8 of the SCM Agreement
and Article 21.5 of the DSU?

15. Brazil refers the Panel to its answer to Qu estion 24, above, which sets forth the particular
characteristics of Article 7.8 of the SCM Agreement.

16. Article 7.8 of the SCM Agreement is a special and additional rule, under Appendix 2 of
the DSU. Because there is no conflict between Article 7.8 and Article 21.5 of the DSU, Article 7.8
does not replace Article 21.5 in compliance proceedings, but instead supplements Article 21.5.

17. An Article 21.5 compliance panel assessi ng implementation under Article 7.8 plays two,
overlapping roles. First, the compliance panel assesses whether an implementing Member has taken
affirmative action constituting either appropriate steps to remove the adverse effects, or withdrawal of
the subsidy causing those adverse effects. S econd, the compliance panel assesses whether any
measures taken to comply exist, and if they ex ist, whether those measures, in their totality
9, are
consistent with the covered agreements.

18. As a practical matter, these two assessments can overlap, and may involve the same evidence.
But there may be instances in which a Member has, e.g., "withdrawn the subsidy" under Article 7.8
but, nevertheless, is not in compliance with Articles 5 and 6 of the SCM Agreement. For example, an
actionable subsidy found to cause adverse effects may be withdrawn within a period of six months in
apparent compliance with Articles 7.8 and 7.9 thereo f. However, if the implementing Member later
enacts a replacement subsidy of a relatively similar nature, structure, design and operation as the older
subsidy, then an Article 21.5 panel would be re quired to determine (a) whether the replacement
subsidy is taken to comply with the recommendations and rulings, a nd (b) whether this new measure
taken to comply – the replacement subsidy – is c onsistent with the covere d agreements and does not
cause adverse effects. Such an interpretation is necessary to avoid a Member simply withdrawing one
subsidy and replacing it somewhat later with a similar subsidy.

19. In this case, the compliance Panel, under Article 7.8 of the SCM Agreement and Article 21.5
of the DSU, must first assess Brazil's claim that no measur es taken to comply exist with respect to the
period 21 September 2005 and 1 August 2006. Second, the compliance Panel must assess whether the
United States took action constituting full removal of the adverse effects caused by the basket of three
price-contingent and mandatory measures, or fully withdrew those measures. Third, the compliance
Panel must determine whether the measure taken to comply, i.e., the limited amendment of the FSRI
Act of 2002, is inconsistent with Artic les 5(c), 6.3(c) and 6.3(d) of the SCM Agreement. In this case,
steps two and three above involve the same proof, i.e., that Brazil suffers serious prejudice by reason
of the collective effect of marketing loan and CCP subsidies.

9 Appellate Body Report, U.S. – Softwood Lumber IV (21.5) , para. 67; Appellate Body Report, U.S. –
Shrimp (21.5), para. 87.

26. Could the parties explain whether they agree or disagree with the arguments of
New Zealand in its Third Party Submission that Article 7.8 of the SCM Agreement has certain
consequences for the burden of proof in an Ar ticle 21.5 proceeding? [Paragraphs 5.04-5.06 of the
Third party Submission of New Zealand]
20. Brazil does not agree entirely with New Zeal and's "burden of proof" arguments. In the
particular circumstances of this case, the original panel found that the "basket" of marketing loan,
Step 2, and CCP subsidies caused significant price suppression in the world market for upland cotton.
However, the United States repealed one of those three measures – the Step 2 legislation in the FSRI
Act of 2002. In view of these particular facts and as set out in Answer to Question 25, Brazil has the
burden of demonstrating under Article 7.8 that the United States did not take appropriate steps to
remove the adverse effects caused by the original basket of measures. Viewed from the Article 21.5
perspective, Brazil has the burden of demonstrati ng that the revised FSRI Act of 2002 providing for
marketing loan and CCP subsidies and mandatory and price-contingent payments was a measure
taken to comply that is inconsistent with Articles 5 and 6.3 of the SCM Agreement.

21. Where no changes to the basket of measures found to cause collectively adverse effects have
been made, then a complaining member would have th e right to proceed immediately to Article 7.9 of
the SCM Agreement and Article 22.2 of the DSU. The rationale for this right is set forth in Brazil's
answer to Question 24 above, i.e., that Article 7.8, at a minimum, requires an implementing Member
to take some action.

22. However, if arguendo, a complaining member was required to challenge in an Article 21.5
proceeding the fact that an unchanged basket of measures continued to cause significant price
suppression, then Brazil agrees with New Zealand that it might be appropriate to permit the
complaining Member to establish a prima facie case simply by demonstrating the absence of any
change in the measures. Further, for the reasons set forth in Brazil's Answer to Question 30, a
complaining party would be entitled to rely in an Ar ticle 21. 5 proceeding on the prior findings of a
panel. This is particularly the case where the sa me basket of measures found to cause adverse effects
continues to exist, unchanged, at the time of the Article 21.5 proceeding.

27. Could the parties comment on the followi ng statement of the European Communities:

"The text of Article 7.8 of the SCM Agreement does not state expressly that a Member
that has been requested by the DSB to implement its recommendations and rulings
under Article 7.8 of the SCM Agreement has to do anything" (original emphasis)

23. Brazil disagrees with this assertion of the Eur opean Communities for the reasons set forth in
Brazil's Answer to Panel Questions 22, 24, and 25.

28. The parties present divergent views with resp ect to the relevant marketing year to be
considered by the panel in its analysis of Brazil's serious prejudice claims.

a) Could the parties explain what they consid er to be the relevant legal considerations
by which the Panel should be guided in determining whether MY 2005 or MY 2006
is the appropriate marketing year?

24. In assessing the effects of marketing loan and CCP subsidies, the Panel should use the
methodological tool of a "reference period."
10 The appropriate reference period is MY 2005, the last
recent marketing year for which essentially complete data exists. 11 It may also be appropriate to use
partial MY 2006 data where the data has particular indicia of reliability and credibility. However,

10 Panel Report, U.S. – Upland Cotton, paras. 7.1195-1.1201.
11 Panel Report, U.S. – Upland Cotton, para. 7.1198.

partial year data should be used with caution because historical data shows that there have been fairly
significant shifts of prices, demand, supply based on a number of different factors.

25. The relevant legal considera tions for selecting a representative period of time, or a "reference
period," to assess the existence of serious prejudice were discussed by the original panel as follows:
Article 5(c) and 6(c) of the SCM Agreement do not refer to any specific time period
within which we must conduct our evaluation. … The Panel concurs with the
United States assertion that MY 2002 is a relevant year for our serious prejudice
inquiry. It represents a recent period for wh ich essentially complete data exists. The
identification of "significant price suppression" flowing from the "effect of the
subsidy" calls for an evaluation of this effects-based phenomenon that cannot be
conducted in the abstract. Rather, discerning adverse effects of subsidies seems to us
to require reference to a recent historical period. We believe, however, that it is
important for the establishment of "current" serious prejudice that such prejudice
would be established to exist up to, and including, a recent point in time.
12
26. The original panel also found that "considera tion of developments over a period longer than
one year [is] not necessarily required (at least for Ar ticles 5(c) and 6.3(c))," but that a longer period
"provides a more robust basis for a serious prej udice evaluation than merely paying attention to
developments in a single year."13

27. As the original panel noted, there is no speci fic guidance for selecting a reference period for
assessing price suppression claims. However, context fo r interpreting Article 6.3(c) is found in other
provisions of Part III of the SCM Agreement. Paragraph 2 of Annex IV provides that in "determining
whether the overall rate of subsidization exceed s 5 percent of the value of the product … the
"12-month period, for which sales data is availabl e, preceding the period in which the subsidy is
granted" be used. Similarly, para graph 5 of Annex IV provides that the "rate of inflation experienced
in the 12 months preceding the month in which the subsidy is to be given" be used.

28. Article 6.4 of the SCM Agreement provides in respect of claims of displacement or impedance
under Article 6.3(b) that "an appropriate representative period sufficient to demonstrate clear trends
in the development of the market for the product co ncerned … in normal circumstances, shall be at
least one year." Article 6.7 refers to "the relevant period" for the purpose of Article 6.3(a) and 6.3(b)
claims. Article 6.3(d) provides for the assessmen t of an increase in the world market share by
comparing data from one year with "the previous period of three years and this increase follows a
consistent trend over a period when subsidies have been granted." Less specific time periods are
referred to regarding price undercutting claims under Articles 6.3(c) and 6.5 where the comparison of
prices "shall be made … at comparable times."

29. These various provisions indicate that some period of time should be used to assess various
forms of serious prejudice. While Article 6.3 provides for no particular time period for the
assessment of significant price suppression, Brazil agrees with the original panel that significant price
suppression in the same market requires an examin ation of some representative time period to assess
trends, data, and evidence in order to conduct the necessary counter-factual analysis.

30. However, the use of such a "reference period" to determine whether serious prejudice exists,
does not limit the "measures" at issue to that refere nce period. As Brazil demonstrated in its answers
to Questions 11 and 15, challenges to subsidies causing serious prejudice are not "as applied" or
"per se" claims. Rather, they are challenges based on the "effects" of "any subsidy." By contrast, the

12 Panel Report, U.S. – Upland Cotton, para. 7.1198.
13 Panel Report, U.S. – Upland Cotton, para. 7.1199.

United States seeks to turn the "reference period" for assessing serious prejudice into a jurisdictional
limitation on the measures themselves. The Unite d States is incorrect. The necessary use of a
reference period has no implications for the implem entation obligations of a subsidizing Member –
and certainly does not limit those obligations to onl y payments made in the past during the reference
period. Rather, the finding of adverse effects creat es an implementation obligation to ensure that the
use of the subsidy in the future does not cause adverse effects.

31. In sum, this compliance Panel should use the reference period of MY 2005 to assess whether
serious prejudice exists from the new basket of meas ures. Partial MY 2006 data should also be used
when it can be considered reliable and credible.

b) Do the parties agree or disagree with the argument of the European Communities
that in a dispute involving a claim of present serious prejudice the parties must
provide the "most recent reasonably avail able" data? [Paragraphs 43 and 54-55 of
the Third Party Submission of the European Communities]

32. Brazil disagrees with European Communities to the extent that the European Communities
asserts that panel considering serious prejudice challe nges should rely on any partial year data simply
because it is the most recent, regardless of its reliab ility in allowing an assessment of trends. As set
out in Brazil's answer to Question 28(a), above, in assessing the effects of marketing loan and CCP
subsidies, the compliance Panel should use th e methodological tool of a "reference period."
14 The
appropriate reference period is MY 2005, the last recent marketing year for which essentially
complete data exists.15 However, to assess effects, the comp liance Panel can also use data throughout
the lifetime of the FSRI Act of 2002. This permits the Panel to assess the continued relevance of the
numerous findings of fact made by the original panel based on the earlier reference period MY 2002
and MY 1999-2002. The data to be assessed includ es annual marketing year data regarding planted
and harvested acreage, yields, production, exports, various futures and actual prices, production costs
and the magnitude of subsidies in a given marketing year. Single week, month, or even partial year
data do not provide as clear a picture because data on supply, demand, exports, prices, and price-
contingent subsidies changes over time.

33. However, the reference peri od could be expanded to allow the assessment of evidence after
the end of MY 2005. This is particularly the case given the fact that marketing loan and
CCP programs in the FSRI Act of 2002 result in an unending stream of price-contingent subsidies that
cause, with no clear dividing line, present serious prejudice today and a threat thereof tomorrow, and
in the years ahead. Mandated marketing loan and CCP subsidies are paid today, and will continue to
be paid months from now when the compliance Panel issues its report. In fact, current projections
by USDA indicate that they will be paid every da y until the FSRI Act of 2002 is repealed. Brazil's
various serious prejudice claims in this proceeding, as before the original panel, involve past, present
and future serious prejudice from this unending river of subsidies mandated by the FSRI Act of 2002.
It is, therefore, appropriate for the compliance Pane l to assess, with caution and only where it finds it
credible and reliable, evidence concerning reference periods after 31 July 2006.

Questions to the United States

29. Does the United States contest the fact that a "strong positive relationship between upland
cotton (base acre) producers receiving annual payments and upland cotton production" exists? 16 In
particular, does the US disagree with the following statements17:

14 Panel Report, U.S. – Upland Cotton, paras. 7.1195-1.1201.
15 Panel Report, U.S. – Upland Cotton, para. 7.1198.
16 See para. 131 of Brazil's First Submission. The Panel clarifies that this phrase refers to the fact that
"the recipients who hold upland cotton base acres" and "those who continue to plant upland cotton" overlap with

• a very large proportion of farms with upland cotton base acres continue to plant
upland cotton in the year of payment;

• the overwhelming majority of farms enro lled in the programs which plant upland
cotton also hold upland cotton base?

Question to Brazil

30. How does Brazil respond to the argument of the United States that "whether or not the
marketing loan and counter-cyclical payment pr ograms or payments under the programs cause
significant price suppression is a question of first impression"? [Rebuttal Submission of the
United States, paragraph 219]

34. Brazil agrees that it is a question of "first impression" whether the new basket of price-
contingent subsidy measures – consisting of mark eting loan and CCP subsidies – causes significant
price suppression in the world market for upland cott on. The original panel made its overall price
suppression and causation findings largely based on the collective effects of the "basket of measures"
that included Step 2, marketing loan, and CCP subsidies.

35. But this does not mean, as the United States argues, that all findings of the original panel
regarding the individual effects of marketing loan a nd CCP subsidies, or even some of the collective
effects of the original basket of measures are irrelevant. Brazil fully agrees with the United States that
the original panel's findings "are taken as a gi ven for purposes of this Article 21.5 proceeding."
18 As
the Appellate Body stated, a compliance panel should apply the findings of the original panel "in the
absence of any change in the underlying evidence in the record and explanations."19

36. In making a new assessment of whether marke ting loan and CCP subsid ies collectively cause
serious prejudice, the compliance Panel can and must rely on the many findings of the original panel
that isolated and examined separately the text, nature, magnitude, and effects of marketing loan and
CCP subsidies.
20 The statutory and regulatory framework of these subsidies has not changed. Other
unchanged findings involve the existence of Brazilian and U.S. cotton in the same world market, the
continued relevance of the large world market sh are of U.S. supply, and the resulting substantial
proportionate influence of U.S. production and export s on the world market price for cotton. Because
the conditions of competition have not changed in any fundamental way since the original panel's
reference period of MY 2002, the compliance Panel should rely on these earlier findings in making its
new assessment of whether marketing loan and CCP subsidies cause significant price suppression in
the world market for upland cotton.

2. The structure, design and operation of the countercyclical and marketing loan payment
programs

Question to the United States

31. Brazil claims that the structure, desi gn and operation of US counter-cyclical payments
stimulate US upland cotton production. Both Brazil and the United States have referred to the

each other to a great extent. (See pa ra. 7.637 of the report of the origin al panel.) The Panel understands that
Brazil uses this phrase in the same sense.
17 These passages are reproduced from para. 7.636 of the report of the original panel.
18 U.S. First Written Submission, para. 180.
19 Appellate Body Report, U.S. – Softwood Lumber VI (21.5), para. 103.
20 Brazil First Submission, Sections 7.3 and 7.8; Brazil's Rebuttal Submission, Section 2.3.1.

Westcott (2005) 21 study to provide support for their opposing analysis of the possible production
impact of counter-cyclical payments. In its rebut tal, Brazil quotes the following passage from
Westcott:

So where do CCPs fit compared with other farm commodity programs in the 2002 Farm Act?
Marketing loans are fully coupled since they are available on all production and their link to
market prices means they affect production decisi ons of farmers. Direct payments are mostly
decoupled, since they are paid on a fixed, hi storically-based quantity rather than on current
production and are not dependent on market pr ices or other factors that would affect
production. …

CCPs fall in between these two programs, having some properties similar to mostly
decoupled direct payments and other properties similar to fully coupled marketing loans.
Like direct payments, CCPs do not depend on current production since they are paid on a
fixed, historically-based quantity. However, similar to marketing loans, CCPs are linked to
market prices so there may be some influe nce on current production decisions of farmers,
which would potentially make CCPs at least partially or somewhat coupled

a) Does the United States agree with this characterization of the CCP?

b) How would the United States respond to the argument that, by design, counter-
cyclical payments are in some measure coupl ed to production decisions because part
of the payments is contingent on the actual realization of market prices?

3. Economic simulation model

Question to the United States

32. Brazil has presented a partial e quilibrium model to simulate the effects of eliminating US
upland cotton payments, particularly the marketing loan and counter-cyclical payments. In both its
submission and rebuttal, the United States has provided reactions to the simulation model.

a) Would it be accurate to describe the Un ited States' response as constituting a general
acceptance of the framework of analysis adopted by Brazil but contesting the
assumptions made regarding the values of the parameters, the supply and demand
elasticities and the "coupling factor", used in the model? (The coupling factor is the
amount by which the expected price is increa sed by each dollar per unit of subsidy
payments.)

b) In its First Written Submission and Rebuttal Submission, the United States uses the
same value of 1 that Brazil adopts for the coupling factor assigned to marketing loan
payments. Does this imply an acceptan ce by the United States that, by design,
marketing loan payments provide a one-for-one incentive to upland cotton
production?

c) In its First Written Submission and Rebuttal Submission, the United States used a
non-zero value of 0.25 (not much lower from the 0.4 that Brazil adopts) for the
coupling factor assigned to counter-cyclical payments. Does this imply an
acceptance by the United States that, by design, counter-cyclical payments are
partially tied to upland cotton production, and of a magnitude (25 cents to a dollar of

21 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely
to be Limited" (Exhibit US-35).

counter-cyclical payments) not very far from Brazil's own estimate (of 40 cents to a
dollar of counter-cyclical payments)?

E. E
XPORT CREDIT GUARANTEES

1. Permissibility of an a contrario interpretation of item (j) of the Illustrative List

Questions to the United States

33. Please discuss whether (and if so, how) the panel rulings in Korea – Vessels and Brazil -
Aircraft (21.5) (I and II) affect the United States' a pproach to the interpreta tion of the relationship
between item (j) of the Illustrative List and Article 3.1(a) of the SCM Agreement.

34. Does the United States considers that item (j) of th e Illustrative List is one of the provisions to
which footnote 5 of the SCM Agreement applies? W hat impact does this have for the United States'
interpretation of the interaction between item (j) of the Illustrative List and Article 3.1(a) of the
SCM Agreement?

35. How does the United States address Brazil's ar gument that permitting an a contrario reading
of item (j) would prevent a Member from challengi ng specific export credit guarantees or cohorts of
such guarantees granted by a Member, as oppo sed to export credit guarantee programs? [see
paragraphs 472 ff. of Brazil's Rebuttal]

Questions to Brazil

36. What is Brazil's reading of the Appellate Body's statement in paragraph 80 of its Report in
Brazil – Aircraft (21.5) that it "... would have been prepared to find that the payments made under
the revised PROEX are justified under item (k) of the Illustrative List"? Should the Panel take this
statement into account in deciding whether item (j) can be interpreted a contrario?

37. Brazil has explained that, in its view, footnote 5 of the SCM Agreement expressly identifies
the only circumstances in which the Illustrative List can be relied upon to identify measures that are
not
 prohibited—namely, where the me asures are "referred to…as not constituting export subsidies."
This is also the view adopted, after extensive analysis, by the panels in Brazil – Aircraft (21.5) and
Korea – Vessels , the latter of which concluded on this basis that item (j) of the Illustrative List does
not meet the requirements of footnote 5 and therefore cannot be interpreted a contrario.

38. This position is not inconsistent with the Appellate Body's statement, in dicta in Brazil –
Aircraft (21.5), that it "would have been prepared," in effect, to accept an a contrario reading of the
first paragraph of item (k) of the Illustrative List.22

39. As a threshold matter, it must be noted that the Appellate Body's statement appeared in dicta,
and was accompanied by an express reservation that the Appellate Body did not purport to interpret or
apply footnote 5 to this question. The Appellate Body was very clear on this point: "[W]e wish to
emphasize that we are not interpreting footnote 5 of the SCM Agreement, and we do not opine on the
scope of footnote 5…"
23 Accordingly, the analysis of footnote 5 by the panel in Brazil –
Aircraft (21.5) and, subsequently, by the panel in Korea – Vessels, stands unaffected by the Appellate
Body's statement. The Korea –Vessels panel expressly considered the Appellate Body's statement on

22 Appellate Body Report, Brazil – Aircraft (21.5), para. 80.
23 Appellate Body Report, Brazil – Aircraft (21.5), para. 80 (emphasis added).

item (k), first paragraph. It concluded that that statement posed no bar to the panel's analysis, which
relied on footnote 5 to preclude an a contrario reading of item (j).24
40. Furthermore, item (k) is substantively distinct from other Illustrative List items. That is, even
if the Appellate Body could be unders tood to have contemplated a possible a contrario reading of the
first paragraph of item (k) notwithstanding footnote 5, such license would not extend beyond item (k).

41. As Brazil explained to the original panel 25, the first paragraph of item (k) is not like item (j).
Paragraph 1 of item (k) calls for an analysis of "m aterial advantage," which is closely related to the
"benefit" standard under Article 1.1. 26 Both focus on an assessment of the "benefit to the recipient."
An a contrario reading of the first paragraph of item (k) would not supplant the "benefit to recipient"
standard in Article 1.1(b).

42. Not so with an a contrario reading of item (j). A determination that an ECG program breaks
even tells one nothing about whether ECGs confer benefits on recipients relative to market
benchmarks. Yet an a contrario application of item (j) would definitively eliminate any consideration
of that "benefit". As such, it cannot be contemplated, whether or not an a contrario application of
item (k), first paragraph, might conceivably be available.

43. Again, however, Brazil does not understa nd the Appellate Body's statement in Brazil –
Aircraft (21.5) to have embraced an a contrario reading of item (k), because the Appellate Body did
not carry out an analysis addressing the impact of footnote 5 on that question. To the contrary, the
Appellate Body insisted that it was not taking that step, leaving the question entirely open to this
compliance Panel.

2. Outstanding export credit guarantees / measures taken to comply

Questions to Brazil

37. Brazil relies on the panel and Appellate Body Reports in Brazil – Aircraft (21.5) in support
of its arguments that the United States has not "withdrawn" the subsidy and is, "[a]t a minimum...
prohibited from making 'payments' on claims against" any outstanding export credit guarantees
[Paragraph 397 of Brazil's Rebuttal Submission]. Please discuss how the findings of the panel and
Appellate Body in that case apply to the provision of the US export credit guarantees at issue.

44. Brazil's claim is supported by two elements of the compliance panel and Appellate Body
reports in Brazil – Aircraft (21.5).

45. First, these reports conclude d that in continuing, after
 the implementation deadline, to
perform on financial commitments undertaken before adoption of the DSB's recommendation, Brazil
was not fully withdrawing the subsidy. 27 Analogously, in continuing, after the implementation
deadline, to perform on ECGs issued before adoption of the DSB's recommendation, the United States
has not fully withdrawn the subsidy.

24 Panel Report, Korea – Commercial Vessels, para. 7.197.
25 Panel Report, U.S. - Upland Cotton , Annex I-1 (Answers of Brazil to Questions from the Panel,
11 August 2003), paras. 143-149.
26 Appellate Body Report, Brazil – Aircraft (21.5) , para. 61 ("We ruled [...] that the determination of
whether a payment is 'used to secure a material adva ntage' calls for a comparis on between the export credit
terms available under the measure at issue and some other 'market benchmark'.").
27 Appellate Body Report, Brazil – Aircraft (21.5) , para. 45. See also Panel Report, Brazil –
Aircraft (21.5), para. 6.17. The compliance panel considered that "the obligation to cease performing illegal
acts in the future is a fundamentally prospective remedy." Panel Report, Brazil – Aircraft (21.5 I), para. 6.15.

46. Second, continuing to perform on ECGs outstanding on 1 July 2005 does not satisfy the
definition of "withdraw" offered by the Appellate Body in Brazil – Aircraft (21.5). The original panel
found that the ECG programs were export subsidies within the meaning of item (j). The
recommendation that the United States "withdraw the subsidy" therefore applied to the ECG
programs. However, the recommendation also includ es the subsidiary obligation not to perform on
certain outstanding ECGs issued under those programs (i.e., those ECGs issued for export transactions
involving unscheduled products and rice).
28 The Appellate Body defined the term "withdraw" as to
"remove" or "take away" the subsidy. 29 Paying a claim on default of a GSM 102 credit subject to the
DSB's recommendation to "withdraw the subsidy" does not "remove" or "take away" that subsidy.

3. "Benefit" under Articles 1 and 3.1(a) of the SCM Agreement

Question to the United States

38. Please discuss the relevance of the original panel's characterization, in paragraph 6.31 of its
report, of Brazil's reliance on Articles 1 and 3.1(a) of the SCM Agreement as "not a separate claim,
but merely another argument" on the United States' view in this respect (and notably the United States
statement, in paragraph 67 of its First Written Submission, that "... the panel in the original
proceeding specifically declined to address Brazil's alleged 'claim' under Articles 1 and 3.1(a) of the
SCM Agreement")?

Questions to Brazil

39. The Panel understands the United States to argu e that it has relied on the Panel's findings
under item (j) to implement the DSB recommendations with respect to export credit guarantees.
How would this, in Brazil's view, affect the comp liance panel's role in this proceeding? Was the
United States also expected to implement change s in order to make its export credit guarantee
programs consistent with article 1.1 and 3.1(a) of the SCM Agreement, even though there were no
findings of the original panel in this respect?

47. The United States' "reliance" on the original Panel's findings under item (j) should not affect
the compliance Panel's role in these Article 21.5 proceedings.

48. The United States cannot escape the export subsidy disciplines of the Agreement on
Agriculture and the SCM Agreement by arguing that it somehow relied on the factual and legal basis
for the original panel's finding that the GSM 102 program constitutes an export subsidy – to wit,
item (j) of the Illustrative List. The question in these compliance proceedings is not limited to
whether the United States has cured the basis on wh ich the original panel found a violation. The
Appellate Body has stated that in Article 21.5 pro ceedings, "a panel is not confined to examining the
'measures taken to comply' from the perspective of the claims, arguments and factual circumstances
that related to the measure that was the subject of the original proceedings."
30

49. Brazil thus understands that the compliance Panel is charged with reviewing the "new"
measure – the amended GSM 102 program – from the perspective of the claims and arguments (as
well as the facts) put before it in these
 proceedings, and not the claims and arguments before it in the
original proceedings, with respect to the "old" measure.

28 Appellate Body Report, U.S. – FSC (21.5) , paras. 223-231 (recommendation to withdraw a subsidy
in the form of an overarching measure, the FSC, includes the obligation to stop making pre-committed payments
to existing FSCs); Appellate Body Report, Brazil – Aircraft (21.5), para. 45 ("… to continue to make payments
under an export subsidy measure found to be prohibited is not consistent with the obligation to 'withdraw'
prohibited export subsidies, in the sense of 'removing' or 'taking away'.").
29 Appellate Body Report, Brazil – Aircraft (21.5), para. 45.

50. Moreover, the United States could not legitima tely have "relied on" the original panel's
findings under item (j) as the bounds of its implemen tation obligations. The United States is surely
aware that under the Appellate Body's interpretati on of Article 21.5, any U.S. "measure taken to
comply" would be a new measure subject to review from the perspective of claims, arguments and
factual circumstances that may differ from the origin al proceedings. This new measure must be fully
consistent with every relevant provision of the covered agreements.

51. In fact, in the original proceedings, Braz il urged the original panel to make findings on
Brazil's extensive evidence and argument that under the "old" measure, GSM 102 ECGs confer
"benefits" and constitute e xport subsidies under Articles 1.1 and 3.1(a) of the SCM Agreement .
31
While Brazil repeatedly urged it not to do so 32, the original panel exercised judicial economy with
respect to the evidence and argument offered by Brazil under Articles 1.1 and 3.1(a). Nonetheless,
the arguments are familiar to the United States, and should have been anticipated.

52. As emphasized in Brazil's oral statement at th e meeting with the compliance Panel, all of this
is not to say that the DSB's recommendations are irrelevant in implementation proceedings
implicating prohibited subsidies and Article 4.7 of the SCM Agreement. As noted by the Appellate
Body, "full withdrawal of a prohibited subsidy within the meaning of Article 4.7 of the
SCM Agreement cannot be achieved by a 'measure taken to comply' that replaces the original subsidy
with yet another subsidy found to be prohibited."
33

53. Thus, even if the United States has withdr awn the elements of the GSM 102 program that
made it an export subsidy under item (j) (a prop osition with which Brazil does not agree), it has
"replace[d] the original subsidy with yet anot her" prohibited subsidy – the provision of export-
contingent GSM 102 ECGs at below-market fees. It has, therefore, failed to achieve "full withdrawal"
of the subsidy, consistent with the Article 4.7 recommendation. In urging the Panel not to examine
whether its replacement measure confers export- contingent "benefits", the United States seeks
precisely to escape its obligation under that provision to fully withdraw the prohibited subsidy.

40. In paragraph 410 of its Rebuttal, Brazil ref ers to paragraph. 7.398 of the Panel Report in
Canada – Aircraft II. The Panel notes, howeve r, that in the same paragraph, the Canada –
Aircraft II panel also indicated that there woul d be a "'benefit' when the cost-saving for a
Bombardier customer for securing a loan with an IQ loan guarantee is not offset by IQ's fees".
Please discuss, in light of this sentence, wheth er the Panel should read the Canada – Aircraft II
panel as having rejected the "total cost of fund s" as the proper benchmark under Article 14(c) of
the SCM Agreement.

 31 In addition to Brazil's exhibits in the original proceedings, see Brazil's 18 February 2004 Comments
on U.S. Answers to Additional Questions, para. 65 (Panel Report, U.S. – Upland Cotton, Annex I-20); Brazil's
28 January 2004 Comments on U.S. Answers to Questions, paras. 139-144 (Panel Report, U.S. – Upland
Cotton, Annex I-13); Brazil's 20 January 2004 Answers to Additional Questions, para. 14 (Panel Report, U.S. –
Upland Cotton, Annex I-10); Brazil's 18 November 2003 Further Rebuttal Submission, U.S. – Upland Cotton ,
paras. 229-242; Brazil's 7 October 2003 Oral Statement, U.S. – Upland Cotton , para. 72; Brazil's
27 August 2003 Comments on U.S. Rebuttal Submission, paras. 68-80 (Panel Report, U.S. – Upland Cotton ,
Annex D-3); Brazil's 22 August 2003 Rebuttal Submission, U.S. – Upland Cotton , paras. 102-107; Brazil's
11 August 2003 Answers to Questions, paras. 139-140, 152-157, 182-189, 192-196 (Panel Report, U.S. –
Upland Cotton, Annex I-1); Brazil's 22 July 2003 Oral Statement, U.S. – Upland Cotton , para. 116; Brazil's
24 June 2003 First Submission, U.S. – Upland Cotton, paras. 287-294.
 32 See Brazil's 2 November 2004 Other Appellant Submission, U.S. – Upland Cotton, para. 19; Brazil's
17 May 2004 Interim Comments, U.S. – Upland Cotton , paras. 19-23; Brazil's 28 January 2004 Comments on
U.S. Answers, para. 145 (Panel Report, U.S. – Upland Cotton, Annex I-13); Brazil's 18 November 2003 Further
Rebuttal Submission, U.S. – Upland Cotton , para. 228; Brazil's 11 August 2003 Answers to Questions,
para. 150 (Panel Report, U.S. – Upland Cotton, Annex I-1).
33 Appellate Body Report, U.S. – FSC (21.5 II) , para. 83 (italic emphasis in original; underlining
supplied).

54. The sentence quoted by the compliance Panel from the report in Canada – Aircraft Credits
and Guarantees appears to be a rough approximation of what the United States characterizes as a
"total cost of funds" approach to Article 14(c).
34 Brazil does not believe that the panel in that dispute
rejected the "total cost of funds" approach, or Article 14(c) in general, in subsequently concluding that
"it is safe to assume that such cost difference would not be covered by [guarantee] fees if it is
established that [the guarantee] fees are not market-based." 35 Rather, consistent with the proper
interpretation of the provision, the panel merely dec lined to apply it rigidly, without consideration of
the factual circumstances at hand.

55. At the United States' urging, the Appellate Body has rejected a "r igid" approach to the
quantification methodologies included in Article 14, even for disputes regarding countervailing
measures, to which the provision expressly applies. Quoting from a U.S. submission, the Appellate
Body in U.S. – Softwood Lumber IV noted "that the use of the term 'guidelines' in Article 14 suggests
that paragraphs (a) through (d) shoul d not be interpreted as 'rigid rules that purport to contemplate
every conceivable factual circumstance'."
36 Absent flexibility in Article 14, the Appellate Body
worried that "the subsidy disciplines in the SCM Agreement . . . could be undermined or
circumvented."37

56. Canada – Aircraft Credits and Guarantees was an export subsidy dispute under Part II of the
SCM Agreement , to which Article 14 applies, but as context for a conclusion that Article 1.1(b)
involves a "benefit to recipient", rather than a "cost to government", standard.
38 As noted above, even
in the context of countervailing measures disputes, Article 14 admits of flexibility; the Appellate
Body has cautioned against applying the provision too rigidly, without reference to the particular
factual circumstances at hand. Outside the context of countervailing measures disputes, the
SCM Agreement does not mandate that the existence of a "b enefit" under Article 1.1(b) be established
using a particular quantification methodology. Indeed, unlike in countervailing duty proceedings,
where a duty must be calculated, disputes under Part II of the SCM Agreement do not require precise
quantification of the "benefit" found under Article 1.1(b).

57. Thus, while the panel in Canada – Aircraft Credits and Guarantees was correct in
acknowledging the relevance of the "total cost of f unds" approach in Article 14(c) at some level,
declining to follow it rigidly was entirely appropriat e in the factual circumstances of that dispute.
Unlike in countervailing duty proceedings, where a duty must be calculated as a function of the
amount of "benefit" conferred by government suppor t, no such precise calculation of the "benefit"
flowing from government support is required for an export subsidy dispute. In Canada – Aircraft
Credits and Guarantees, all Brazil, as the complaining Member, was required to show, was that some
"benefit" was conferred. The pane l in that dispute concluded that some "benefit" would have been
conferred were fees for the government gua rantee to be shown to be below-market.
39 Doing so did
not constitute "rejection" of Article 14(c), but instead , was consistent with the proper interpretation of
Article 14, and constituted a flexible approach called for by the factual circumstances at hand.

34 U.S. First Written Submission, para. 138.
35 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.
36 Appellate Body Report, U.S. – Softwood Lumber IV, para. 92. See also U.S. Appellant's Submission,
U.S. – Softwood Lumber IV , para. 25, accessed February 2007 at
http://www.ustr.gov/assets/Trade_Agreements/Monitoring_Enforcement/Dispute_Settlement/WTO/Dispute_Set
tlement_Listings/asset_upload_file760_6326.pdf ("[T]he provisions of Article 14 are explicitly designated as
"guidelines" and they must be interpreted in accordance wi th the ordinary meaning of that word. A "guideline"
is "a directing or standardizing principle laid down as a guide" to procedure or policy. The fact that Members
are obligated to follow the guidelines in Article 14 does not alter their character. Members have specifically
designated the provisions in Article 14 as "guides" or "principles," not rigid rules that purport to contemplate
every conceivable factual circumstance.").
37 Appellate Body Report, U.S. – Softwood Lumber IV, para. 100.
38 Appellate Body Report, Canada – Aircraft, para. 155.
39 Panel Report, Canada – Aircraft Credits and Guarantees, para. 7.345.

Questions to both parties

41. What are the relevant considerations to gu ide the Panel in the selection of a market
benchmark in this case?:

a) That the institution that provides the product is, on the whole, or on a program or
product-specific basis, profitable? If so, is "any" profit sufficient to qualify an
institution/product/program as a releva nt "market benchmark" or must the
institution/product/program achieve a cert ain level of profit? Must the Panel
conduct an examination of the level of profit achieved by commercial or private
actors operating in the field?

b) Are the institution/program/products' stated goals relevant in assessing whether
they can be used as a "market benchmark"?

c) Is the "governance" of the institution relevant?

d) What other factors are relevant?

58. When assessing a benchmark drawn from an en tity that is truly a participant in the
"marketplace"
40 – meaning an entity the financial indepe ndence of which is not "[]distorted by
government intervention"41 – a panel need not review the entity's profitability, goals or governance. If
the entity is truly a participant in the market place, the terms on which it offers its products are the
market, by definition. In those circumstances, it is not relevant for a panel to inquire into the entity's
profitability, goals or governance (unless those elemen ts are alleged to reveal that the entity is not
truly a participant in the marketplace).

59. In these proceedings, Brazil has demonstrated that there is no credit protection product
available in the marketplace that is comparable to a GSM 102 ECG. 42 Accordingly, the GSM 102
program offers a unique financial instrument without any parallel at market, and therefore confers
"benefits" per se. Where other Members' measures were at issue, the United States has agreed.43

60. In addition, Brazil has offered evidence de monstrating that GSM 102 fees are considerably
below those charged for virtually identical products offe red by an entity that is not a participant in the
marketplace – the U.S. Export-Import Bank ("ExIm Bank"). Benchmarking to fees charged by an
entity that is not a participant in the marketpl ace likely understates the extent of the "benefit"
conferred by a GSM 102 ECG, for reasons expressed in Brazil's submissi ons to the compliance
Panel.44 In the circumstances of these particular proceedings, Brazil is willing to accept that
understatement. The Panel will recall that in a prohib ited subsidies dispute, unlike in a countervailing
measures dispute, quantification of the precise amount of "benefit" is not required.

40 Appellate Body Report, Canada – Aircraft , para. 157 ("In our view, th e marketplace provides an
appropriate basis for comparison in determining whethe r a 'benefit' has been 'conferred', because the trade-
distorting potential of a 'financial contribution' can be identified by determining whether the recipient has
received a 'financial contribution' on terms more favourable than those available to the recipient in the market.").
41 Panel Report, Brazil – Aircraft (21.5 II), para. 5.29.
42 Brazil's First Written Submission, paras. 377-378. See also Id ., Annex III (Statement of Professor
Rangarajan Sundaram), paras. 8-9.
43 Panel Report, Canada – Aircraft Credits and Guarantees , Annex C-2 (para. 7) ("If the commercial
market does not offer a particular borrower the exact terms offered by a government, then the government is
providing a benefit to the recipient whenever those terms are more favorable than the terms that are available in
the market. A government entity "operating on commercial principles" is still a government entity. It is not the
commercial market.").
44 See, e.g., Brazil's Oral Statement, paras. 188-192.

61. In a dispute under Part II of the SCM Agreement, a defending Member may not, however,
justify the terms on which it offers a challenged fina ncial contribution with reference to a benchmark
associated with a product offered by a government/ public entity. Brazil believes that the compliance
Panel's question is whether, in these circumstan ces, the defending Member could appeal to the
profitability, goals or governance of that governme nt/public entity, to show that even if the entity is
not truly a participant in the marketplace, the product serving as the proposed benchmark is offered on
market terms.

62. In Brazil's view, the answer must be in the negative, to avoid circumvention of the disciplines
in the SCM Agreement.

63. Brazil addressed the issue of "profitability" of a government/public entity in its opening
statement at the meeting with the compliance Panel.
45 The original panel in this dispute observed that
public entities tend to borrow from government treasur ies, or enjoy a guarantee flowing from the full
faith and credit of governments. 46 As a result, government/public entities tend to enjoy a lower cost
of funds than their market-based counterparts. Other immunities enjoyed by government/public
entities – from taxation, in particular – lower costs even further. 47 The United States made this point
forcefully in Canada – Aircraft Credits and Guarantees:

. . . [T]he competitive pressures on financ ial actors in the marketplace generate
financing offers that reflect any internal cost advantages enjoyed by a particular actor.
For wholly commercial actors, however, th e ability and willingness to compete is
constrained by such factors as balance sheets, true market-determined borrowing
costs, arms-length shareholder lending po licies, arms-length business costs, and the
disciplines imposed by the need to provide returns to owners. [Government/public
entity's] operations are largely free of these c onstraints, and thus are in a position to
confer benefits by exceeding, if sometimes only in a small way, what purely market-
based financial institutions can (or may be willing to) offer. Their ability to do so
explains their existence, since there would otherwise be no reason for
[government/public entity operations] to exist in parallel with private financial market
actors, much less any logical reason for governments to limit their [entities'] activities
to nationals.
48
64. Whatever the definition of the term, making a "profit" does not mean that fees charged by a
government/public entity are consistent with mark et. A government/public entity can charge below-
market fees and still make a "profit", particularly because its costs are be low those faced by its
market-based counterparts. A mark et-based entity must go a step furthe r to survive: it must charge
fees high enough to make a profit on costs higher than those faced by its government/public
counterpart, and the profit must offer a sufficien t return to attract ca pital from investors.
"Profitability" of a government/public entity does not provide a relevant or sufficient measure of the
"benefit" conferred by a government financial contribution.

45 Brazil's Oral Statement, paras. 188-192. To show the conservative nature of its ExIm Bank exercise,
Brazil has discussed the extent to which ExIm Bank is loss-making. See Brazil's First Written Submission,
para. 384 and Annex III (Statement of Professor Rangarajan Sundaram), paras. 17-24. ExIm Bank's fees are
apparently not high enough to turn a "profit" on the low cost of funds it enjoys as a U.S. government agency
backed by the full faith and credit of the United States Treasury.
46 Panel Report, U.S. – Upland Cotton, para. 7.858.
47 Brazil's Rebuttal Submission, paras. 439 (IFC immune from taxation), 441 (EBRD immune from
taxation), 442 (IDB immune from taxation).
48 Panel Report, Canada – Aircraft Credits and Guarantees, Annex C-2 (Third Party Submission of the
United States), para. 5.

65. The United States made this point in the panel Korea –Vessels. The panel asked whether the
United States considered it relevant, in assessing "b enefit", that a Korean government bank, KEXIM,
"operated at a profit". The United States responded as follows:
No. … [T]he benefit-to-recipient approach must be applied to KEXIM financing.
That approach, in turn, requires a compar ison of KEXIM financing to a market-based
benchmark; i.e., comparable commercial financing. Evidence that KEXIM earned a
profit would be irrelevant to this exercise, because it would not prove that KEXIM
was charging market rates.49
66. A government/public entity's stated goal of offering products consistent with market is
equally irrelevant, as such a goal can be considered little more than self-serving. The governance of a
government/public entity will tend, as noted by the original panel 50, to demonstrate access enjoyed by
the entity to low-cost funds or government guarantees, which in turn highlight the irrelevance of the
entity's ability to turn a profit.

4. Claims under item (j) of the Illustrative List

Questions to the United States

42. How does the United States address Brazil's argum ents with respect to the MPRs under the
OECD Arrangement?

Question to Brazil

43. What is Brazil's reaction to paragr aph 25 of Japan's Third Party Submission?

67. As the Panel will recall, Braz il has demonstrated that fees ch arged by the United States in the
GSM 102 program are significantly lower than the minimum premium rates ("MPRs") of the OECD
Arrangement on Officially Supported Export Credits (the "OECD Arrangement") for similar risk
categories, tenors and repayment profiles. Brazil offers this comparison as additional evidence that
GSM 102 fees are not structured and designed to co ver the long-term costs and losses of the program,
because the OECD Arrangement MPRs are set with the objective of ensuring "that
Participants…charge premium rates in addition to in terest charges that…are not inadequate to cover
long-term operating costs and losses."
51

68. In paragraph 25 of its Third Party Submissi on, Japan objects to Brazil's invocation of the
OECD Arrangement in this context. Japan's objections rest on the premise that the OECD
Arrangement is factually inapposite for a comparison to GSM 102 ECGs, because the OECD
Arrangement does not cover export credits for agri cultural commodities such as upland cotton and it
applies to export credits with different tenors than those offered under GSM 102.

69. Japan's objection appears to stem from a misunderstanding of the purpose for which Brazil
has invoked the OECD Arrangement's MPRs. Brazil acknowledges these factual differences between
the GSM 102 program and the OECD Arrangement, and indeed did so in its own submissions.
52
These distinctions, however, do not undermine the value of the comparison between GSM 102 fees

49 Response of the United States to Questions from the Parties, Korea – Measures Affecting Trade in
Commercial Vessels , 22 March 2004, paras. 6-7 (emphasi s added), accessed February 2007 at
http://www.ustr.gov/assets/Trade_Agreements/Monitoring_Enforcement/Dispute_Settlement/WTO/Dispute_Set
tlement_Listings/asset_upload_file769_5561.pdf.
50 Panel Report, U.S. – Upland Cotton, para. 7.858.
51 Exhibit Bra-547 (OECD Document TD/PG(2004)10/FINAL, 6 July 2004, para. 1).
52 Brazil's First Written Submission, para. 442.

and the MPRs to this Panel's analysis under item (j). This is because Brazil does not contend that the
OECD MPRs constitute a strict quantitative benchm ark for analysis of the U.S. upland cotton ECG
fees. Brazil is not, for example, proposing the kind of direct quantitative comparison that would be
triggered under item (k), second paragraph, of the Illu strative List. Rather, this comparison offers the
compliance Panel a qualitative reference point for appreciating the degree to which GSM 102 fees fall
below internationally-accepted standards for EC G programs that are, according to the OECD,
structured and designed to break even.

70. Brazil turns to Japan's specific objections . As Brazil explained in its First Written
Submission, comparing GSM 102 fees for agricultural ECGs to the OECD MPRs for industrial ECGs
is, if anything, conservative. As Japan itself no tes, "the risks of financing arrangements" for
agricultural products are "substantial." As Brazil has noted, the perishability of agricultural products
diminishes their value as security for lenders.
53 Japan echoes Brazil's argument that in these
circumstances, GSM 102's extended coverage is unique; Japan acknowledges that in normal
circumstances, even non-market entities like ExIm Bank cap coverage under similar credit protection
products "at 180 days for bulk agricultural products." 54 If the OECD Arrangement were to cover
export credits for agricultural products, the MPRs would certainly not be lower; the gap between
MPRs and GSM 102 fees would not decrease, and would likely increase.

71. Nor does Japan's objection concerning the dive rgence between tenors for credits covered by
GSM 102 and credits subject to OECD MPRs undermi ne Brazil's reference to the latter, for two
reasons.

72. First, although the OECD Arrangement forma lly covers export credits with a tenor of two
years or more, it provides a formula that a llowed Brazil to extrapolate the MPRs that would be
applicable to export credit guarantees with terms of l ess than two years. This permits an "apples-to-
apples" comparison with respect to fees for credits with tenors of less than two years.

73. Second, the comparison provided by Brazil spans GSM 102 ECGs with tenors ranging as long
as 36 months.
55 Even if one were to accept a premise that GSM 102 fees may be compared only to
MPRs for export credits with terms of two years or more, the comparison points at 24, 30 and
36 months would all remain valid.
56 Those points of comparison, in turn, reveal not only a wide gap
between GSM 102 fees and MPRs, but a gap that grows as the tenor – and, correspondingly, the risk –
of the transaction increases. This same pattern app eared in Brazil's comparison of GSM 102 fees and
fees charged by the U.S. Export-Import Bank. As the risks of the transactions increase, the
inadequacy of the GSM 102 fees as compared to the MPRs (or to ExIm's fees) becomes even more
pronounced.

53 Brazil's First Written Submission, para. 443.
54 See Japan's Third Party Submission, para. 25, citing Brazil's First Written Submission,
paras. 387, 389.
55 Exhibits Bra-548 (MPR and CCC Annual Compar ison) and Bra-549 (MPR and CCC Semi-Annual
Comparison).
56 See Exhibits Bra-548 (MPR and CCC Annual Co mparison) and Bra-549 (MPR and CCC Semi-
Annual Comparison).

74. Accordingly, Brazil maintains that a compar ison of the fees charged in the GSM 102 program
with the MPRs set under the OECD Arrangement constitutes a useful reference point for this
compliance Panel. The factual differences noted by Jap an in fact suggest that the reference point is a
conservative one, such that it is even more clea r that the GSM 102 program is not structured and
designed to charge fees that cover its long-term operating costs and losses.