Initial briefs of parties and third parties


IV. “STEP 2” PAYMENTS ARE PROHIBITED SUBSIDIES CONTRARY TO ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND/OR ARTICLE 3 OF THE SCM AGREEMENT



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IV. “STEP 2” PAYMENTS ARE PROHIBITED SUBSIDIES CONTRARY TO ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND/OR ARTICLE 3 OF THE SCM AGREEMENT
49. Section 1207(a)(1) of the 2002 FSRI Act provides: “… the Secretary shall issue marketing certificates or cash payments … to domestic users and exporters for documented purchases by domestic users and sales for export by exporters …”. Section 136 of the 1996 FAIR Act provided similarly that “… the Secretary shall issue marketing certificates or cash payments to domestic users and exporters …”.
50. The regulations to implement s.1207(a)(1) of the FSRI Act provide:
Eligible upland cotton must not be: … (2) imported cotton …218
Payments … shall be made available to eligible domestic users and exporters who have entered into an Upland Cotton Domestic User/Export Agreement with CCC and who have complied with the terms and conditions in this subpart, the Upland Cotton Domestic User/Exporter Agreement and instructions issued by CCC.219

51. The standard Upland Cotton Domestic User/Export Agreement220 provides inter alia:

Upland cotton eligible for payment is cotton consumed by the Domestic User in the United States … (Section B-2)

Eligible upland cotton will be considered consumed by the Domestic User on the date the bagging and ties are removed from the bale in the normal opening area, immediately prior to use, … (Section B-3(b))

Upland cotton eligible for payment is cotton which is shipped by an eligible Exporter … (Section C-2)

Eligible upland cotton will be considered exported based on the on-board-vessel-date as shown on the bill of lading. (Section C-3)

52. A “Step 2” payment is unquestionably a subsidy within the meaning of the Agreement on Agriculture and the SCM Agreement. A “Step 2” payment involves a direct transfer of economic resources (cash or the equivalent value in ownership of goods) to a domestic user or exporter of US upland cotton.

53. The Article 21.5 stage of United States – Tax Treatment for “Foreign Sales Corporations” (US – FSC (21.5)) involved provisions under which more favourable tax treatment was available in either of two, mutually exclusive, situations. The availability of the favourable tax treatment was found to be a prohibited export subsidy in one of those situations notwithstanding that the favourable tax treatment was freely available in both situations, subject to the prescribed conditions for entitlement being met. The Appellate Body said:
In our view, it is … necessary, under Article 3.1(a) of the SCM Agreement, to examine separately the conditions pertaining to the grant of the subsidy in the two different situations addressed by the measure. We find it difficult to accept the United States’ arguments that such examination involves an ‘artificial bifurcation” of the measure. The measure itself identifies the two situations which must be different since the very same property cannot be produced both within and outside the United States.221

54. The availability of “Step 2” payments under s.1207(a)(1) is analogous to the situation examined in US – FSC (21.5). “Step 2” payments are available only to exporters (“Step 2” export payments) or to domestic users (“Step 2” domestic payments). Section 1207(a)(1) “identifies the two situations which must be different since the very same property cannot be” exported or used within the United States.


A. “STEP 2” EXPORT PAYMENTS ARE PROHIBITED EXPORT SUBSIDIES CONTRARY TO ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND ARTICLE 3.1(A) AND 3.2 OF THE SCM AGREEMENT

(i) “Step 2” export payments are subsidies contingent upon export performance

55. For “Step 2export payments, the export contingency is expressly provided for in s.1207(a)(1), which provides “… the Secretary shall issue marketing certificates or cash payments … to exporters for … sales for export by exporters …” and in the implementing regulations.
56 “Step 2” export payments are only payable once US-produced upland cotton has been placed aboard a vessel: they are “conditional” upon the cotton actually being exported. Thus, “Step 2” export payments are contingent upon export performance.
(ii) “Step 2” export payments are export subsidies contrary to Articles 3.3 and 8 of the Agreement on Agriculture
57. “Step 2” export payments are a type of export subsidy expressly foreseen by AA Article 9.1(a) and subject to budgetary outlay and quantity reduction commitments thereunder. They are a direct subsidy, including through payment-in-kind, to an industry, to producers of an agricultural product, or to a cooperative or other association of such producers, contingent on export performance.
58. The United States has not specified any reduction commitments in its Schedule for upland cotton.
59. Consequently, by providing “Step 2” export payments under both the 1996 FAIR Act and the 2002 FSI Act, the United States has provided export subsidies contrary to its obligations:


  1. pursuant to AA Article 3.3 not to provide export subsidies in respect of any agricultural product not specified in Section II of Part IV of its Schedule; and



  1. pursuant to its obligation pursuant to Article 8 not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in its Schedule.

(iii) “Step 2” export payments are prohibited export subsidies contrary to SCM Article 3


60. Because “Step 2” export payments are export subsidies that do not conform fully to the provisions of Part V of the Agreement on Agriculture, Article 13(c)(ii) of that Agreement is not applicable and the payments are not protected from the operation of SCM Article 3.
61. A “Step 2” export payment is a subsidy within the meaning of SCM Article 1.1(a)(1)(i) for the purposes of SCM Article 3.1: it involves a direct transfer of economic resources to a domestic user or exporter of US upland cotton, and confers a benefit on the recipient by making US upland cotton commercially competitive.
62. Further, a “Step 2” export payment is contingent upon export performance: it is only payable once the upland cotton has been placed aboard a vessel for export. The Appellate Body has said:

We see no reason, and none has been pointed out to us, to read the requirement of “contingent upon export performance” in the Agreement on Agriculture differently from the same requirement imposed by the SCM Agreement.222

63. As a consequence, because “Step 2” export payments mandated by s.1207(a)(1) of the FSRI Act are export subsidies that are not being made “as provided in the Agreement on Agriculture”, they are prohibited export subsidies pursuant to SCM Article 3.1(a), and the United States is acting contrary to its obligations under SCM Article 3.2 by granting or maintaining such subsidies pursuant to s.1207(a)(1) of the FSRI Act. Consistent with the provisions of SCM Article 4.7, Australia endorses Brazil’s request223 that the Panel recommend that the United States withdraw the “Step 2” export payments without delay.

B. “STEP 2” DOMESTIC PAYMENTS ARE LOCAL CONTENT SUBSIDIES CONTRARY TO ARTICLE 3 OF THE SCM AGREEMENT
64. For “Step 2” domestic payments, the local content requirement is expressly provided for in s.1207(a)(1), which provides “… the Secretary shall issue marketing certificates or cash payments … to domestic users … for documented purchases by domestic users …” and in the implementing regulations, which provide that “eligible cotton must not be … imported cotton”.
65. “Step 2” domestic payments are only payable once US-produced upland cotton is consumed by a domestic user. “Step 2” domestic payments are contingent upon the use of domestic over imported goods.
66. Thus, s.1207(a)(1) of the FSRI Act mandates the payment of subsidies which are prohibited pursuant to SCM Article 3.1(b), and the United States is acting contrary to its obligations under SCM Article 3.2 by granting or maintaining such subsidies. Consistent with the provisions of SCM Article 4.7, Australia endorses Brazil’s request224 that the Panel recommend that the United States withdraw the “Step 2” domestic payments without delay.
C. THE UNITED STATES CANNOT AVOID ITS OBLIGATIONS RELATING TO PROHIBITED SUBSIDIES BY DESIGNING A MEASURE UNDER WHICH ENTITLEMENTS ARE OSTENSIBLY AVAILABLE IN MULTIPLE CIRCUMSTANCES
67. In Australia’s view, the United States cannot avoid its obligations relating to prohibited subsidies under the Agreement on Agriculture and the SCM Agreement by designing a measure under which entitlements are ostensibly available in multiple circumstances. As the Appellate Body concluded in US – FSC (21.5):

Our conclusion that the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted in the second set of circumstances might not be export contingent does not dissolve the export contingency arising in the first set of circumstances.225

68. Moreover, in the circumstances of the present case, it would be a manifestly inequitable outcome if a WTO Member was able to avoid its obligations relating to prohibited subsidies under the Agreement on Agriculture and the SCM Agreement on the basis that there is a second set of circumstances in which a subsidy can be paid, when the second set of circumstances is itself a prohibited subsidy.

69. Australia considers that, through the “Step 2” payments mandated by s.1207(a)(1) of the FSRI Act, the United States is paying: (1) export subsidies contrary to its obligations pursuant to AA Articles 3.3 and 8 and SCM Article 3.1(a) and 3.2; and (2) local content subsidies contrary to its obligations pursuant to SCM Article 3.1(b) and 3.2.
V. CONCLUSION
70. This dispute raises fundamental issues concerning the object and purpose of the Agreement on Agriculture, and the balance of rights and obligations accepted by all Members under the Marrakesh Agreement Establishing the World Trade Organization. The outcome of this dispute will determine whether, in fact, Members accepted any meaningful obligations in relation to domestic support measures pursuant to the Agreement on Agriculture.
71. In Australia’s view, Brazil has provided prima facie evidence that the United States has not acted consistently with its obligations in relation to domestic support measures and export subsidies provided to upland cotton under the Agreement on Agriculture. Further, Australia considers that the “Step 2” payments for domestic users and exporters of upland cotton are clearly subsidies prohibited by the SCM Agreement, and endorses Brazil’s request that these be withdrawn without delay.
Annex B-5

THIRD PARTY SUBMISSION OF BENIN


15 July 2003
TABLE OF CONTENTS


I. INTRODUCTION 51
II. BENIN AND US COTTON SUBSIDIES 52

III. WTO LEGAL ISSUES 54

IV. CONCLUSIONS 57

I. INTRODUCTION
1. The issue in this dispute is of critical importance for Benin, West Africa, and many developing countries: whether WTO Members must respect agreed disciplines for the provision of agricultural subsidies.
2. The right to grant agricultural subsidies is by no means absolute. During the Uruguay Round, the drafters of the Agreement on Agriculture and the SCM Agreement established a number of preconditions for the provision of WTO-consistent subsidies. These preconditions, including those embodied in Article 13 of the Agreement on Agriculture - the so-called “peace clause” - were part of the overall balance of rights and obligations accepted by the United States and other participants at the conclusion of the Round.
3. Benin, upon its accession to the WTO in 1996, accepted the Uruguay Round package. In doing so, it expected that the subsidies provided by its trading partners, including the United States, would remain within these agreed parameters.
4. However, contrary to its WTO obligations, the United States has provided huge subsidies for the production, use and export of US cotton. These WTO-inconsistent subsidies have been highly damaging to Benin.
5. Benin supports the positions advanced by Brazil in this dispute, particularly those set out in Brazil’s first submission of June 24. Benin welcomes the opportunity to provide its views to the Panel, divided into two headings:
(a) Benin and US cotton subsidies, which provides appropriate additional context to the issues facing the Panel; and
(b) WTO legal issues.

II. BENIN AND US COTTON SUBSIDIES

6. Benin is a least-developed country, with a GNP per capita of US $380. Of the 175 countries listed in the 2003 Human Development Index of the United Nations Development Programme, Benin is ranked 159th.226

7. Cotton plays a crucial role in the development of Benin. It is the most important cash crop in the national economy. Cotton accounts for 90 per cent of agricultural exports, and has provided around 75 per cent of the country’s export earnings over the past four years. Benin is the 12th largest exporter of cotton in the world.
8. Cotton generates 25 per cent of the country’s revenues. A third of all households in Benin depend on the cultivation of cotton, and a fifth of wage-earning workers are employed in the cotton sector. Overall, about a million people in Benin – out of a population of six million – are dependant on cotton, or cotton-related activities.
9. The cotton sector in Benin, which is mainly in the rural regions, has suffered considerable hardship. As the International Monetary Fund noted in a report earlier this year, “poverty is prevalent in cotton-producing areas”.227 Cotton growers are concentrated in the north of the country, a more arid region where the potential for any agricultural diversification is lower, and where opportunities for non-farm employment are scare.228
10. Despite these problems of persistent poverty, the cotton sector in Benin and the region remains highly competitive by world standards. The cost of producing cotton in West Africa is 50 per cent lower than comparable costs in the United States.229

11. As recent report noted: “West Africa is one of the world’s most efficient cotton producing regions. The IMF estimates that the sector can operate profitably at world price levels of around 50 cents/lb. Few producers in the US could compete at this price. Indeed, the USDA estimates average production costs at 75 cents/lb.”230

12. Moreover, the sector has also undergone major structural reforms in recent years to increase efficiency. The IMF reported that: “Benin has moved away from the integrated monopoly that characterized the organization of cotton production and marketing of seed cotton in western and central Africa. Benin’s reform process is among the most advanced in the region.”231
13. Unfortunately, the benefits of such reforms have been completely negated by massive US subsidies. As noted by Brazil in its First Submission, total upland cotton subsidies amounted to US$12.9 billion during the 1999-2002 marketing years.232 The International Cotton Advisory Cotton estimates that US subsidies are equivalent to 24 cents per pound of cotton produced.233
14. Subsidies of this magnitude have sharply increased supplies on the international market, thereby producing a collapse in global cotton prices. From January, 2001 to May, 2002, world cotton prices fell by nearly 40 per cent, from 64 cents to about 39 cents per pound, the lowest level since the 1930s. Although prices have improved since last year, the world market for cotton remains characterized by oversupply as a result of US subsidies. This has extremely serious consequences for Benin and other West African countries.

15. Benin is highly vulnerable to changes in the world price of this cash crop. The International Food Policy Research Institute has estimated that a 40 per cent reduction in farm-level prices of cotton results in an increase in rural poverty in Benin of 8 per cent in the short term, and 6-7 per cent in the long term. An increase of 8 per cent is equivalent to pushing an additional 334,000 people below the poverty line.234 This, in turn, has produced a deterioration in the social conditions of many rural communities, including conditions pertaining to housing, schooling, sanitation, nutrition and other basic needs.

16. The overwhelming magnitude of US cotton subsidies, and the impossibility of Benin competing with them, are well illustrated in the table below.235 As the table indicates, the subsidies paid by the United States to 25,000 US cotton farmers exceeds the gross national income of Benin. These subsidies also exceed the gross national income of Burkina Faso, the Central African Republic, Chad, Mali and Togo.



17. Thus, when cotton from Benin enters world markets, it must compete against such massively subsidized US cotton.
18. Oxfam has estimated that US subsidies have caused Benin to lose US $33 million in foreign exchange earnings, equivalent to 9 per cent of the country’s export earnings.236
19. Indeed, the shock of such subsidies, and their attendant effect on prices, threatens the very existence of the cotton sector in Benin. It has created a genuine economic crisis in the sector, and it is possible that the cotton sector in Benin could simply disappear during the 2003/04 marketing year. This would have catastrophic effects both for the national economy, and for the social cohesion of the country in regions where cotton production predominates. This also poses a significant threat to Benin’s efforts at poverty alleviation in economically precarious rural areas.
20. With these preliminary comments as additional context, Benin now comments briefly on some of the legal issues raised in Brazil’s submission.
III. WTO LEGAL ISSUES
21. Benin agrees with Brazil that the United States cannot successfully invoke the peace clause to bar the actionable subsidy claims that have been advanced in this dispute.

22. The peace clause is an affirmative defence. The United States, not Brazil, must bear of burden of demonstrating that US domestic support and export subsidies comply with the requirements of Article 13.

23. Affirmative defences, as the Appellate Body made clear in United States – Wool Shirts and Blouses, are “limited exceptions from obligations under certain other provisions”, not “positive rules establishing obligations in themselves”. In the view of the Appellate Body, “[i]t is only reasonable that the burden of establishing such a defence should rest on the party asserting it”.
24. The language in Article 13 shows the clear intent of the drafters that the Member seeking to invoke the peace clause must bear the burden of demonstrating full compliance with all of the preconditions set out in this provision.
25. In addition to the arguments advanced by Brazil, Benin would note that the use of the proviso “provided that” in Article 13(b)(ii) and (iii) also shows the intent of the drafters to shift the burden to the Member seeking to invoke this exception. In both subsections, the exemption from actions has been qualified by the addition of this proviso:
(b) domestic support measures that conform fully to the provisions of Article 6 of this Agreement including direct payments that conform to the requirements of paragraph 5 thereof, as reflected in each Member's Schedule, as well as domestic support within de minimis levels and in conformity with paragraph 2 of Article 6, shall be:
(ii) exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 and 6 of the Subsidies Agreement, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year; and

(iii) exempt from actions based on non-violation nullification or impairment of the benefits of tariff concessions accruing to another Member under Article II of GATT 1994, in the sense of paragraph 1(b) of Article XXIII of GATT 1994, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year…” [emphasis added]

26. A similar proviso can be found in GATT Article XVIII:11, dealing with the elimination of restrictions imposed for balance of payments purposes:
“[T] he contracting party concerned… shall progressively relax any restrictions applied under this Section as conditions improve, maintaining them only to the extent necessary under the terms of paragraph 9 of this Article and shall eliminate them when conditions no longer justify such maintenance; Provided that no contracting party shall be required to withdraw or modify restrictions on the ground that a change in its development policy would render unnecessary the restrictions which it is applying under this Section.” [emphasis added]

27. In construing GATT Article XVIII:11, the Appellate Body made clear in the Quantitative Restrictions case that the burden of proof lay clearly on the responding party – in that case, India – seeking to invoke the proviso:

“The proviso precludes a Member, which is challenging the consistency of balance-of payments restrictions, from arguing that such restrictions would be unnecessary if the developing country Member maintaining them were to change its development policy. In effect, the proviso places an obligation on Members not to require a developing country Member imposing balance-of payments restrictions to change its development policy….

[W]e do not exclude the possibility that a situation might arise in which an assertion regarding development policy does involve a burden of proof issue. Assuming that the complaining party has successfully established a prima facie case of inconsistency with Article XVIII:11 and the Ad Note, the responding party may, in its defence, either rebut the evidence adduced in support of the inconsistency or invoke the proviso. In the latter case, it would have to demonstrate that the complaining party violated its obligation not to require the responding party to change its development policy. This is an assertion with respect to which the responding party must bear the burden of proof. We, therefore, agree with the Panel that the burden of proof with respect to the proviso is on India.”237

28. Although the use of the proviso “provided that” is not determinative, it does provide strong textual support for the proposition that the drafters of Article 13 of the Agreement on Agriculture, like the drafters of GATT Article XVIII:11, intended the burden of proof to shift to the party seeking to invoke the proviso.
29. Indeed, the situation in the Cotton dispute is very similar to that examined by the Appellate Body in the Quantitative Restrictions case. The United States is seeking to invoke the “provided that” proviso set out in Article 13. This is, as the Appellate Body reasoned, “an assertion with respect to which the responding party must bear the burden of proof”. Therefore, as with India in Quantitative Restrictions, the burden of proof with respect to the proviso is on the United States.
30. Article 13, construed as a whole, also supports the position that if the United States seeks entry into the “safe harbour”, it bears the burden of demonstrating that it has met the preconditions necessary to justify entry.
31. For example, the chapeau to paragraphs (a), (b) and (c) all provide that the measures or subsidies “must conform fully” with the applicable disciplines. Domestic support measures or export subsidies that do not “conform fully” to the specified provisions cannot benefit from the peace clause. Since the United States claims that it “conforms fully” to the relevant provisions of the Agreement on Agriculture, the SCM Agreement, and the GATT 1994, and it is up to the United States to provide sufficient evidence in support of this defence.

32. Thus, as argued above, the burden falls on the United States if it wishes successfully to invoke the affirmative defence of Article 13.

33. However, even if the burden rested on Brazil – which it does not – Brazil has amply demonstrated in its First Submission that the United States is providing domestic support and export subsidies far in excess of WTO commitments.
34. For example, as Brazil demonstrated in its submission, US non-“green box” domestic support to upland cotton in the 1992 marketing year was $1,994.4 million. By 2001, US non-“green box” domestic support increased to $4,093 million. Thus, the defence that may have been conditionally available to the United States – had it “conformed fully” to the requirements of Article 13 – is unavailable.
35. Brazil presents compelling evidence on the WTO-inconsistency of all of the impugned US measures, encompassing both domestic support payments and export payments. Benin agrees with Brazil that the US measures violate the Agreement on Agriculture, the SCM Agreement, and the GATT 1994.

36. The United States, in its submission of July 11, has done nothing to rebut the presumption of WTO-inconsistency established by Brazil.


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