Initial briefs of parties and third parties



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IV. CONCLUSION
55. At this stage of the proceedings, it is Canada’s view that if the panel accepts the evidence presented by Brazil in its first written submission, it would find that PFC payments and direct payments do not satisfy the policy-specific criteria in paragraph 6(b) of Annex 2 of the Agriculture Agreement. Contrary to those requirements, the amount of these payments would be found to vary based on current production of certain fruit, vegetables and wild rice.
56. Regarding the US export credit guarantee programmes, in Canada’s view, were the Panel to find that these programs provide export subsidies within the meaning of Article 1(e) of the Agriculture Agreement, then it would also find that the United States has violated Articles 8 and 10.1 at the very least in respect of exports of upland cotton.


ANNEX B-7

third party submission of china


15 July 2003

TABLE OF CONTENTS


Page

1. INTRODUCTION 72
2. ARGUMENTS 72
2.1. The Burden of Proof Under The Peace Clause 72
2.2 Proper Categorization Of US FSRI 2002 Direct Payments 73
2.3 Panel Treatment Of Measures

Found By Earlier Proceedings To Be In Violation 74
3. CONCLUSION 77

1. INTRODUCTION

1. China is appreciative of this opportunity to present its views to the Panel in this proceeding on various domestic supports and export subsidies granted by the United States (the “US”) for the production, use and export of US upland cotton.
2. In line with this Panel’s decision dated 20 June 2003, China will focus its submission to issues relating to
(1) the burden of proof under Article 13 of the Agreement on Agriculture (the “Peace Clause”);
(2) proper categorization of direct payments under the US. Farm Security and Rural Investment Act of 2002 (“FSRI”); and
(3) treatment of a non-complying measure by this Panel.
In China’s opinion, these three issues, amongst others, call for close attention and analysis by the Panel.
2. ARGUMENTS
2.1. The Burden Of Proof Under The Peace Clause
3. China agrees with Brazil that “the [P]eace [C]lause is in the nature of an affirmative defense, and that the burden of proof that US domestic support and export subsidies to upland cotton are provided in conformity with the requirements of the [P]eace [C]lause lies with the United States and not with Brazil as the complainant”277.

4. The burden of proof issue has been squarely dealt with by the Appellate Body in the US – Shirts and Blouses Case278. It stated that a complaining party asserting a claim under a positive rule, establishing obligations in themselves, first has the burden of proof to establish a prima facie case of an infringement of obligations by the responding Member, then the burden shift to the responding Member to adduces sufficient evidence to rebut the presumption279. However, with respect to rules providing "limited exceptions from obligations under certain other provisions of the GATT 1994", the Appellate Body is of the view that they are “in the nature of affirmative defense, thus it is only reasonable that the burden of establishing such a defense should rest on the party asserting it”280.

5. The parties to this dispute disagree on the nature of the Peace Clause. The US does not see the Peace Clause as an affirmative defense; it argues that portions of the Peace Clause impose positive obligations. It cites Articles 13(a)(i), 13(a)(ii) and 13(b)(ii) of the Peace Clause to prove that by incorporating obligations under Article 6 and Annex 2 within the "conform fully to" requirement, the Peace Clause contains positive obligations on members281.
6. China has a different opinion. When stand-alone, Article 6 in and Annex 2 to the Agreement on Agriculture and may contain positive obligations on Members. However, when cross-referred to by Articles 13(a)(ii) and 13(b)(ii) respectively, they are brought under the Peace Clause to form part and parcel of pre-conditions to its application. Generic components of the relevant Peace Clause provisions282 are (i) domestic support measures or export subsidies; (ii) that fully conform to Annex 2 and/or Article 6 of the Agreement on Agriculture; (iii) are exempt from actions; (iv) provided that…283 The thrust of the relevant provisions of the Peace Clause lies in its exemption of measures from certain actions. To qualify under the exemption, a measure under item (i) above must first meet the requirements under items (ii) and (iv) above. The moment either Annex 2 or Article 6 are brought into “fully conform to” formula under item (ii) above, it ranks pari passu with the other requirement under item (iv) above to form conditions precedent to a successful exemption.

7. China believes the US errs on seeing no distinction between "obligation" and "condition". The Peace Clause requirement for full conformity to Article 6 and Annex 2 does not create new obligations because Members have to comply with Article 6 and Annex 2 whether Article 13 exists or not. Within the Peace Clause, these requirements do not stand to impose obligations on Members, but to set conditions precedent for a Members intending to invoke Peace Clause protection. Positive obligations to comply with Article 6 and Annex 2, lie under where they are, i.e. under Article 6 and Annex 2, but not under the Peace Clause.

8. China does not see any "absurdity" as described by the United States in its written submission284. No such "absurdity" would be instilled into the process if at the first stage, the party alleging protection of Peace Clause for its measures is required to discharge its burden to prove that such measures do conform to the relevant Peace Clause conditions; if it cannot so prove, the measures would lose Peace Clause protection. A second stage will follow for the party claiming against the measures to establish its substantive case, without the Peace Clause shield.
9. China hopes the above two-step approach will help both this Panel and the parties to move the procedures on towards resolution of the case.
2.2 Proper Categorization Of US FSRI 2002 Direct Payments
10. The United States in its first written submission argues that direct payments (“DP”) under FSRI conforms fully to Annex 2 of the Agreement on Agriculture285 and are therefore “Green Box” in nature. Brazil argues that DP programme is inconsistent with Paras. 1, 6(a) and (b) of Annex 2 to the Agreement on Agriculture, as
(1) it conditions the type of production undertaken by the producer286;
(2) it sanctions base period updating287; and
(3) it has production and trade-distorting effects288.

11. Para. 6(a) of Annex 2 to the Agreement on Agriculture provides to the effect that eligibility for “Green Box” direct payment support measures “shall be determined by clearly-defined criteria” “in a defined and fixed base period.” The word “in” requires a link between the “criteria” and the “defined and fixed base period”. In other words, to qualify for “Green Box” direct payment measure under Para. 6(a), a criterion adopted by a Member must be tied, in a chronological sense, to a starting time frame that cannot be moved up on the calendar.
12. As the United States concedes, production acreage is a criterion for making FSRI DP289. However, under FSRI, production acreage for the purpose of DP is not tied to a defined and fixed base period. It moves progressively along the calendar.
13. Under the FSRI DP scheme, payment acreage, being one factor in calculating payment290, is 85% of a person’s base acreage. Base acreage, in turn, are either (i) “a four year average (1998-2001) of plantings of covered commodities (including upland cotton)”, or (ii) the total of production flexibility contract (“PFC”) acreage under the US 1996 Federal Agricultural Reform Improvement and Reform Act (“FAIR”) and the four-year average (1998-2001) of plantings of eligible oilseeds291. With respect to base acreage calculation method (i) above, the United States explains, FSRI DP allowed landowners to retain PFC base acres and “add 1998-2001 acres of eligible oilseeds or simply declare base acreage for all covered commodities” (including upland cotton)292. With respect to base acreage calculation method (ii) above, the United States explains that while a landowner may elect to simply utilize acres devoted to covered commodities during the 1998-2001 period for purpose of DP, a landowner need not do so; base acres may remain those under FAIR, implying no cotton production need have occurred since the 1993-1995 period for a landowner to have “cotton base acres”. The United States then concludes that “[t]hese … base acres are defined in the 2002 [FSRI] Act and fixed for the duration of the legislation (that it, from marketing year 2002-2007)”293. Such a conclusion ignores the fact that during the progression from PFC to DP, the requisite link between the programme acreage as a criterion and the “defined and fixed” starting time frame is broken. The change of legislation from FAIR to FSRI and the replacement of PFC with DP were utilized for producers to leap from their previous coverage acreage, which should have been tied to the base period, to a new updated acreage in 2002.

14. Enticement certainly exists for a producer to obtain more payments by leaping over the calendar and updating production acreage. The fundamental requirement that “no, or at most minimal trade distorting effects or effects on production” as required by Article 1 of Annex 2 to the Agreement on Agriculture is therefore not met.
15. In China’s opinion, without dwelling upon the burden of proof issue, the preponderance of evidence as produced by the parties indicates that the US DP under FSRI fails to meet the “tie” requirement under Para. 6(a) of Annex 2 of the Agreement on Agriculture and shall be properly categorized as non-“Green Box” measures.
2.3 Panel Treatment Of Measures Found By Earlier Proceedings To Be In Violation
16. Brazil also brought claims against export subsidy support granted for upland cotton export sales by US “Foreign Sales Corporations” (“FSCs”) under the “FSC Repeal and Extraterritorial Income Act of 2000” (“ETI Act”) 294.

17. The US ETI Act has previously been found to violate the Agreement on Agriculture and the Subsidies Agreement by both the panel295 and the Appellate Body296 in US – FSC (21.5). On 29 January 2002, the WTO Dispute Settlement Body (the “DSB”) adopted the panel and Appellate Body reports, declaring that the ETI Act violates Articles 3.1(a) and 4.7 of the Subsidies Agreement, Articles 8 and 10.1 of the Agreement on Agriculture and Article III:4 of GATT 1994.

18. As the United States had failed to implement the DSB recommendations and rulings within the prescribed time framework, on 25 April 2003, the European Communities (the “EC”) requested the DSB authorization to take appropriate countermeasures and to suspend concessions pursuant to Article 4.10 of the Subsidies Agreement and Article 22.7 of the DSU297. On 7 May 2003, the DSB authorized the EC to impose countermeasures against the US.
19. Brazil quoted main EC arguments and portions of the panel’s and the Appellate Body’s reasoning from their respective reports in US – FSC (21.5), all to persuade this Panel into taking the same reasoning and conclusion298.
20. China believes that the panel and the Appellate Body’s reasoning and their conclusion in US – FSC (21.5) are of extraordinary value to the current Panel.

21. First, “[a]dopted panel reports are an important part of the GATT acquis. They are often considered by subsequent panels. They create legitimate expectations among WTO members, and, therefore, should be taken into account where they are relevant to any dispute. [emphasis added].” 299 Export subsidy support provided to upland cotton export sales by US “Foreign Sales Corporations” under the ETI Act as challenged by Brazil in this case, is exactly the very same one challenged by the EC and found to violate the Agreement on Agriculture and the Subsidies Agreement by the panel300 and the Appellate Body301 in US – FSC (21.5). The panel and the Appellate Body’s decisions, as well as DSB’s adoption of same in US – FSC (21.5), have already created “legitimate expectations” among WTO members. Should this Panel re-consider the arguments, analysis and conclusions in respect of the same measure adopted by the same Member in dispute, and re-decide with even the slightest difference, the WTO Members’ legitimate expectations will be seriously disturbed and offended. Unless the current Panel finds the FSC export subsidies under the ETI Act challenged by Brazil in this case different from the FSC export subsidies under the ETI Act challenged by the EC in the US – FSC (21.5), relevancy is fulfilled to the maximum extent possible. The very same export subsidies shall be governed by the same juridical analysis, rule and conclusion. Substantive deviation from that the reasoning and conclusion of the earlier case on the same measure may well cast misgivings on the established DSB authority and reputation.

22. The United States in its First Written Submission argues that:

It also is well-established that even though panels may take into account prior panel and Appellate Body reports, “panels are not bound by previous decisions of panels or the Appellate Body even if the subject-matter is the same.”302

China notes that US had omitted the immediate subsequent paragraph, in which the panel states:
However, in the course of "normal dispute settlement procedures" required under Article 10.4 of the DSU, we will take into account the conclusions and reasoning in the Panel and Appellate Body reports in WT/DS50. Moreover, in our examination, we believe that we should give significant weight to both Article 3.2 of the DSU, which stresses the role of the WTO dispute settlement system in providing security and predictability to the multilateral trading system, and to the need to avoid inconsistent rulings (which concern has been referred to by both parties). In our view, these considerations form the basis of the requirement of the referral to the "original panel" wherever possible under Article 10.4 of the DSU.303 [emphasis added]

China believes that second sentence following the US quote from the panel’s report could not be more relevant to the US ETI Act before this Panel.


23. Secondly, the DSB has already, upon request by the EC, authorized the EC to impose countermeasures against the US, for its failure to implement the DSB recommendations and rulings within the prescribed time framework. DSB’s authorization to counteract

(1) further strengthens the weight of the panel and the Appellate Body’s decisions in US – FSC (21.5). Authorization by the DSB for countermeasures against the very same measures is a collective reflection that the measures shall have been withdrawn, and;

(2) brings up the need for efficiency. Given the DSB’s heavy caseload, as well as workload of this Panel, benefits of efficiency far overweighs whatever need for repeating the work that had been completely accomplished by a previous panel and the Appellate Body.
24. Thirdly, in light of difficulties encountered by the DSB in encouraging compliance subsequent to the US – FSC (21.5) proceedings, a different finding by this Panel in relation to ETI in the current dispute will frustrate WTO’s effectiveness as reflected in the DSB mechanism. The essence of “[p]rompt compliance with recommendations or rulings of the DSB” “to ensure effective resolution of disputes to the benefit of all Members” called for under Article 21.1of the DSU will evaporate.
25. Being a multilateral system, the WTO cannot afford to permit non-compliance by any Member in its face. One dispute settled will definitively involve several legal issues having been clarified and practices of certain members adjudicated. Such clarification and adjudication in one case must serve to benefit all members in the multilateral system. As Article 3.2 of the DSU tries to impress, the dispute settlement system of the WTO is a pivotal element in providing uniform security and predictability to the multilateral trading system and to avoid multiplication of the same practices being disputed in separate but non-distinct cases. To compel panels in later instances to re-visit the same legal issue and re-adjudicate the same practices the DSB recommends against on a second or even indefinite analytical journey would relegate WTO dispute settlement regime into disrepute.

26. The concern is not unfounded. The fact that Brazil had to resort to the WTO dispute settlement system and bring the ETI Act before this Panel is distinctly telling. This current Panel must put an end to that concern by ruling that the panel and the Appellate Body’s reasoning and their conclusion in US – FSC (21.5) be taken by this Panel, unless by the time the current Panel makes it decision, such measures will have already been withdrawn by the US.

3. CONCLUSION
27. To sum up, China is of the following opinion:
(1) The Peace Clause is an affirmative defense in nature, and a party seeking its protection bears the burden of proof;
(2) The US DP, which removes production acreage from its required nexus with a defined and fixed based period by allowing acreage updating, is not “Green Box” measure within the meaning of Para. 6(a) of Annex 2 to the Agreement on Agriculture; and
(3) The US ETI Act has been found by a prior panel and the Appellate Body to violate the Agreement on Agriculture and the Subsidies Agreement. In addition, the DSB has authorized the complaining party in the prior proceeding to take countermeasures. In light of coherency and efficiency of the WTO dispute settlement mechanism, this Panel shall take the reasoning and conclusion of the Appellate Body in the earlier case.
28. China thanks this Panel for granting this opportunity to present its views on issues related to this proceeding, and hopes that this Panel will finds the above points helpful.
Annex B-8

FIRST THIRD PARTY SUBMISSION BY

THE EUROPEAN COMMUNITIES
15 July 2003
TABLE OF CONTENTS

I. Introduction 79

II. Preliminary Issue - Brazil’s reference to a “Mandatory / Discretionary Doctrine” is unfounded 79

III. Article 13 of the Agreement on Agriculture cannot be considered an affirmative defence 80

IV. The Interpretation of Annex 2 of the Agreement on Agriculture 82

A. The relevance of the first sentence of paragraph 1 of Annex 2 82

B. Interpretation of paragraph 6 of Annex 2 84


V. Interpretation of Articles 10.1 and 10.2 of the Agreement on Agriculture (Export Credit Guarantees) 85

VI. Conclusion 86
I. INTRODUCTION
1. This dispute raises a number of complex yet important questions in respect of the applicable WTO regime for trade in agricultural goods. In this First Third Party Submission, the European Communities has submitted arguments on a number of questions raised by Brazil’s First Written Submission.304 However, the present submission should not be seen as exhaustive. Given the very short period between the deadline for the US First Written Submission and the deadline for submissions from third parties, the European Communities has not been able to incorporate in this submission a response to all of the arguments brought in the US First Written Submission which might merit a comment. Consequently, the European Communities reserves its right to submit argument on other questions (or to further develop the arguments set out here) at the First Session of the First Substantive Meeting with the Parties.
2. Following the Panel’s invitation of 20 June 2003, the European Communities has essentially limited itself to questions related to the interpretation of Article 13 of the Agreement on Agriculture, and some of the “non-peace clause” related claims brought by Brazil. The European Communities will therefore argue that :
▻ As a preliminary matter, Brazil is incorrect to consider that only legislation which mandates a particular action can be found inconsistent with the WTO Agreements;

▻ Article 13 Agreement on Agriculture is not an affirmative defence;

▻ The first sentence of paragraph 1 of Annex 2 to the Agreement on Agriculture does not create a free-standing obligation, separate from the basic criteria set out in the second sentence of paragraph 1; and,
▻ Article 10.2 of the Agreement on Agriculture does not exempt export credits and export credit guarantees from the disciplines of the Agreement on Agriculture.
3. The European Communities does not express an opinion on the application of the relevant legal interpretations to the facts of this dispute.
II. PRELIMINARY ISSUE - BRAZIL’S REFERENCE TO A “MANDATORY / DISCRETIONARY DOCTRINE” IS UNFOUNDED
4. Before turning to the substantive questions of interpretation the European Communities would like to touch briefly upon one systemic issue raised in Brazil’s submission. Brazil states in its First Written Submission that:
“It is established under WTO law that a Member can only challenge measures of another Member per se if such measures mandate a violation of the WTO Agreement.”305

5. Brazil cites as authority for this position para. 88 of the Appellate Body’s Report in United States – 1916 Act. However, the Appellate Body did not “establish” that measures can only be challenged if they mandate a violation of the WTO Agreements. In that case, the Appellate Body upheld the panel’s finding that the legislation in question was not discretionary and thus;

“[did] not find it necessary to consider [..] whether Article 18.4, or any other provision of the Anti-Dumping Agreement, has supplanted or modified the distinction between mandatory and discretionary legislation”.306

6. Panels have taken different approaches to this issue. The panel in United States – Section 301 found that discretionary legislation may violate certain WTO obligations.307 This approach can be contrasted with that of the panel in United States – Export Restraints.308 More recently, the Appellate Body in considering an EC claim against US legislation noted that;


“[it did not] preclud[e] the possibility that a Member could violate its WTO obligations by enacting legislation granting discretion to its authorities to act in violation of its WTO obligations. We [the Appellate Body] make no finding in this respect”.309

7. Consequently, it is far from established that only mandatory legislation can be found per se inconsistent with the WTO Agreements. The European Communities, for one, is convinced that discretionary legislation may, in certain circumstances, be found to be inconsistent with WTO obligations. However, further discussion of this issue does not appear necessary at present, since Brazil claims that the legislation in question permits of no discretion and the United States does not appear to dispute this point.310 Consequently, the European Communities will not develop its arguments on this issue further in this submission.




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