III. ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE CANNOT BE CONSIDERED AN AFFIRMATIVE DEFENCE 8. Brazil argues that Article 13 of the Agreement on Agriculture should be understood as an affirmative defence and thus that the United States bears the burden of proof.311 The United States has indicated that it disagrees with this characterisation, and considers that Article 13 is not an affirmative defence.312
9. The European Communities shares the view of the United States that there are compelling reasons to consider that Article 13 is not an affirmative defence.313 Article 13 cannot be considered an affirmative defence which will excuse a violation of another provision of the WTO Agreements. Rather, it seems to the European Communities, Article 13 is a form of “gateway” or “threshold” provision, which regulates the use of certain mechanisms (countervailing duties, serious prejudice claims, non-violation complaints) in respect of certain types of subsidies. Conformity with the conditions of Article 13 has the effect of providing an exemption from action under Article XVI GATT 1994 and the SCM Agreement. Consequently, once a panel has determined whether or not agricultural subsides conform to the conditions of Article 13, it need not, indeed cannot, rule on whether those agricultural subsidies are consistent with Article XVI GATT 1994 and the SCM Agreement. For that reason, it cannot be equated to a defence to a violation of a provision of a WTO Agreement, in the way, for instance, Article XX may be considered a defence to a violation of Article I or III GATT 1994.
10. Even assuming, arguendo, Brazil’s contention that Article 13 of the Agreement on Agriculture is an exception to the otherwise applicable disciplines314, the Appellate Body has pointed out in EC-Hormones that merely characterising a provision as an “exception” and consequently an affirmative defence is insufficient to shift the burden of proof in dispute settlement proceedings.315 Any finding reversing the ordinary rule that the complaining party bears the burden of proof to establish a prima facie case must be derived from an application of the normal rules of treaty interpretation. The ordinary rules of treaty interpretation do not lead to such a conclusion in this case.
11. First, as noted above, the Panel is not asked to examine a general rule – exception situation with respect to Article 13. Article 13 is more akin to a threshold permitting further action if that threshold is not complied with.
12. Second, Article 13 is an integral part of the Agreement on Agriculture. In that sense, it is comparable to Article 6 of the Agreement on Textiles and Clothing, Article 3.3 of the Sanitary and Phytosanitary Agreement and the second sentence of Article 2.4 of the Agreement on Technical Barriers to Trade which were found not to be affirmative defences by the Appellate Body.316 Article 13 incorporates the obligations which a WTO Member assumes under the Agreement on Agriculture should it decide to provide agricultural subsidies to its producers, and regulates the status of such subsidies with respect to potential dispute settlement and the application of countervailing duties. In a similar fashion, Article 6 of the Agreement on Textiles and Clothing provides certain obligations which a WTO Member assumes if it decides to dis-apply the disciplines of the ATC in the form of a “transitional safeguard measure”. Likewise, Article 3.3 of the Sanitary and Phytosanitary Agreement sets out obligations on a Member wishing to maintain a higher level of sanitary or phytosanitary protection than provided for in international standards. These provisions, like Article 13 of the Agreement on Agriculture provide certain rights to WTO Members, but cannot be seen as exceptions.
13. Third, as pointed out by the United States, considering Article 13 as an affirmative defence leads to perverse effects.317 If a complaining Member makes a claim that a Member has acted inconsistently with the Agreement on Agriculture, the complaining Member will bear the burden of proof to establish a breach of the Agreement. However, if Article 13 is considered an affirmative defence, where a complaining Member brings a claim arguing breach of both the Agreement on Agriculture and the SCM Agreement the complaining Member would bear the burden of establishing a breach of the Agreement on Agriculture, the responding Member would bear the burden of proving that it was in compliance with the same provisions of the Agreement on Agriculture in order to apply Article 13, and the complaining Member would bear the burden of proof under the SCM Agreement. This cannot be what WTO Members intended when they negotiated Article 13. Indeed, the negotiators were aware of the issue of burden of proof and explicitly reversed the burden of proof in Article 10.3 Agreement on Agriculture with respect to potential circumvention of export subsidy commitments. That they did not agree on similar language with respect to Article 13 suggests that they intended the ordinary rules of burden of proof to apply.
14. Consequently, the European Communities respectfully requests that the Panel find that Article 13 is not an affirmative defence.
IV. THE INTERPRETATION OF ANNEX 2 OF THE AGREEMENT ON AGRICULTURE
A. THE RELEVANCE OF THE FIRST SENTENCE OF PARAGRAPH 1 OF ANNEX 2
15. Brazil argues in several instances that the first sentence of paragraph 1 of Annex 2 of the Agreement on Agriculture is an independent obligation which must be satisfied in addition to the basic criteria set out in paragraph 1 and the policy-specific criteria set out in paragraphs 2 to 13 of Annex 2.318 The European Communities considers that this interpretation is incorrect. The first sentence does not set out an independent obligation. It simply signals the objective of Annex 2.
16. Paragraph 1 of Annex 2 reads as follows:
1. Domestic support measures for which exemption from the reduction commitments is claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on production. Accordingly, all measures for which exemption is claimed shall conform to the following basic criteria:
(a) the support in question shall be provided through a publicly-funded government programme (including government revenue foregone) not involving transfers from consumers; and,
(b) the support in question shall not have the effect of providing price support to producers;
plus policy-specific criteria and conditions as set out below.
17. The European Communities will set out its understanding of the first sentence below. While some ambiguity as to the effect of the first sentence might arise when considering its ordinary meaning in isolation, as Brazil does, it is quite clear that, when seen in context, the first sentence should not be considered to be a free-standing obligation. This result also follows from a consideration of the objective of Annex 2.
18. It should be recalled that the provision of domestic subsidies for industrial products (i.e. non-export contingent subsidies) is not prohibited as such under the SCM Agreement or other WTO Agreements.319 Such subsidies will only be actionable if they meet the requirements of Articles 1 and 2 of the SCM Agreement, and cause adverse effects to the interests of another Member in the sense of Article 5 of the SCM Agreement.
19. The Agreement on Agriculture initiated a process of reform for domestic support for agricultural products.320 Negotiators recognised that domestic support for agricultural products required discipline and binding limits on the amount of domestic support. However, given that the provision of domestic subsidies to industrial products can be unlimited, provided there is no infringement of Article 5 of the SCM Agreement, it would have been inequitable to subject all types of domestic support to the strict discipline and limitations of the Agreement on Agriculture when the economic effects of different types of measures are not comparable. Consequently, it was necessary for the negotiators to differentiate between those types of support measures whose economic effect was deemed significant321, and those types of measures whose economic effects were deemed less significant. This differentiation was achieved, not by defining those measures deemed to have a significant effect, but rather those deemed to have a less significant effect. The result was Annex 2 to the Agreement on Agriculture.
20. The first sentence of paragraph 1 announces the differentiation which is achieved by the criteria set out in Annex 2.322 It sets out the logic for distinguishing between the types of domestic support which come under Annex 2 and are exempt from reduction commitments and other domestic support measures. That the first sentence does not set out an independent obligation can be seen from the next sentence of Paragraph 1 which starts with the word “accordingly”. “Accordingly” means “in accordance with the logical premises; correspondingly”.323 “Accordingly” consequently links the “fundamental requirement” in the first sentence with the “basic criteria” in the second sentence making it clear that in order to be considered to have “no, or at most minimal, trade-distorting effects or effects on production” the measure must meet the basic criteria in the second sentence of paragraph 1 together with the policy-specific criteria set out in paragraphs 2 to 13.
21. Contextual support for this position can be found in Annex 2 itself and in Articles 6 and 7 of the Agreement on Agriculture.
22. Paragraph 5 of Annex 2 states that support provided through direct payments which are to be exempted from reduction commitments “shall meet the basic criteria set out in paragraph 1 above, plus specific criteria applying to individual types of direct payment as set out in paragraphs 6 through 13.” It is quite clear that the “basic criteria” referred to here is the “basic criteria” referred to in the second sentence of paragraph 1 of Annex 1. There is no reference to the fundamental requirement and thus that the measures should have “no or at least minimal trade distorting effects or effects on production”. Consequently, this fundamental requirement cannot be an additional criteria for a domestic measure to be exempted from reduction commitments under Annex 2.
23. Further support for this view is found in the Agreement on Agriculture. Article 6.1 applies to domestic support measures other than those “which are not subject to reduction in terms of the criteria set out in this Article and in Annex 2” (emphasis added). Article 7.1 obliges Members to ensure that domestic support measures “not subject to reduction commitments because they qualify under the criteria set out in Annex 2 to this Agreement are maintained in conformity therewith” (emphasis added). Article 7.2(a) goes on to state that “any measure that is subsequently introduced that cannot be shown to satisfy the criteria in Annex 2 to this Agreement […] shall be included in the Member’s calculation of its Current Total AMS” (emphasis added). Annex 2 itself clearly distinguishes between the “fundamental requirement” of the first sentence of paragraph 1 and the “basic criteria” of the second sentence of paragraph 1 and the “policy-specific criteria” set out in paragraphs 1 to 13. The use of the word “criteria” in Articles 6 and 7, and its use in Annex 2 make it quite clear that in order to be exempted from reduction commitments by virtue of inclusion in the green box a domestic support measure must meet the criteria. It is obvious that the negotiators developed the criteria in order to determine whether a policy could be deemed to meet the “fundamental requirement” set out in paragraph 1 of Annex 2 and did not intend the first sentence to set out an independent obligation.
24. This interpretation is also supported by the objective behind Annex 2 and the Agreement on Agriculture more generally. In the administration of its agricultural policy, in order to ensure respect for their reduction commitments, a WTO Member must know how to classify its support measures. It is thus vital, for reasons of legal security and predictability, that a Member can determine the classification of its measures. The clear and specific criteria set out in Annex 2 provides WTO Members with guidance on how to approach this task. Assuming Brazil’s argument to be correct, a Member would also have to determine whether a particular measure to be taken might have a more than minimal trade distorting effect or effect on production. This is inevitably a difficult exercise, based on a subjective appreciation of a particular situation, which often may only be performed on an ex post facto basis. This is not a reasonable basis for advancing reform of trade in agriculture, and promoting the predictability of the system. Moreover, it can be noted that there is no such “effects” text in respect of other exempted domestic support measures viz. “de minimis payments” under Article 6.4 of the Agreement on Agriculture and “blue box payments” under Article 6.5 of the Agreement on Agriculture.
25. On the basis of the above, the European Communities respectfully requests the Panel to conclude that the first sentence of Paragraph 1 of Annex 2 of the Agreement on Agriculture does not impose an obligation independent of the basic and policy-specific criteria set out in Annex 2.
B. INTERPRETATION OF PARAGRAPH 6 OF ANNEX 2
26. Brazil’s first written submission raises a number of questions as to the correct interpretation of paragraph 6 of Annex 2. The European Communities attaches the utmost importance to the correct interpretation of these provisions. While the European Communities is still analysing the Brazilian and US arguments, it already takes note of the fact that the US does not claim that its counter-cyclical payments qualify as exempt under the green box.324 V. INTERPRETATION OF ARTICLES 10.1 AND 10.2 OF THE AGREEMENT ON AGRICULTURE (EXPORT CREDIT GUARANTEES) 27. Brazil argues that the US export credit guarantee schemes violate the Agreement on Agriculture and the SCM Agreement.325 The European Communities can concur with this argument to the extent it can be confirmed that the export credit guarantees in question are to be considered export subsidies.
28. The European Communities points out, in this regard, that Article 10.2 of the Agreement on Agriculture cannot be considered to exempt export credit guarantees from the disciplines of Article 10.1 of the Agreement on Agriculture.326 Article 10.2 states:
Members undertake to work toward the development of internationally agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export credits, export credit guarantees or insurance programmes only in conformity therewith.
29. Article 10.2 makes it clear that the provision of export credit guarantees is not one of the types of export subsidies listed in Article 9.1 which a Member is given a limited authorisation to apply. Article 10.1 provides that non-listed export subsidies may not be applied in order to circumvent export subsidy commitments. Since export credit guarantees may be “export subsidies not listed in paragraph 1 of Article 9” they may be applied in a manner which “results in or threatens to lead to, circumvention of export subsidy commitments” and thus may be prohibited by Article 10.1. For unscheduled products, since the listed export subsidies cannot be provided, the Appellate Body has found that the transfer of economic resources in the form of non-listed export subsidies (e.g. export credit guarantees) threatens to circumvent the prohibition on giving listed export subsidies to such products.327 Thus, export credit guarantees which qualify as export subsidies may be illegal under Article 10.1 where they might lead to circumvention of the export subsidy commitments.
30. Such a conclusion does not render Article 10.2 devoid of meaning. Article 10.2 is designed to develop disciplines of a broader nature than simply the regulation of export credits and export credit guarantees which operate as an export subsidy, since whether an export credit guarantee is an export subsidy depends on an analysis of the structure of that instrument. One reason why Article 10.2 was necessary is that export credits and export credit guarantees for agricultural commodities are not covered by the OECD Arrangement on Guidelines for Officially Supported Export Credits (see Article 3d).328 Export credits which conform to this arrangement are considered not to be prohibited export subsidies.329 Consequently, Article 10.2 sets up an obligation to develop disciplines for export credits and export credit guarantees irrespective of the question whether such instruments operate as export subsidies. It does not permit any differentiation in treatment between export credits, export credit guarantees or insurance programmes and other non-listed export subsidies.330 31. The European Communities submits, therefore, that Article 10.2 cannot be seen as exempting export credit guarantees granted to agriculture products from WTO disciplines.
VI. CONCLUSION 32. By way of conclusion, the European Communities respectfully requests the Panel to find that:
▻ Article 13 Agreement on Agriculture should not be considered an affirmative defence;
▻ The first sentence of the first paragraph of Annex 2 to the Agreement on Agriculture should not be interpreted as a free-standing obligation; and,
▻ Article 10.2 of the Agreement on Agriculture does not exempt export credits and export credit guarantees, which are export subsidies, from the disciplines of the Agreement on Agriculture.
33. The European Communities reserves its right to address new arguments, and further develop the arguments set out herein, in its oral statement to the first session of the first substantive meeting.
THIRD PARTY SUBMISSION OF NEW ZEALAND
15 July 2003
CONTENTS I. INTRODUCTION 88 II. DOMESTIC SUPPORT MEASURES 89 A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST
ACTIONABLE SUBSIDY CLAIMS RELATED TO SUPPORT PROVIDED TO UPLAND
COTTON IN MARKETING YEARS 1999, 2000, 2001 AND 2002 89
2. Marketing loss payments, counter-cyclical payments and crop insurance payments 91
3. Production Flexibility Contract Payments, Direct Payments 93 III. PROHIBITED EXPORT SUBSIDIES 95 A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST
PROHIBITED AND ACTIONABLE SUBSIDY CLAIMS RELATED TO EXPORT SUBSIDIES 95
B. THE UNITED STATES EXPORT SUBSIDIES VIOLATE THE AGREEMENT ON
AGRICULTURE AND THE SCM AGREEMENT 95 1. Step 2 Export Payments 95
(a) Per se violation of Articles 3.3 and 8 of the Agreement on Agriculture 95
(b) Violation of Article 3.1(a) and 3.2 of the SCM Agreement 96
2. Export Credit Guarantee Programme 96
(a) Violation of Articles 8 and 10.1 of the Agreement on Agriculture 96
(b) Violation of Articles 3.1(a) and 3.2 of the SCM Agreement 97
3. FSC Replacement Measure 98 IV. PROHIBITED SUBSIDIES 98 A. STEP 2 DOMESTIC PAYMENTS VIOLATE THE SCM AGREEMENT AND GATT 1994
ARTICLE III:4 98
V. UNITED STATES REQUEST FOR A PRELIMINARY RULING ON
CERTAIN MATTERS 98 VI. CONCLUSION 99 I. INTRODUCTION 1.01 The present dispute between Brazil and the United States regarding United States subsidies to upland cotton, as well as being important in respect of addressing the rights and obligations of the parties concerned, is also timely. New Zealand hopes this dispute will give greater clarity to the proper interpretation of important WTO disciplines applicable to agricultural trade. Although New Zealand is not a producer or exporter of cotton, New Zealand has a systemic interest in ensuring the continued integrity of these disciplines and has therefore joined this dispute as a third party.
1.02 New Zealand also acknowledges the importance of the cotton sector for a number of developing countries. In this regard New Zealand recalls the recent joint proposal made in the context of the Doha Development Agenda negotiations by Benin, Burkina Faso, Chad, Mali entitled ‘Poverty Reduction: Sectoral initiative in favour of cotton’.331 The joint proposal calls for recognition of the strategic nature of cotton for development and poverty reduction in many least developed countries and for the complete phasing out of support measures for the production and export of cotton. As the paper points out, the efforts of cotton producers in West and Central African countries towards liberalisation and competitiveness are virtually nullified by the fact that certain WTO Members continue to apply support measures to cotton that distort global markets.
1.03 The joint proposal outlines the damage caused by the very high levels of support given to cotton producers in certain WTO Member countries, including artificially increasing supply in international markets and bringing down export prices. This is the very same damage that Brazil is attempting to address through this dispute.
1.04 With respect to WTO disciplines, one of the biggest achievements of the Uruguay Round was the recognition that domestic support policies were instrumental in determining the overall nature of international agricultural trade. For the first time specific disciplines were placed on the ability of Members to use domestic support programmes in an unfettered manner. Trade-distorting or production-distorting domestic support measures became subject to reduction commitments.
1.05 New Zealand is concerned to ensure trade-distorting or “amber box” measures cannot be used contrary to the “peace clause” in a manner that negatively affects other Members.
1.06 At the same time as addressing trade-distorting support, Members recognized that some forms of domestic support were less trade-distorting than others and that certain types of programmes should continue to play a role in Members' policy “tool box”. Accordingly the “green box”, as set out in Annex 2 of the Agreement on Agriculture, was designed to allow Members to pursue agricultural objectives such as the provision of general services, disaster relief, food security and structural adjustment assistance and to support incomes as long as that was done in a way totally “decoupled” from production. The “green box” therefore allows WTO Members to meet legitimate non-trade objectives in a non-trade distorting way.
1.07 Strict eligibility criteria have been set down in Articles 6 and 7 and Annex 2 of the Agreement on Agriculture to ensure that only genuine non-trade distorting measures escape reduction commitments, including explicit inclusion of the “fundamental requirement” that such measures “have no, or at most minimal, trade-distorting effects or effects on production”.332
1.08 The fact that basic and policy-specific criteria were included in the Agreement on Agriculture shows Members recognised the potential for the “green box” to be abused and domestic support commitments circumvented. In New Zealand's view it is critical that the integrity of the disciplines on “green box” measures are not weakened or their legitimate purpose undermined through the inclusion of measures that fail to meet the strict requirements of Annex 2, including the fundamental criterion that such measures are non-trade or production distorting. Accordingly one of New Zealand’s key objectives in joining this dispute as a third party is to ensure that the “green box” cannot be used to circumvent commitments on trade-distorting measures.
1.09 Under the Uruguay Round Members also agreed to a “peace clause” (Article 13 of the Agreement on Agriculture). Of particular relevance to this dispute is Members’ agreement that provided non-“green box” measures meet the requirements of the Agreement on Agriculture and the levels of support did not exceed 1992 levels, such measures would be exempt during the implementation period of the Agreement from certain actions that would otherwise be available to Members under the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”) and General Agreement on Tariffs and Trade 1994 (the “GATT 1994”). “Peace clause” protection was also extended to export subsidies conforming with the requirements of the Agreement on Agriculture.
1.10 Accordingly, New Zealand is also concerned to ensure that Members are able to utilise their rights under the SCM Agreement and GATT 1994 to take action in respect of domestic support measures and export subsidies where the requirements of the “peace clause” have not been respected.
1.11 New Zealand believes that the arguments put forward by Brazil333 show that the “peace clause” has not been respected in relation to domestic support and export subsidies provided by the United States to upland cotton in the marketing years (“MY”) 1999, 2000, 2001 and 2002, and that accordingly Brazil is entitled to bring actionable and prohibited subsidy claims against the United States under the GATT 1994 and the SCM Agreement.
1.12 This submission, as requested by the Panel334, primarily addresses issues raised in the submissions of Brazil and the United States relating to the substantive interpretation of Article 13 of the Agreement on Agriculture. As further elaborated in this submission New Zealand supports the claims made by Brazil. New Zealand has had only limited time to consider the First Written Submission of the United States335 and therefore addresses only some of the issues raised therein. In particular New Zealand addresses, at the end of this submission,336 the request by the United States for a Preliminary Ruling on certain matters.337 New Zealand looks forward to the next phase of the case which will examine Brazil’s claims under Articles 3, 5 and 6 of the SCM Agreement and Article XVI of the GATT 1994.