II. DOMESTIC SUPPORT MEASURES 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
2.01 New Zealand agrees with Brazil that Members may assert a “peace clause” defence under Agreement on Agriculture Article 13(b)(ii) only if the total quantity of support granted through all non-“green box” domestic support measures to a specific commodity does not exceed the quantity of non-green box domestic support decided to be granted in MY 1992.
2.02 New Zealand endorses the process outlined by Brazil338 for determining whether the United States can claim peace clause protection against serious prejudice claims under SCM Agreement Articles 5(c) and 6.3 and GATT 1994 Article XVI.1.
2.03 Specifically New Zealand agrees that the first step is to identify and quantify all the United States non-“green box” support for the production of upland cotton in MY 1992. The second step is to identify and quantify all non-“green box” United States payments that grant support to upland cotton in MY 1999, 2000, 2001 and to provide estimates for MY 2002. The final step is to determine whether United States support to upland cotton in MY 1999-2002 exceeded its 1992 support to upland cotton.
2.04 The information provided by Brazil339 demonstrates that the level of domestic support for upland cotton in each of those marketing years did in fact exceed the level decided during the 1992 marketing year and therefore such domestic support measures may be subject to claims based on GATT 1994 Article XVI or SCM Agreement Articles 5 and 6.
2.05 New Zealand notes that the United States argues that the relevant concept for the comparison required by Article 13(b)(ii) is only the ‘per pound’ rate of support set by the relevant domestic support measures.340 Using this concept the United States argues that the support currently granted to upland cotton ($0.52 per pound) does not exceed that granted to upland cotton in the 1992 marketing year ($0.729 per pound).341 2.06 New Zealand agrees that the measures concerned (the loan rate) contribute to the effect of guaranteeing a producer price at a specified rate per pound of production and that the per pound rate of guaranteed price for producers is one of the relevant factors in making the comparison required by Article 13(b)(ii). However New Zealand does not agree that the use of the word “decided” in Article 13(b)(ii) was intended to be, or should be, construed to mean that the per pound rate of guaranteed price to producers of a commodity is the only factor to be considered in determining the amount of support granted. Indeed, New Zealand sees no support for such an approach in either the specific wording of Article 13(b)(ii) or in its object and purpose.
2.07 New Zealand considers that the comparison must take into account the totality of payments to upland cotton producers in order to reflect the true nature of the support that is being granted to a producer – the United States approach ignores this objective. For example, in relation to support granted to United States producers of upland cotton, Step 2 payments and crop insurance payments are also factors which affect farmers production decisions as is, of course, the “counter-cyclical” payments programme that effectively guarantees a price of $0.724 per pound. Therefore even under the United States assumption that the use of a “rate” is key, the story is very different from that claimed by the United States.
2.08 Further, New Zealand considers that an evaluation of budgetary payments is also essential in order to see the real effects of the support programmes. Focussing solely on a rate per pound ignores the actual levels of domestic support represented by budgetary outlays that must be granted in order to maintain those rates and the other payments received.
2.09 In this respect New Zealand recalls that the rationale behind the proviso in Article 13(b)(ii) that such measures not grant support to a specific commodity in excess of that decided during the 1992 marketing year is to create an upper limit in the level of trade or production distortion caused by such measures. The clear overarching intention of WTO Members in the negotiation of the Agreement on Agriculture was that henceforth such distortions would be reduced, consistent with the long term objective of “correcting and preventing restrictions and distortions in world agriculture markets”.342 Accordingly it would be inconsistent with the object and purpose of the Agreement, and Article 13(b)(ii) specifically, to adopt an interpretation that artificially limits consideration of the scope of support granted to that of a ‘per pound rate’ of guaranteed price to a producer rather than the totality of the support granted that creates the trade and production distortions.
2.10 In that respect the fact that United States budgetary outlays have increased from their 1992 levels is not coincidental. Such increases are due, at least in part, to the production and market distorting effects of the United States measures that have lead to higher export levels of upland cotton from the United States that have in turn pushed world market prices for cotton down. In essence, the level of trade distortion has increased as the gap between the price farmers expect to receive and the world price has increased. Looking at it the other way around, had the United States maintained the 1992 level of support its producers would be far more aware of the realities of the world market for cotton and have less incentive to add further to the trade distortion.
1. Step 2 payments, loan deficiency payments, marketing loan gains and cottonseed payments 2.11 These payments are clearly non-“green box” support, as implied by the notification by the United States to the WTO Committee on Agriculture for MY 1999.343 As Brazil points out, the structure of most of these programmes is substantially the same in MY 2000-2001 and under the Farm Security and Rural Investment Act of 2002 (the “2002 FSRI Act”)344 as it was in MY 1999. New Zealand considers that these payments should continue to be treated as non-“green box” support to upland cotton and must therefore be used in calculating the total quantity of support granted to upland cotton in MY 1999-2002.
2. Marketing loss payments, counter-cyclical payments and crop insurance payments 2.12 The United States has notified crop insurance payments and marketing loss assistance payments as “amber box” domestic support.345 Brazil notes that the 2002 FSRI Act institutionalised marketing loss assistance payments with a new program of “counter-cyclical” payments (“CCP”).346
2.13 New Zealand notes that Brazil argues that CCP subsidies do not meet the criteria set out in Agreement on Agriculture Annex 2, specifically paragraphs 6(b) and (c), and fail to meet the fundamental requirement that “green box” measures “have no, or at most minimal, trade-distorting effects or effects on production”.
2.14 Brazil argues that the CCP programme is not a “green box” measure because payments are not based on prices of upland cotton that took place in a prior base period but are linked to present prices for the product concerned, contrary to the requirements of Annex 2 paragraph 6(c).347 2.15 Paragraph 6(c) of Annex 2 makes it clear that the amount of decoupled income support payments “shall not be related to, or based on, the prices, domestic or international, applying to any production undertaken in any year after the base period.” As Brazil notes, the amount of the payment under the CCP programme varies with fluctuations in the national average market price, that is, it is linked to a current price. Accordingly, in New Zealand’s view this is sufficient to support a finding by the Panel that the CCP programme involves payments that are not “green box” support measures in accordance with Annex 2 of the Agreement on Agriculture and must therefore be used in calculating the total quantity of domestic support granted to upland cotton for MY 2002. Indeed, the United States endorses this approach.348 2.16 New Zealand notes, however, that the United States has argued that the term “support to a specific commodity” used in Article 13(b)(ii) should be interpreted to mean “product-specific support”.349 On this basis the United States argues that the CCP programme and crop insurance programme should be excluded from the scope of support granted to upland cotton for the purposes of Article 13(b)(ii). 350
2.17 While New Zealand notes that the United States has notified marketing loss assistance and crop insurance (and presumably will notify CCP payments) as non-product specific domestic support,351 it is clear from discussion in the WTO Committee on Agriculture that Members, including New Zealand, have questioned whether that is appropriate.352
2.18 The United States asserts that CCP payments are non-product specific because they are not coupled to current production of any specific commodity but rather are based on historical fixed base acreage and yields.353 However in New Zealand’s view Brazil has brought forward significant evidence of a strong linkage between the CCP payments and production of upland cotton, such that farmers with upland cotton base acreage are likely to continue to produce upland cotton.
2.19 In particular Brazil points out that most cotton farmers have made considerable investments in cotton-specific equipment, or farm in locations where cotton is the most productive crop, and are therefore more likely to continue to produce cotton.354 The linkage between the receipt of CCP payments and production of cotton is further reinforced by the CCP payments being explicitly calculated on the basis of current cotton prices.
2.20 Brazil also points out that CCP payments create incentives for farmers with upland cotton base acreage to maintain upland cotton production.355 In fact under the CCP programme the only way a farmer can guarantee a particular outcome is to continue to grow the same crop, otherwise the farmer runs the risk of missing out. For example, if he or she chooses to produce wheat and cotton prices are high enough that no CCP payment is made but wheat prices fall, the farmer will make a loss they would not have made had they stayed with cotton production.
2.21 Irrespective of whether or not these payments are notified as product-specific or not, they must still be considered “support granted to a specific commodity” for the purposes of Article 13(b)(ii). There is no foundation for the assertion by the United States that “support granted to a specific commodity” should be read as meaning “product-specific support”. Given the detailed listing of domestic support measures potentially exempt in the chapeau to Article 13(b)(ii) itself, had Members intended to exclude non-product specific support they would surely have said so. Further, had they meant that “support granted to a specific commodity” was to be read as “product specific” support they would have said so – the phrase was used at least five times elsewhere in the Agreement.
2.22 Rather, the reference to support to a “specific commodity” in Article 13(b)(ii) was used to distinguish the nature of the “peace clause” from the domestic support commitments more generally which are on a “Total” (i.e. over all agriculture) Aggregate Measurement of Support (“AMS”) basis. Only if support increases for a particular product can it be open to challenge under the SCM Agreement. Without such clarification “peace clause” protection could potentially be lost for any agricultural product if Total AMS increases, even though support to that specific product had not increased. This would have unpredictable results for individual products and cannot have been the intended effect of the “peace clause”.
2.23 Nothing in Article 6 suggests that treating product-specific and non-product specific support separately under Article 13 is warranted. New Zealand sees no basis on which to suggest that support to a specific commodity should be excluded simply because other commodities may receive similar support. Support provided through generally available programmes (which, New Zealand notes, the marketing loss assistance programme and now the CCP programme are not) is still support received for the individual products. Taking the United States argument to its logical extreme would effectively render all agricultural support non-product specific so long as the same kind of support was being provided to more than one product.
2.24 Accordingly, New Zealand considers that the United States incorrectly categorises CCP payments as non-product specific support. But whether they are product-specific or non-product specific is, in fact, irrelevant for the purposes of Article 13(b)(ii) as there is no basis upon which to read such a limitation on the kinds of domestic support to be considered within the meaning of that provision. Instead, the portion of any non-product specific support granted to a specific commodity, in this case to upland cotton, must be included in the comparative analysis required by Article 13(b)(ii). In this respect New Zealand notes that what Brazil is proposing is no more than what the United States has done in relation to export credits in its First Written Submission where it has allocated export credit administrative costs to the specific product of upland cotton.356
2.25 The same arguments can be made with respect to the payments under the crop insurance programmes.
3. Production Flexibility Contract Payments, Direct Payments 2.26 In New Zealand’s view one important aspect of the “Direct Payments” (“DP”) programme rules out inclusion of those payments in the “green box”, specifically the ability of farmers to update the base acreage used for calculation of DP payments.357 As outlined by Brazil, the DP programme is the successor to the Production Flexibility Contract Payments (“PFC”) programme and to permit an updating of the ‘fixed’ base period by changing the name of the PFC programme to a DP program would render the provisions of paragraph 6(a) and (b) of Agreement on Agriculture Annex 2 a nullity.358 2.27 The option for farmers to update base acreage under the 2002 FSRI Act directly violates the requirement under Annex 2 paragraph 6 that decoupled income support be determined in relation to a “defined and fixed base period”. New Zealand agrees with Brazil’s interpretation that paragraph 6(a) and (b) contemplates only one base period that is fixed and unchanging.
2.28 As Brazil points out, permitting the updating of the base period to capture additional payment acreage (as one third of all United States farms with eligible acreage opted to do)359 would link increased recent volumes of production with the amount of current payments.360 Brazil is also correct to state that this is contrary to the object and purpose of “de-coupled income support”, which is to break the link between production and the amount of support and thereby ensure that such measures “have no, or at most minimal” effects on production. As the evidence brought forward by Brazil shows, an expectation of being able to update base acreage and payment yields influences production in a number of ways,361 particularly as, having had one opportunity to update their base acreage, farmers could reasonably expect further opportunities to do so in the future.
2.29 In New Zealand’s view the updating of base acreage for the DP programme alone is sufficient to exclude it from the scope of permitted “green box” measures as set out in Annex 2. Instead such payments are “amber box” measures that, in accordance with Article 6 of the Agreement on Agriculture, are domestic support to upland cotton in MY 2002.
2.30 Brazil has also argued that the PFC and DP programmes have more than a minimal effect on production and trade and therefore fail to meet the “fundamental requirement” of “green box” domestic support measures.
2.31 New Zealand agrees with Brazil’s interpretation that the “fundamental requirement” that “green box” domestic support measures “have no, or at most minimal, trade-distorting effects or effects on production” means that the quantity or level of production or trade distorting effects need only be very small to trigger denial of “green box” status under Annex 2 of the Agreement on Agriculture.362 The language of paragraph 1 of Annex 2 makes it clear that this fundamental requirement and the other criteria set out in Annex 2 are to be strictly applied to any measures in order to obtain exemption from reduction commitments.
2.32 The trade-distorting effects or effects on production of any domestic support measure must be determined on a case-by-case basis, looking at the specific circumstances and characteristics of each particular measure. Brazil has provided comprehensive information regarding the effects of the PFC and DP programmes to enable the Panel to determine whether those payments have even very minimal production or trade distorting effects and thus fail to meet the “fundamental requirement” for “green box” measures as provided in Agreement on Agriculture Annex 2.
2.33 New Zealand notes that the United States provides no response to any of Brazil’s arguments regarding the PFC/DP programme and the level of production distortion it causes other than to claim that changing the name of the programme indemnifies it from consideration. Accordingly Brazil’s arguments should stand.
III. PROHIBITED EXPORT SUBSIDIES A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST PROHIBITED AND ACTIONABLE SUBSIDY CLAIMS RELATED TO EXPORT SUBSIDIES
3.01 New Zealand supports the arguments made by Brazil that the three types of export subsidies applied to upland cotton and other commodities by the United States (the Step 2 Export Programme, the Export Credit Guarantee Programme, and the FSC Replacement Programme) violate Articles 3.3, 8 and 10.1 of the Agreement on Agriculture and therefore fail to meet the requirement of conformity with Part V of the Agreement, with the result that such subsidies are not exempt from claims by Brazil based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement.
B. THE UNITED STATES EXPORT SUBSIDIES VIOLATE THE AGREEMENT ON AGRICULTURE AND THE SCM AGREEMENT
1. Step 2 Export Payments (a) Per se violation of Articles 3.3 and 8 of the Agreement on Agriculture
3.02 As outlined by Brazil,363 Step 2 export payments clearly fall within the description of an export subsidy set out in Article 9.1(a) of the Agreement on Agriculture in that it is a direct subsidy provided by the United States government to exporters of upland cotton contingent upon export.
3.03 Even if the Panel were to find that Step 2 export payments did not fall within the description set out in Article 9.1(a) of the Agreement on Agriculture, the Appellate Body has determined, as Brazil notes, that the effect of Article 10.1 is that a Member can only provide export subsidies in conformity with the Agreement on Agriculture if it has scheduled export subsidy reduction commitment levels for the agricultural product concerned.364 The use of any other type of export subsidy will “at the very least” threaten circumvention of subsidy reduction commitments within the meaning of Article 10.1.
3.04 Accordingly New Zealand agrees with Brazil that the Step 2 export payments violate per se Articles 3.3 and 8 of the Agreement on Agriculture 3.05 New Zealand notes that the United States has argued that Step 2 export payments are not export subsidies as defined by Article 9.1(a) and 10 of the Agreement on Agriculture (and Article 3.1(a) of the SCM Agreement) because the Step 2 payments are available to domestic users as well as exporters of upland cotton.365 As the Appellate Body in US-FSCRecourse to Article 21.5366recognised, the fact that a scheme allows for payments to be made otherwise than contingently on export does not diminish the export contingency of those that are.
3.06 In US-FSC Recourse to Article 21.5 the United States argued that a measure that provided tax exclusion for exported products, but also allowed tax exclusion to be obtained without exportation, could not be considered to be ‘contingent upon export performance’. The Appellate Body disagreed.
3.07 The Appellate Body said that the measure “contemplates two different factual situations”; where property is produced within the United States and held for use outside the United States, and where property is produced outside the United States and held for use outside the United States. The Appellate Body said that “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”.367 3.08 New Zealand considers that the fact that payments are also able to be made to domestic users of upland cotton does not ‘dissolve’ the export contingency of the payments that are made to exporters. Payments to eligible exporters of upland cotton are dependent on proof of export being provided and are therefore contingent on export performance.
3.09 Accordingly Step 2 export payments breach the obligation of the United States under Article 3.3 not to provide such subsidies in respect of any agricultural product that it has not specified in Section II of Part IV of its Schedule and therefore violates per se the undertaking by the United States in Article 8 not to provide export subsidies otherwise than in conformity with the Agreement on Agriculture.
(b) Violation of Article 3.1(a) and 3.2 of the SCM Agreement 3.10 New Zealand supports Brazil’s conclusion that the Step 2 export payments meet the requirements of a subsidy under Article 1.1(a)(1)(i) and Article 1.1(a)(2) of the SCM Agreement and are contingent upon export within the meaning of Article 3.1(a) of the SCM Agreement.
3.11 Accordingly if the Panel finds, as New Zealand believes it should, that Step 2 export payments constitute per se prohibited subsidies under Article 3.1(a) and 3.2 of the SCM Agreement, the Panel is required to recommend under Article 4.7 of the SCM Agreement that the United States withdraw the programme without delay. New Zealand therefore supports Brazil’s request that the Panel expressly make such a recommendation.
2. Export Credit Guarantee Programme (a) Violation of Articles 8 and 10.1 of the Agreement on Agriculture 3.12 New Zealand supports Brazil’s arguments that the export credit guarantee programme provides export subsidies that can lead to, or threaten to lead to, circumvention of export subsidy commitments under Article 10.1. As established by the Appellate Body in US-FSC,368 Article 10.1 of the Agreement on Agriculture is violated where an export subsidy is available for unscheduled agricultural products for which no reduction commitments have been made, as, “at the very least”, this threatens to lead to circumvention of export subsidy commitments.
3.13 It is evident that Members considered that export credit programmes could provide export subsidies through the specific reference to such programmes in Agreement on Agriculture Article 10.2. While not all government export credit programmes necessarily provide export subsidies, it is clear that the United States programme does so in both of the ways demonstrated by Brazil (ie because it clearly falls within Item j of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement369 or is otherwise an export subsidy as defined in Articles 1.1 and 3.1(a) of the SCM Agreement).370 The export credit scheme is therefore a subsidy contingent on export in the context of Article 10.1 of the Agreement on Agriculture.
3.14 New Zealand notes that the United States has argued that “the plain words of Article 10.2 (of the Agreement on Agriculture) indicate that the export credit guarantee programs are not subject in any way to the export subsidy disciplines of that Agreement.”371 New Zealand disagrees with this assertion. The heading of Article 10 is ‘Prevention of circumvention of export subsidy commitments’ and the inclusion of reference to export credits under that Article clearly reflects Members’ concern that export credits can provide export subsidies.
3.15 Nor does Article 10.2 in any way suggest that it provides an exception from the disciplines of Article 10.1. New Zealand agrees with the United States that Article 10.2 does not say “in addition to the export subsidy commitments” of the Agreement.372 That is because it did not have to, coming as it does directly after the general prohibition against circumvention in Article 10.1. While Article 10.1 currently provides the only discipline on the use of export credits, it is expected that the work envisaged in Article 10.2 will elaborate further and more specific disciplines that will presumably make identification of the extent to which such export credit programmes constitute export subsidies more straightforward. However it is incorrect to assume that there is a vacuum in the meantime. Item j of the Illustrative List of the SCM Agreement clearly already provides guidance on when export credit guarantee or insurance programmes are to be considered to be ‘export subsidies’ and beyond this the general definition in Articles 1.1 and 3.1(a) of the SCM Agreement also applies. While the provisions of Item j do not apply to agricultural products mutatis mutandis there is no reason to believe that the guidance there and elsewhere in the SCM Agreement is not appropriate for analyses under the Agreement on Agriculture.
3.16 Nor should the application of the disciplines in the Agreement on Agriculture in the meantime obviate the need for continued negotiations as envisaged by Article 10.2, as New Zealand hopes that those negotiations will result in clearer and more specific rules. Indeed it may even be that the result of the negotiations is that an export credit programme that is considered to be an export subsidy under the current, more generally applicable rules, will be deemed not to be an export subsidy in the future. However in that respect New Zealand notes, for example, that the United States Intermediate Export Credit Guarantee Program (GSM-103) provides for a repayment term of between 3 and 10 years373, terms clearly well outside the scope of disciplines to govern the use of export credit guarantee programmes currently being considered in the negotiations.
(b) Violation of Articles 3.1(a) and 3.2 of the SCM Agreement 3.17 As export credits are not in conformity with Part V of the Agreement on Agriculture and thus do not benefit from protection under the “peace clause”, they can equally be examined under the SCM Agreement. If the Panel finds, as New Zealand believes it should, that export credit guarantee payments are prohibited subsidies under Article 3.1(a) of the SCM Agreement, the Panel is required to recommend under Article 4.7 of the SCM Agreement that the United States withdraw the payments without delay. New Zealand therefore supports Brazil’s request that the Panel expressly make such a recommendation.