3. FSC Replacement Measure 3.18 New Zealand supports the claims made by Brazil,374 based on the findings already made by the Appellate Body in US-FSC Recourse to Article 21.5, that the tax cuts under the FSC Repeal and Extraterritorial Income Act of 2000 threaten to circumvent United States export subsidy commitments within the meaning of Article 10.1 of the Agreement on Agriculture and therefore cannot be exempt from actions under the SCM Agreement under Article 13(c)(ii) of the Agreement on Agriculture. In addition the Appellate Body found that there was a prohibited subsidy under Article 3.1(a) of the SCM Agreement.
3.19 Accordingly if the Panel finds, as New Zealand believes it should, that the tax cuts under the FSC Repeal and Extraterritorial Income Act of 2000 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 subsidies without delay. New Zealand therefore supports Brazil’s request that the Panel expressly make such a recommendation.
IV. PROHIBITED SUBSIDIES A. STEP 2 DOMESTIC PAYMENTS VIOLATE THE SCM AGREEMENT AND GATT ARTICLE III:4
4.01 New Zealand supports Brazil’s argument that the “peace clause” provides no immunity for “amber box” subsidies from prohibited subsidy claims under Article 3.1(b) of the SCM Agreement.375 New Zealand believes that Brazil has demonstrated that Step 2 domestic payments are a prohibited subsidy under Article 3.1(b) in that the payments are contingent on the use of domestic over imported upland cotton. On that basis they also violate Article III.4 of GATT 1994.
4.02 Accordingly if the Panel finds, as New Zealand believes it should, that Step 2 domestic payments violate per se Article 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 payments without delay. New Zealand therefore supports Brazil’s request that the Panel expressly make such a recommendation.
V. UNITED STATES REQUEST FOR A PRELIMINARY RULING ON CERTAIN MATTERS 5.01 New Zealand rejects the arguments of the United States that measures no longer in effect are not within the Panel’s terms of reference.376 Such measures should be within the scope of the Panel’s consideration, particularly when the programmes in question have effectively only been renamed and in fact continue in a slightly different form. In addition, the nature of serious prejudice claims may necessitate consideration of data beyond a single year and may in fact require a Panel to consider trends over a number of years. Accordingly New Zealand rejects the United States claim that market loss assistance payments and PFC payments should be excluded from the Panel’s consideration of Brazil’s claims.
5.02 New Zealand also considers that the Panel should reject the United States request that that Panel rule that export credit guarantee measures relating to eligible United States agricultural commodities (other than upland cotton) are not within its terms of reference.377 While New Zealand did not participate in the consultations, in New Zealand’s view Brazil had little choice but to look at a broader commodity coverage in relation to export credits because the information specific to upland cotton alone was not available. To prevent Brazil from doing so would unjustly allow a lack of transparency to preclude scrutiny of measures by Members taking disputes, especially where the information at a higher level of aggregation showed there was clearly a case to answer in respect of a particular measure, in this instance export credits. While more time is needed to analyse the information brought forward by the United States (which does not appear to be sourced from publicly available documents), at this stage of the Panel’s consideration of Brazil’s claims, New Zealand considers that the Panel should not make the ruling requested by the United States.
VI. CONCLUSION 6.01 In conclusion, New Zealand believes that Brazil had demonstrated 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 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. 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.
third party submission by paraguay
INTRODUCTION 1. Paraguay is grateful for the opportunity to express its views on the matter at issue in this dispute.
2. Because Paraguay is a firm believer in a fair system of international trade, it feels that it should explain its position on this issue which is of particular interest to its economy.
Applicable rules 3. In the Marrakesh Ministerial Declaration of April 1994 itself, Ministers affirmed that the establishment of the WTO ushered in a new era of global economic cooperation, reflecting the widespread desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of their peoples, and expressed their determination to resist protectionist pressures of all kinds as well as their belief that the strengthened rules achieved in the Uruguay Round would lead to a progressively more open world trading environment.
4. Moreover, in October 2002, on the occasion of the meeting of the International Cotton Advisory Committee, governments observed the critical situation that the world cotton industry was going through and its link to subsidies, suggesting the establishment of a schedule for the elimination of measures that distorted world production and trade in cotton, and stressing the need to submit complaints before the WTO for violation of the applicable rules.
5. Paraguay considers that the subsidies and support granted by the United States to its cotton production are inconsistent with the Agreement on Subsidies and Countervailing Measures, the Agreement on Agriculture and the rules and principles of the GATT 1994, and that for the purposes of this dispute it is therefore essential to take account of WTO legislation, which was carefully drafted to avoid causing distortions in international trade and prejudice to developing countries such as Paraguay.
6. WTO jurisprudence and the principles of interpretation of international law applied to the various cases suggests that the applicable rules should be read cumulatively, taking account of all elements applied to the case in order to support the system as an integrated whole.
7. Paraguay considers Brazil's complaint and the legal justifications invoked with respect to the inconsistency of the United States' laws, regulations and administrative procedures with the applicable WTO rules to be fully consistent with the law.
PEACE CLAUSE 8. With respect to the applicability of Article 13(b)(ii) concerning domestic support measures that conform fully to the provisions of Article 6 of the Agreement including direct payments that conform to the requirements to 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, Paraguay considers they shall be exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 and 6 of Subsidies Agreement, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year.
9. This implies that it is not limited or confined to specific products. Thus, it can be concluded that the United States does not enjoy protection from actions relating to subsidies using 1999, 2001 and 2002 as a basis, as Brazil duly proved.
10. In interpreting the Peace Clause, account must be taken of the serious prejudice that Member economies could suffer, and an assessment made of the overall significance of all of the agreements relating to the case.
11. Paraguay does not grant subsidies, either under the Subsidies Agreement or under the Agreement on Agriculture. Paraguay did notify the Committee on Agriculture, on 22 July 2002, of its domestic support commitments for 2000 and 2001 (G/AG/N/PRY/10, supporting table DS.1 and related supporting tables) as required under the Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures.
12. Consequently, as long as discriminatory support not provided for under WTO Agreement on Agriculture or the WTO Agreement on Subsidies on Countervailing Measures continues to be granted, Paraguay will have no choice but to file complaints with the relevant bodies.
Inconsistency with the Agreement on Agriculture 13. The Step 2 programme introduced by the United States to stimulate exports and the competitiveness of its products on the international market is inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture.
14. Article 3 of the Agreement on Agriculture refers to the incorporation of concessions and commitments. Paragraph 3 thereof stipulates that:
Subject to the provisions of paragraphs 2(b) and 4 of Article 9 of this Agreement, a Member shall not provide export subsidies listed in paragraph 1 of Article 9 in respect of the agricultural products or groups of products specified in Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity commitment levels specified therein and shall not provide such subsidies in respect of any agricultural product not specified in that Section of its Schedule.
15. The above paragraph enables Members to provide the subsidies listed in Article 9.1 of the Agreement on Agriculture subject to fulfilment of the commitments assumed.
16. Similarly, Article 8 of the said Agreement regulates export competition commitments, stipulating that:
Each Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and the commitments as specified in that Member's Schedule.
17. For the above reasons, and because it does not consider the provisions of the Agreement on Agriculture to have been complied with, Paraguay believes that the export subsidies granted by the United States to its cotton industry are inconsistent with Articles 3.3, 8 and 9.1 of the Agreement on Agriculture.
Inconsistency with the Agreement on Subsidies and Countervailing Measures 18. The agricultural subsidies cause "serious prejudice" to the domestic industry of other Members under Articles 5 and 6 of the Agreement on Subsidies and Countervailing Measures.
19. The introductory paragraph of part III, Article 5 of the said Agreement provides that no Member should cause, through the use of any subsidy – specific and not exempted under the Agreement – adverse effects to the interests of other Members, more specifically, as categorically stated in the indents that follow, (a) injury to the domestic industry of another Member and (c) serious prejudice to the interests of another Member.
20. Article 6 specifically refers to cases in which "serious prejudice" is deemed to exist in the sense of paragraph (c) of Article 5.
Effects of agricultural subsidies
21. Agricultural subsidies have effects on world trade, and measures such as those applied by the United States have a significant impact on developing countries like Paraguay.
22. Indeed, Paraguay is all the more affected by the said measures in that it is precisely cotton production that provides sustenance for the most needy segments of the population.
23. Paraguay has a total population of approximately 5,300,000, of which more than 500,000 are linked to cotton production. If we add the related industries and activities, the figure reaches an estimated 1,500,000, or approximately 30 per cent of the country's total population.
24. Any slump in the cotton trade causes an exodus of rural population towards the urban areas which do not offer any relief or solution, and this further undermines the economic situation of a country that depends on its agriculture.
25. As regards exports, in 1991, the foreign exchange revenue generated by sales of cotton and byproducts thereof reached US$318,912,000, approximately 43 per cent of the total for the country's exports that year. At the time, a total of 299,259 farms, 190,000 were cultivating cotton.
26. By 2001, the figures had changed considerably. Export revenue had fallen to US$90,505,000, a 72 per cent drop in the value of exports. The number of farms producing cotton decreased to about 90,000, representing a 52 per cent decrease in farms, employment and small farmer income. In other words, the impoverishment was real.
27. Regarding international cotton fibre prices, in 1991, the price per ton of Paraguayan type fibre was quoted on the New York Exchange at US$1,624, while in 2001, it was quoted at US$934.
28. In Paraguay, some 60 per cent of cotton is produced on farms of less than 10 hectares, making it the main or only source of income for small farmers and the main source of employment for the rural workforce in the most disadvantaged segment of society where access to capital and technology is more restricted and the leading socio-economic welfare indicators are lower than anywhere else.
CONCLUSION 29. Paraguay is a small economy. It is a land-locked country that has no oil, gas, gold or other natural resources of a kind that could make it of particular interest to the developed countries. The Paraguayan economy is essentially based on agricultural production, including the production and sale of cotton.
30. Paraguay therefore considers that the measures adopted by the United States cause serious prejudice to world trade, affecting Paraguay in particular, and that the necessary steps should be taken to eliminate the adverse effects and seek to achieve a balance in world trade.
31. Paraguay respectfully requests the Panel to conclude that the measure applied by the United States is inconsistent with its WTO obligations under the various provisions of the Agreement on Agriculture, the GATT 1994 and the Agreement on Subsidies and Countervailing Measures.
Annex B-11 THIRD PARTY SUBMISSION OF THE SEPARATE CUSTOMS TERRITORY OF TAIWAN, PENGHU, KINMEN AND MATSU.
15 July 2003
1. In its fax of 28 May 2003 to the parties to this dispute, the Panel poses questions regarding the correct interpretation of Article 13 of the Agreement on Agriculture and the on the issue of preliminary rulings. As the Panel’s questions raise an important point of law and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu has a systemic interest in the proper interpretation and operation of these and other relevant provisions involved in the procedures, we would like to submit our views on the following aspects:
I. THE BURDEN OF PROOF REQUIRED BY ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE (THE “PEACE CLAUSE”), AND
II. THE QUESTION OF PRELIMINARY RULINGS.
I. BURDEN OF PROOF IN THE “PEACE CLAUSE” 2. In attempting to arrive at a proper interpretation of the burden of proof as provided in Article 13 of the Agreement on Agriculture, we suggest comparing different types of exemptions, defences, or carving-out under different agreements.
3. It could happen that a matter is brought under an agreement not covered by the DSU. Since Article 1 of the DSU provides that the DSU shall apply to disputes brought pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix 1 to the DSU and the WTO Agreement, it follows that consultation or dispute arising from or in connection with any non-covered agreement would not be within the scope of the dispute settlement procedures under the DSU. Thus, if a Member brings a complaint alleging a breach of certain international environmental treaties, for example, the complaining party would bear the burden to prove that the issue in dispute falls within the purview of the DSB.
4. It could also be that a matter is specifically excluded from the dispute settlement procedures by certain relevant agreements. A typical example of this would be the provision in Article 6 of the TRIPS agreement, which provides that “for the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights”. It is apparent that as long as it is an “issue of the exhaustion of intellectual property rights,” the dispute settlement procedure shall not be used. There is no threshold or prerequisite for applying such provision. The Member applying this provision would be able to prevent such dispute settlement procedures unless the complaining party asserts and proves that the measure concerned is not such an “exhaustion issue”.
5. It could also happen that exceptions or exemptions are granted under relevant agreements providing specific obligations. There are different ways of providing exceptions for specific activities or measures. Examples include paragraph 2 of Article XI of the GATT stating “...shall not extend to the following”; Articles XX and XXI of the GATT stating “nothing in this Agreement shall be construed to...” These are in the nature of an affirmative defence. Here, the burden of proof rests on the party invoking the exception.
6. It is clear that Article 13 of the Agreement on Agriculture is not a “matter under an agreement not covered under the DSU”. Neither is it a matter specifically excluded from the dispute settlement procedures as provided in Article 6 of the TRIPS Agreement. It is also not typical of the type of exception as contained in Articles XI, XX or XXI of the GATT. In our view, Article 13 falls between the type of exception in Article 6 of the TRIPS and that in Article XI, XX or XXI of the GATT. Thus the procedures for applying the provision should be interpreted differently.
7. In its First Written Submission, Brazil asserted that, “Article 13 is in the nature of an affirmative defense, because it provides an exception to a legal regime otherwise applying to agricultural support measures. It does not alter the scope of other provisions providing positive obligations on Members, and is not itself a positive obligation” and as a consequence, in this proceeding the United States has the burden of proof on the question of whether its subsidies “are in conformity with the AOA Article 13”378.
8. In our view, the very nature of Article 13 is such that it is not appropriate for any particular description or “label” such as an “affirmative defence”, or “exception”, to be ascribed to it, simply for the convenience of resolving the question of burden of proof.379 We consider that Article 13 in itself contains both rights and obligations of Members. The right conferred by Article 13, i.e. entitlement to “exempt from actions” is conditional; conditional upon a positive obligation of full conformity to the requirements as set out in the relevant provisions of the Agreement on Agriculture. We agree with the view put forward by the United States at paragraph 43 of its First Written Submission which purports to identify such positive obligations. If the contention that Article 13 confers a right as well as imposes a positive obligation, is accepted, then, as a complainant, it is for Brazil to prove a breach of this positive obligation by demonstrating non-conformity rather than for the United States to bear the burden of proving conformity. We consider that the above contention is the only logical conclusion in giving effect to Article 13. Since there is no scheme for a Member under Article 13 to prevent the initiation and the establishment of a panel, suppose Article 13 is interpreted in such a way as to still require the United States to bear the burden of proving the conformity of relevant provisions of the Agreement of Agriculture, it would mean Article 13 having less than its originally intended effect.
9. In addition to the above, drafters’ intent should be taken into account when interpreting this Article. Domestic support measures are expressly allowed under this Article with the intention of giving Members some flexibility on domestic support measures to help the progressive liberalization of their agriculture. Requiring the respondent to bear the burden to prove that the subsidy measure in question is consistent with this Agreement will, to a certain degree, offset the respondent’s right to claim for the exceptions provided by this Provision, which is contrary to the drafters’ intention.
10. To impose the burden of proof on the respondent has another negative implication. In the case before us, if Brazil’s argument stands, it would render the words “exempt from actions” pointless as the result would inevitably be a full-blown dispute settlement proceeding with Brazil submitting evidence to substantiate its complaints and the US filing its defence by invoking Article 13 and submitting proof of conformity thereto.
II. THE QUESTION OF PRELIMINARY RULINGS 11. Although on the evidence of past dispute settlement cases the normal practice of the Panel tends to be that it hears preliminary issues, provides indicative rulings and consolidates detailed reasoning only in the final Panel report, the questions associated with the correct interpretation of Article 13 are such that they merit the Panel’s consideration and disposition at the earliest opportunity.
12. We consider that the preliminary issues raised in this dispute determine the manner in which the parties to this proceeding prepare their case. If the question of the correct interpretation of the words “exempt from actions” is not resolved along with the question of the allocation of burden of proof, considerable resources will be wasted both by complaining and defending claims. Needless to say, due process will not be properly served in such a case. Accordingly, we respectfully urge this Panel to adopt a special procedure to deal with this preliminary issue at the earliest opportunity so that parties to this dispute will not be prejudiced.380
ORAL STATEMENTS OF PARTIES AND THIRD PARTIES
AT THE FIRST SESSION OF THE FIRST
Annex C-1 Executive Summary of the Opening Statement of Brazil
Annex C-2 Executive Summary of the Closing Statement of Brazil