US “statute of limitations” interpretation of the peace clause 13. There is no express or implied “statute of limitations” in the peace clause. Subsidizing Members such as the United States are offered conditional protection under the peace clause during a 9-year period. But the rights of Members injured by subsidies provided in excess of 1992 marketing year levels are preserved throughout the implementation period as well. This is the balance struck by the peace clause.
14. The US “statute of limitations” argument in this case is very similar to one rejected by the Appellate Body in US – Lead Bars. This argument is further inconsistent with the views of the Indonesia – Automobiles panel, which held that measures applied in the past must be examined to assess present serious prejudice. The US interpretation would cut off a Member’s right to challenge such measures because it missed an imaginary deadline. This US interpretation is inconsistent with the object and purpose of the AoA because it would permit Members to provide huge “non-green” box support one year without peace clause protection, and then claim absolution as soon as the next marketing year began.
“Support to Upland Cotton”
15. Brazil has produced extensive evidence providing the factual basis for the Panel to find that CCP, DP, market loss, and PFC payments are “support to” upland cotton within the meaning of the peace clause. USDA categorizes the PFC and market loss payments as part of “total payments” to upland cotton. US National Cotton Council officials repeatedly testified and produced documents revealing that their producer members requested, received, and depended on all four of these subsidies. Crop insurance is also support to cotton as evidenced by specific upland cotton crop insurance policies and groups of policies for upland cotton. Moreover, USDA specifically identifies and tabulates crop insurance subsidies for upland cotton. Thus, the Panel should find that all five of these programmes granted support to upland cotton in MY 1999-2002.
IV. STEP 2 PAYMENTS 16. The US Step 2 export subsidies clearly constitute export subsidies that violate Articles 3.3 and 8 of the Agriculture Agreement and that are prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement because they are contingent upon proof of export of US upland cotton.
17. Similarly, US domestic Step 2 subsidies are prohibited local content subsidies in violation of Article 3.1(b) of the SCM Agreement. There is no explicit derogation of Article 3.1(b) built into the Agriculture Agreement. In fact, the opposite is true, since Article 13(b)(ii) provides a conditional exemption only for claims under Articles 5 and 6 of the SCM Agreement, but not for claims under Article 3 of the SCM Agreement. There is also no conflict between Article 3.1(b) of the SCM Agreement and Agriculture Agreement Article 6 or Annex 3, paragraph 7, because there are two types of domestic subsidies – those that comply with Article 3.1(b) of the SCM Agreement and those that do not.
V. EXPORT CREDIT GUARANTEES 18. With respect to Brazil’s claims regarding the GSM 102, GSM 103 and SCGP export guarantee programmes, the United States interpretation of AoA Article 10.2 should be rejected. Under the US view of Article 10.2, it can grant export credit support at zero percent interest and for unlimited terms – all for free – at least until Members complete negotiations on specific disciplines for export credits. This interpretation is not supported by a Vienna Convention analysis.
19. The United States has not even addressed Brazil’s claim that since there is no commercial market for export credit guarantees on terms such as those provided by the CCC programmes, those programmes confer benefits per se. And Brazil has demonstrated that under the cost formula used by the White House, the US Congress, US government accountants and the CCC itself, operating costs and losses for GSM 102, GSM 103 and SCGP have outpaced premiums collected in every single year since the United States started applying the formula in 1992. These figures represent actual costs and losses of the US export credit guarantee programmes. The programmes therefore constitute export subsidies within the meaning of ASCM Articles 1.1 and 3.1(a), item (j) of the Illustrative List, and AoA Articles 10.1, 1(e) and 8. They “at the very least” threaten to circumvent US export subsidy commitments, in violation of Articles 10.1 and 8 and are prohibited under ASCM Articles 3.1(a) and 3.2.
VI. CONCLUSION 20. Brazil requests the Panel to reject the numerous attempts by the United States to delay the initiation of Brazil’s serious prejudice claims. Brazilian upland cotton producers are experiencing present serious prejudice from continued huge amounts of US subsidies to upland cotton. Applying either methodology of calculating the support for peace clause purposes, the United States has no basis to claim peace clause protection.
1. The United States has stayed within the disciplines and acted consistently with its WTO obligations negotiated and agreed in the Uruguay Round. We share many of Brazil’s objectives with respect to reform of measures that affect agricultural trade, but we obviously do not endorse the means by which Brazil is attempting to obtain changes to WTO consistent US support measures for upland cotton. Brazil seeks to impose disciplines and achieve results through this litigation that were not agreed in the Uruguay Round through negotiation.
2. Brazil suggests that whether a Member’s measures are in breach of the Peace Clause should be judged by comparing the aggregate outlays that may be attributed to a commodity to the aggregate outlays that were made during the 1992 marketing year that, again, may be attributed to that commodity. Brazil’s erroneous analysis stems from three interpretive missteps.
3. First, with respect to measures currently in effect, Brazil mistakenly suggests that support under previous measures in past years is relevant to the Peace Clause comparison. The proviso, however, is written in the present tense and thus, with respect to measures currently in effect, calls for a determination of the support that challenged measures currently grant. Brazil nowhere explains how the support in any previous years is relevant to the present tense criterion that Peace Clause exempted measures “do not grant support” in excess of a certain level. In fact, Brazil’s analysis of the ordinary meaning and context of the phrase “grant support” assigns no meaning to Members’ choice of verb tense.
4. Second, Brazil misunderstands the support that is relevant to the Peace Clause comparison because it misreads the phrase “support to a specific commodity”. Brazil and New Zealand have asserted that, had Members intended for the phrase “support to a specific commodity” to mean “product specific support”, they would have used the latter phrase. With respect, this pushes the general interpretive aid of reading different word choices to carry different meanings too far. It ignores the relevant task for an interpreter, which is to read the text according to its ordinary meaning, in context, and in light of the object and purpose of the agreement. The ordinary meaning of the phrase “support to a specific commodity,” in the context of the Agriculture Agreement, is “product specific support”.
5. We note that the Agriculture Agreement suggests that domestic support consists, in part, of product specific and non product specific support. Brazil’s interpretation of “support to a specific commodity,” however, would apparently also capture “non product specific support”. Absent a clear indication that such a contrary to logic result was intended, the interpreter should read “support to a specific commodity” to exclude “non product specific support”. We note that the Agriculture Agreement suggests that domestic support consists, in part, of product specific support and non product specific support. Brazil’s interpretation of “support to a specific commodity”, however, would apparently also capture “non product specific support”. Absent a clear indication that such a contrary to logic result was intended, the interpreter should read “support to a specific commodity” to exclude “non product specific support”.
6. Third, Brazil ignores the way in which the United States “decided” (that is, “determined” or “pronounced”) the product specific support for upland cotton during the 1992 marketing year. As Brazil explained in its first submission, the Peace Clause text resulted from the EC’s desire to protect from challenge measures “decided” in 1992 for purposes of CAP reform, rather than support “provided” during marketing year 1992. That is precisely the approach the United States suggests: examine the product specific support “decided” during marketing year 1992 and compare it to the product specific support that measures currently in effect grant. Brazil fails to explain to the Panel how US measures actually decided support during the 1992 marketing year in favour of Brazil’s pre baked conclusion that the “term ‘decided during the 1992 marketing year’ requires an examination of the amount or quantity of support . . . for a specific commodity that a WTO Member ‘decided’ to provide during the 1992 marketing year”. In fact, US measures “decided” support in the 1992 marketing year by ensuring upland cotton producer income at a rate of 72.9 cents per pound. Brazil nowhere explains how US domestic support measures could have “decided” the amount of outlays since those outlays resulted from the difference between the income support level and world prices during Marketing Year 1992 beyond the US Government’s control.
7. Brazil has argued that the US approach would create an annual “statute of limitations” for the applicability of the Peace Clause and that the problem with this approach is budgetary outlays are not known until after a given marketing year is completed. This comment, rather, points out the difficulties of Brazil’s approach that only budgetary outlays may be examined under the Peace Clause. That is, Brazil effectively concedes that under its approach there would be no certainty for Members whether measures are exempt from actions. For example, it would be difficult to know whether budgetary outlays under the 2002 Act exceeded 1992 outlays as of Brazil’s panel request in February 2003.
8. With respect to US direct payments, which the United States believes are “green box” measures, Brazil argues that these payments do not satisfy the “fundamental requirement that they have no, or at most minimal, trade distorting effects or effects on production” under the first sentence of paragraph 1 of Annex 2. However, the text of Annex 2 indicates that “domestic support measures” shall be deemed to have met this “fundamental requirement” if the measures “conform to the . . . basic criteria” of the second sentence, plus any applicable policy specific criteria, by beginning the second sentence with “accordingly”. This interpretation is supported by relevant context in the Agreement; as the European Communities notes in its third party submission, Articles 6.1, 7.1, and 7.2 refer to the measures “which are not subject to reduction commitments because they qualify under the criteria set out in Annex 2”.
9. In addition to the basic criteria in paragraph 1, US direct payments must also conform to the five “policy specific criteria and conditions” set out in paragraph 6 of Annex 2. Brazil brings forward two arguments that direct payments do not satisfy the criterion under paragraph 6(b) of Annex 2 that the amount of payments not be related to, or based on, production undertaken in any year after the base period. First, Brazil argues that by eliminating or reducing payments if recipients harvest certain fruits or vegetables, payments are related to production in a year after the base period. However, no particular type of production is required in order to receive such payments – indeed, no production is necessary at all. Brazil’s argument, moreover, proves too much. Under Brazil’s analysis, any limitation on a producer’s choices in a year after the base period that would alter the amount of payment would be inconsistent with paragraph 6(b). However, a requirement that a recipient of direct payments produce nothing at all (or see the payment reduced or eliminated) would link the amount of payment to the type or volume of production in the current year. Such a requirement would also ensure that such payments meet the “fundamental requirement that they have no, or at most minimal, trade distorting effects or effects on production” because there would be no production at all. Thus, under Brazil’s analysis, paragraph 6(b) would prevent a payment that would demonstrably achieve the “fundamental requirement” of Annex 2. This result is not required by the text of paragraph 6(b) and should be avoided.
10. Second, Brazil argues that direct payments are based on production in a year after the base period because once one type of direct payment to producers under Annex 2 has been made, all subsequent measures providing direct payments must be made with respect to the same base period. The Annex 2 text does not support such a reading, however. Annex 2 says that “[d]omestic support measures for which exemption from the reduction commitments is claimed” shall meet the fundamental requirement of the first sentence through the relevant basic and policy specific criteria of the second sentence. For example, in the case of decoupled income support, the particular “domestic support measure” must meet “policy specific criteria and conditions as set out” in paragraph 6. Paragraph 6(a), (b), (c), and (d) relate “such payments” to “a defined and fixed base period”. Thus, payments with respect to a given “domestic support measure for which exemption from the reduction commitments is claimed” must satisfy conditions relating to “a defined and fixed base period”. There is no textual requirement that all domestic support measures for which exemption from the reduction commitments is claimed utilize the same “defined and fixed base period”. Brazil also reads paragraph 6 as though the text were “the defined and fixed base period”. However, this is not what the text says nor what the negotiators agreed.
11. Brazil and the rest of the Cairns Group seek to address this very issue by proposing in the ongoing agriculture negotiations that Annex 2, paragraph 6, be amended to change the reference from “a defined and fixed base period” to “a defined, fixed and unchanging historical base period”. The revised Harbinson text, in Attachment 8, incorporates this Cairns Group proposal by proposing adding to paragraphs 5, 6, 11, and 13 of Annex 2 the text: “Payments shall be based on activities in a fixed and unchanging historical base period.” Again, Brazil is seeking to gain through litigation what it has not yet gained through negotiation.
12. The Step 2 programme has been constructed and implemented in a manner to support the price paid to US upland cotton producers by purchasers of their product. Step 2 is a single programme that provides for payments on all sales of all upland cotton produced in the United States in a given marketing year – whether those sales are for export or for domestic consumption. Step 2 payments are provided to merchandisers or manufacturers who use upland cotton as they represent the first step in the marketing chain where these payments could be made and have the greatest impact on producer prices.
13. The authorizing statute plainly does not state that the Step 2 payment is contingent upon export. The statute provides for Step 2 payments to a class of eligible users who constitute the entire universe of potential purchasers of upland cotton from producers. Payment occurs upon demonstration of the requisite use of the cotton. Unlike the facts of United States FSC (Recourse to Article 21.5) , the Step 2 subsidy involves a universally available subsidy on sales of one agricultural product produced entirely in the United States, not tied to exportation or foreign commerce. Stated most simply, US upland cotton does not have to be exported to receive the payment. Assuming the conditions in the payment formula are met, all US upland cotton is sold with an entitlement to the Step 2 subsidy, whether it leaves the United States or is consumed there.
14. For nearly 15 years before the inception of obligations under the Agreement on Agriculture, as well as since that time, the core features of the two main agricultural export credit guarantee programmes of the United States (GSM 102 and GSM 103) have remained substantially the same. They are well known and well established export credit guarantee programmes, specifically discussed by negotiators during the Uruguay Round, as well as in the OECD and in the current Doha Round.
15. Article 9.1 of the Agriculture Agreement identifies and lists specific export subsidy programmes, also well known to the negotiators, who wanted to assure that such specific practices were embraced within the definition of an export subsidy for purposes of the Agreement on Agriculture. Other export subsidies are captured within the anti circumvention provision of Article 10.1. In contrast, export credit guarantees were not included in either Article 9.1 or 10.1. Instead, as part of the balance struck in the Uruguay Round, negotiators opted to extend the negotiations on this subject but determined to hold Members to a commitment that if and when internationally agreed disciplines emerged, the United States, like all other WTO Members, could only grant export credit guarantees in conformity with such disciplines. To do otherwise would at that time constitute a violation of the Member’s obligations under the Agreement on Agriculture.
16. Article 10.2 expresses the two commitments of the Members in this regard: (1) to engage in such negotiations notwithstanding the conclusion of the Uruguay Round and (2) upon development of internationally agreed disciplines to render them WTO commitments through the portal of Article 10.2. Article 10.2 does not state that export credit guarantees shall be subject to such future negotiated disciplines in addition to the anti circumvention provisions of Article 10.1. To the contrary, Article 10.2 and the reference to export credit guarantees is juxtaposed to Article 10.1 to reflect the intention of the drafters to distinguish export credit guarantee programmes from other programmes that otherwise would be export subsidies subject to Article 10.1.
17. For the foregoing reasons and those set out in our first written submission, the United States believes that US non green box measures are exempt from actions pursuant to Agriculture Agreement Article 13(b)(ii); US direct payments are exempt from actions pursuant to Agriculture Agreement Article 13(a)(ii); and US export credit guarantee programmes for upland cotton and Step 2 payments are consistent with our WTO obligations.
EXECUTIVE SUMMARY OF THE CLOSING STATEMENT
OF THE UNITED STATES AT THE FIRST MEETING
OF THE PANEL WITH THE PARTIES
1. On the US requests for preliminary rulings, the Panel expressed some interest in the question of what prejudice would result to the United States if we were forced to defend export credit guarantees with respect to commodities other than upland cotton. First and foremost, the United States would have lost the benefit of consultations on these measures. Consultations serve a number of important functions, including helping the parties to understand each others’ concerns and aiding in efforts to resolve the dispute. The DSU affirms the importance of consultations and requires that a Member cannot proceed to a panel unless the Member has consulted on that measure.
2. Moreover, to require the United States to address Brazil’s allegations on these measures would impose additional burdens on the United States and detract from the time and resources available to respond for those measures that are within the terms of reference. The United States has export subsidy reduction commitments with respect to 12 commodities. Each such commodity is therefore subject to individual Peace Clause analysis under Article 13(c). In addition, under Brazil’s approach, the type of analysis the United States has offered for upland cotton concerning item (j) of the Subsidies Agreement would be appropriate for all commodities subject to the coverage of the Agriculture Agreement. This would necessitate a commodity-by-commodity analysis of the export credit guarantee programmes, as applied, concerning premiums and long-term operating costs and losses (if any).
3. But in the end, the issue of prejudice to the United States does not figure in the question of whether a measure is within the Panel’s terms of reference. It is that question that underlies the United States’ preliminary ruling requests.
4. First, the United States has requested that the Panel find that export credit guarantee measures relating to other eligible agricultural commodities are not within the Panel’s terms of reference. While Brazil’s panel request did refer to “export credit guarantees . . . to facilitate the export of US upland cotton and other eligible agricultural commodities,” its consultation request did not. That consultation request nowhere included the “other eligible agricultural commodities” language, nor did Brazil include these measures in its statement of available evidence. Thus, those measures on other eligible agricultural commodities were not part of the “measures at issue” that Brazil identified in its consultation request as it is required to do under DSU Article 4.4. Contrary to Brazil’s statement a few moments ago, the United States and Brazil never consulted on export credit guarantees on commodities other than cotton – not once and certainly not three times. Brazil said as much on the first day of the first panel meeting when it acknowledged that the United States told Brazil at the first consultation that its questions were beyond the scope of the consultations.
5. On the question whether the export credit guarantee programmes were one measure or multiple measures: There is no reason why export guarantees for multiple products cannot be multiple measures. Under DSU Article 4.4, it is incumbent upon Brazil to identify in its consultation request “the measures at issue.” Here, Brazil identified the measure as the “export credit guarantees . . . to facilitate the export of US upland cotton,” and the United States may, and did, rely on that consultation request (including the attached statement of evidence) for notice.
6. For example, if a Member banned imports of all animal products for a stated health reason, and another Member filed a consultation request on the ban solely with respect to imports of beef, that complaining Member could not then expand the scope of the dispute through its written consultation questions or its panel request to challenge that ban with respect to other affected agricultural commodities. This is, however, what Brazil is attempting to do here.
7. Brazil also relies on footnote 1 of its consultation request, which refers to an explanation “below”. Such an explanation expanding the scope of the request to include “other eligible agricultural commodities” is not found in the consultation request. DSU Article 4.4 requires Brazil to provide “an identification of the measures at issue,” not a cryptic reference that is not explained further. Despite notice from the United States and despite ample opportunity to submit a new consultation request, Brazil never did so. Therefore, export credit guarantee measures relating to eligible US agricultural commodities other than US upland cotton were not the subject of consultations and pursuant to DSU Articles 4.4, 4.7, and 6.2 do not form part of the Panel’s terms of reference.
8. With respect to production flexibility contract payments and market loss assistance payments, we have explained that these payments were completed, the programmes terminated, and the statutory instruments providing them were superseded before Brazil’s consultation request was filed. The measures that Brazil challenges are subsidies or payments provided by these programmes. The laws authorizing these payments designated that each such payment was allocated to a particular crop or fiscal year. Thus, pursuant to the 1996 Act, the last production flexibility contract payment for fiscal year 2002 was made no later than the end of fiscal year 2002. As Brazil states in its first submission, “[w]ith the passage of the new FSRI Act in May 2002, PFC payments were discontinued”. The last market loss assistance payment was made with respect to the 2001 marketing year (1 August 2001 31 July 2002) pursuant to legislation enacted on 13 August 2001. Because the relevant fiscal year and the relevant marketing year, respectively, had been completed by the time of Brazil’s consultation and/or panel requests, these measures cannot have been consulted upon within the meaning of DSU Article 4.2 nor have been “measures at issue” within the meaning of DSU Article 6.2. They therefore do not fall within the Panel’s terms of reference. Brazil’s suggestion that Articles 7.2 to 7.10 of the Subsidies Agreement should supersede the DSU provisions concerning this Panel’s terms of reference is novel. Preliminarily, we note that Article 7.4 does mention the Panel’s terms of reference, but only in the context of setting a 15 day deadline for establishing them, as opposed to the time line under DSU Article 7.1.
9. Finally, with respect to subsidies provided under the Agricultural Assistance Act of 2003 – the cottonseed payment – these are measures that were not even in existence at the time of Brazil’s panel request. As the cottonseed payment had not been made (implementing regulations were not even issued until 25 April 2003) and the legislation authorizing the payments had not been enacted at the time of Brazil’s panel request, this subsidy or measure was not consulted upon and could not have been a measure at issue between the parties. Therefore, the United States requests that the Panel make preliminary rulings that these three sets of measures are not within its terms of reference.
10. To summarize briefly where our discussions on the Peace Clause have brought us: Brazil suggests in this dispute that the word “ actions” in the phrase “exempt from actions” only refers to “collective action” by the DSB. However, we note that Brazil’s interpretation runs directly contrary to the view it expressed in its consultation request in the dispute European Communities – Export Subsidies on Sugar (WT/DS266/1). With respect to Article 13(c)(ii), which uses the same phrase “exempt from actions” at issue in this dispute, Brazil wrote: “In respect of the claims based on Article 3 of the SCM Agreement, because the export subsidies provided by the EC on sugar do not conform fully to the provisions of Part V of the Agreement on Agriculture, those export subsidies are not exempt from challenge by virtue of Article 13(c)(ii) of the Agreement on Agriculture.” That is, in that WTO document Brazil does not read the phrase “exempt from actions” to mean “exempt from remedies” or “exempt from collective action by the DSB” but rather “exempt from challenge”. Brazil’s interpretation in that WTO consultation request could only result if "exempt from action" in the Peace Clause means "not subject to" the "taking of legal steps to establish a claim” – as the United States has been contending in this dispute. We submit that this interpretation by Brazil is correct.
11. The Peace Clause – in Brazil’s words – “exempt[s] from challenge” certain measures. It follows that the Peace Clause is not an affirmative defence but rather a threshold issue for Brazil in this dispute. As Brazil implicitly recognized in both its panel and consultation requests, to even reach the point where it will, as the complaining party, be allowed to pursue its substantive claims, Brazil must first demonstrate that the Peace Clause does not exempt US measures from action – that is “from challenge”.
12. On US direct payments, which the United States believes are “green box” measures because they satisfy the criteria set out in Annex 2: As a question from the Chair to Brazil suggested, assessing the conformity of a claimed green box measure against the “fundamental requirement” of the first sentence of paragraph 1 would be a difficult, if not impossible task, for a Panel. Members foresaw the problem and therefore provided guidance on how a measure would fulfill that fundamental requirement – that is, if the measures “conform to the . . . basic criteria” of the second sentence plus any applicable policy specific criteria, they shall be deemed to have met the fundamental requirement.
13. With respect to the criterion in paragraph 6(b) that the amount of decoupled income support payments not be based on, or linked to, production undertaken in any year after the base period, this provision need not and should not be read as Brazil suggests. The text supports a reading that a Member may not base or link payments to production requirements. The EC endorsed this view this morning. US direct payments require no particular type of production – indeed, no production is necessary at all. As we have suggested, Brazil’s reading of paragraph 6(b) would prevent a Member from prohibiting a recipient from producing crops – that is, would prevent a measure that bases or links payments to a type or volume of production: none at all. If there is no production at all as a result of the measure, such a measure necessarily can have no “trade distorting effects or effects on production”. Thus, Brazil’s reading of paragraph 6(b) would preclude a Member from establishing a measure that meets the “fundamental requirement” of Annex 2. Paragraph 6(b) need not and should not be read in opposition to that fundamental requirement. In the context provided by the first sentence of Annex 2, then, paragraph 6(b) should be read as establishing that a Member may not base or link payments to requirements to produce any crop in particular – again, US direct payments require no upland cotton production and do not require any production at all.
14. Brazil has repeatedly raised the spectre of unchecked US domestic subsidies should the Panel agree with the US interpretation of the Peace Clause. Brazil’s fears are groundless. Of course the United States may not provide subsidies without any limit. US subsidies are disciplined in several ways, and the US has deliberately kept itself within those limits. There are two main disciplines that apply. The first is the US final bound commitment level under the Current Total Aggregate Measurement of Support. The second, as we have discussed at length, is the Peace Clause itself and its effective limitation to a level of producer support of 72.9 cents per pound. The United States has stayed within the boundaries of those limits despite, as outlined in Brazil’s filings, pressure to do otherwise. We are entitled to the benefit of that compliance.
15. We can understand that Brazil might feel that these limits are not enough. New limits may be negotiated in the ongoing agriculture negotiations, in which the United States shares many of the same goals as Brazil. Until that happens, however, Brazil may not seek to overturn the balance of rights and obligations negotiated and agreed by Members in the Uruguay Round. Brazil’s Peace Clause interpretation would do violence to the text of the Agriculture Agreement and would penalize the United States for deciding support to upland cotton producers within the limits set by the Agreement. We therefore ask the Panel to find that Brazil has not established that US domestic support measures breach the Peace Clause and that such measures are therefore exempt from Brazil’s action at this time.