VI. MEASURES BEFORE THE PANEL (FSC REPLACEMENT SCHEME) 45. The United States has argued that Brazil has failed to make a prima facie case of the inconsistency of the FSC Replacement scheme (the ETI) with the covered agreements. The European Communities must admit to being surprised that the United States considers that Brazil has to present a prima facie case of inconsistency. According to Article 17.14 of the DSU parties to a dispute must “unconditionally accept” adopted Appellate Body Reports as “a final resolution to that dispute.”459 Given that the United States must be assumed to have unconditionally accepted the findings of the Appellate Body in the FSC 21.5 dispute, which, by definition also included a finding that the United States was illegally providing export subsidies to unscheduled agricultural products such as upland cotton, the European Communities fails to see how the United States can argue that Brazil needs to establish a prima facie case. On the contrary, Brazil simply needs to assert a claim.
VII. CONCLUSION 46. This brings us to the end of our statement today. Thank you for bearing with us through a statement which was inevitably long, given the complexity of the issues, and the very short time we had to prepare our written submission.
47. There are a few central points which we would like to leave you with:
The peace clause is not an affirmative defence;
The term "decided" cannot be equated with "granted";
Reducing payments where certain crops are grown for reasons of internal competition does not amount to basing payments on a certain type of production;
Domestic content subsidies in favour of domestic producers are permitted under the Agreement on Agriculture, and can be maintained irrespective of other provisions; and,
Export credit guarantees which operate as export subsidies are subject to the Agreement on Agriculture.
48. Thank you for your attention. We are, of course, happy to answer your questions, here or in writing.
Mr. Chairman and Members of the Panel,
I thank you for the opportunity to present India’s views in this third party session. India has a few short comments to make on the issues in the dispute.
1. Brazil has challenged the US Subsidy programme relating to cotton. The main schemes challenged are
(i) Step 2 export payments
(ii) US export credit guarantee programmes, and
(iii) Extra Territorial Income (ETI) Act export subsidies.
2. These schemes do not conform to the provisions of Part V of the Agreement on Agriculture and thus have no “peace clause” protection from claims under the Subsidies Agreement. These schemes also violate Article 3.1(a) & 3.2 of the Subsidies Agreement.
3. The scheme relating to Step 2 export payments constitutes an export subsidy within the meaning of the Agreement on Agriculture. It also violates the Subsidies Agreement as
(i) It involves grants within the meaning of the Subsidies Agreement as the US Government pays money to its exporters
(ii) These grants involve direct transfer of economic resources for which the US Government receives no consideration
(iii) The scheme confers a benefit within the meaning of Article 1.1(b) of the Subsidies Agreement as they constitute “free money” for which exporters incur no corresponding obligations and they are made for “ less than full consideration” and
(iv) The Scheme is also export contingent within the meaning of Article 3.1(a) of the Subsidies Agreement because exporters are only eligible for payments if they produce evidence that they have exported an amount of US upland cotton.
4. The three Export Credit Guarantee Programmes (GSM 102, GSM 103 & SCGP) are export subsidies within the meaning of the Agreement on Agriculture (AOA) as
(i) They are operated “ at premium rates which are inadequate to cover the long term operating costs and losses of the program” as per item (j) of the illustrative list of export subsidies in ASCM.
(ii) They involve financial contributions that confer “benefits” and are contingent upon export performance within the meaning of Article 1.1 & 3.1(a) of the Subsidies Agreement. The US itself treats them as subsidies in its budget.
5. The ETI Act constitutes export subsidies within the meaning of Article 10.1 of the Agreement on Agriculture. This Act operates to circumvent the US export subsidy commitments by providing an export subsidy to upland cotton while the US does not have any export subsidy reduction commitments for cotton in violation of Articles 10.1 & 8 of the AOA.
6. The Step 2 Domestic Payment Scheme grants are direct transfers of funds and constitute a financial contribution by a Government within the meaning of Article 1.1(a)(1)(i) of the Subsidies Agreement. They also confer a “benefit” within the meaning of Article 1.1(h) of the Subsidies Agreement because the domestic user of US upland cotton receives the financial contribution on terms more favourable than those available in the market. Moreover these payment are contingent upon the use of domestic over imported goods.
Mr. Chairman, Members of the Panel,
7. Brazil has provided the legal arguments as to why the US has no basis to assert a “peace clause” defence against Brazil’s claims on actionable/prohibited subsidies being given by the US.
8. According to Brazil, the “peace clause” of AOA Article 13 is in the nature of an affirmative defence. The US has indicated that it will invoke a “peace clause” defence in the matter. This means that the burden of proof will be on US to show that the US domestic support and export subsidies to upland cotton are provided in conformity with the requirements of the “peace clause”.
9. Brazil has argued that US has no “peace clause” protection under AOA Article 13(c) as the US while invoking an affirmative defence must demonstrate that its export subsidies confirm fully to the provisions of Part V of the AOA. Part V of the AOA consists of Articles 8 to 11. A member violates Part V of the AOA if it provides export subsidies for products for which it has not undertaken any export subsidy reduction commitments.
10. Issues relating to affirmative defence and peace clause defence are mainly legal in nature and should be subject to interpretation under the Vienna Convention on the Law of Treaties and the WTO jurisprudence as seen through Appellate Body findings.
11. As regards subsidies contingent upon export performance, export credit guarantees and premiums, and use of domestic over imported inputs, Mr. Chairman, India believes that they all fall in the category of prohibited subsidies and are actionable under the ASCM.
Thank you for your kind attention.
NEW ZEALAND’S ORAL STATEMENT
24 July 2003
1. Mr Chairman, Members of the Panel, New Zealand’s views on the issues of concern in this dispute are set out in our Third Party Submission of 15 July and in the time available today it is clearly not possible to canvass all of those views. Accordingly, and as suggested by you in your opening remarks Mr Chairman, I will focus only on some key points.
(i) New Zealand’s systemic interest in the dispute
2. First, as outlined in our Third Party Submission, New Zealand has joined this dispute because of our systemic interest in ensuring the continued integrity of WTO disciplines applicable to agricultural trade. In particular we are concerned to ensure that trade-distorting or “amber box” measures cannot be used contrary to the “peace clause” in a manner that negatively affects other Members.
3. It is equally important that where the requirements of the “peace clause” have not been respected 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.
(ii) Brazil’s demonstration that the United States cannot claim “peace clause” protection for domestic support provided in marketing years 1999, 2000, 2001 and 2002 4. Second, Brazil has demonstrated that the level of domestic support for upland cotton granted by the United States in each of the marketing years in question did in fact exceed the level decided during the 1992 marketing year and that there is therefore no “peace clause” protection for those support measures.
5. The United States argues that this is not the case, on the basis that the comparison required by the “peace clause” should be between the ‘per pound’ rates of support set by the relevant domestic support measures and that certain domestic support measures should be excluded from the comparison.
6. Turning first to the United States claim that the relevant comparison should be between ‘per pound’ rates of support, in New Zealand’s view such an interpretation would be inconsistent with the object and purpose of Article 13(b)(ii). Instead, Article 13(b)(ii) requires a comparison that takes into account the totality of payments to upland cotton producers in order to reflect the true nature of the support that is being granted, including for example, total budgetary outlays. This is especially so when those budgetary outlays have been increasing because of falling world market prices. And those prices are falling due, at least in part, to the fact that United States producers are shielded from true price signals by the guaranteed ‘per pound’ rates.
7. Furthermore, New Zealand sees no basis for excluding certain domestic support measures from the calculation required by the “peace clause” as requested by the United States.
8. The “counter-cyclical” payments are plainly not “green box” support measures in accordance with Annex 2 of the Agreement on Agriculture, as the amount of the payment is linked to current prices for upland cotton, in direct contravention of Annex 2 paragraph 6(c).
9. Nor is the scope of support to be measured under Article 13(b)(ii) limited to “product-specific” support in the sense proposed by the United States. There is no basis for such an interpretation in either the wording or the intent of Article 13(b)(ii). [Just to depart from the prepared statement for a moment, the EC has reminded us this morning of the importance of taking context into account when interpreting WTO Agreements. We would note that it is also important to consider the ordinary and natural meaning of the actual words appearing in the Agreements. Here the words used are “support to a specific commodity” – the text does not say “product-specific support”. If the drafters had intended to mean “product-specific support”, they surely would have said so. After all, the phrase “product-specific support” is used at least five times elsewhere in the Agreement on Agriculture. Returning now to the prepared text,] even if such an interpretation as suggested by the US, could be supported, “counter-cyclical” payments are in any event product-specific support because, as Brazil has demonstrated, there is a strong linkage between those payments and production of upland cotton.
10. New Zealand also considers that there is no basis for excluding the Production Flexibility Contract payments or Direct Payments from the required calculation. The ability of farmers to update the base acreage used for calculation of Direct Payments rules out inclusion of those payments in the “green box”, which contemplates only one base period that is fixed and unchanging. To permit a Member to avoid this limitation by simply changing the names of its domestic support programmes would seriously undermine the requirement that there be no link between production and the amount of support.
(iii) Brazil’s demonstration that the United States cannot claim “peace clause” protection in respect of export subsidies; 11. Looking now at export subsidies, New Zealand agrees with 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.
12. New Zealand rejects the argument made by the United States that Step 2 export payments are not export subsidies because payments are available to domestic users as well as exporters of upland cotton. The Appellate Body (in US-FSCRecourse to Article 21.5) has made it clear 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.
13. New Zealand also finds no basis for the assertion by the United States that export credit guarantee programmes are not subject in any way to the export subsidy disciplines of the Agreement on Agriculture. In fact the inclusion of reference to such programmes in the context of Article 10 supports the opposite conclusion and demonstrates that Members were in fact concerned at the potential for such programmes to circumvent Members’ export subsidy reduction commitments.
14. In summary Brazil has demonstrated that the export subsidies to upland cotton do not have “peace clause” protection, and also that they are prohibited subsidies under Article 3.1(a) and 3.2 of the SCM Agreement.
(iv) The request by the United States for a Preliminary Ruling 15. Finally Mr Chairman, New Zealand does not consider that the Panel should grant the preliminary ruling requested by the United States.
16. First, New Zealand believes that measures no longer in effect are not outside the scope of the Panel’s consideration, particularly where the programmes in question, while renamed, in fact continue in a slightly different form. Furthermore, the nature of serious prejudice claims means that Panels may need to consider data beyond a single year and consider trends over a number of years.
17. Second, New Zealand considers that export credit guarantee measures relating to eligible United States agricultural commodities (other than upland cotton) are within the Panel’s terms of reference. To determine otherwise would be to allow a lack of transparency in the operation of particular measures to shield them from scrutiny by Members taking disputes.
Conclusion 18. In conclusion, Mr Chairman, New Zealand believes that Brazil has 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 those claims.
ORAL SUBMISSION BY PARAGUAY
24 July 2003
Mr Chairman, members of the Panel:
1. Paraguay is grateful for the opportunity to participate in these proceedings and to present its views on the matter at issue in this dispute.
2. Because Paraguay is a firm believer in a fair system of multilateral trade, it feels that it should explain its position on this issue as a third party because it is an issue of particular interest to its economy.
3. 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.
4. 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.
5. 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 the Subsidies Agreement, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year.
6. 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.
7. 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.
8. Regarding inconsistency with the Agreement on Agriculture, 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.
9. Article 3 of the Agreement on Agriculture refers to the incorporation of concessions and commitments. Paragraph 3 thereof stipulates that:
3.3 "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."
10. 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.
11. 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."
12. 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.
13. 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.
14. 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.
15. Article 6 specifically refers to cases in which "serious prejudice" is deemed to exist in the sense of paragraph (c) of Article 5.
16. 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.
17. 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.
18. 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.
19. 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, of a total of 299,259 farms, 190,000 were cultivating cotton.
20. 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.
21. 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.
22. 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.
23. In spite of its marked decline, cotton continues to be an important cash crop for the "capitalized" farms, and the main – if not only – cash crop of the farms that are on the decline.
24. The agricultural sector is fundamental to the Paraguayan economy, accounting for 90 per cent of exports, 35 per cent of employment and 25 per cent of GDP, in addition to which it supports an agro-industry that accounts for 11 per cent of GDP and 10 per cent of total employment.
Mr Chairman, members of the Panel:
25. The importance of cotton for Paraguay, both in social and economic terms, is such that an increase in international cotton fibre prices as a result of the elimination of significant market distortions such as subsidization of production would not only bring about a general improvement in the standard of living of the country's inhabitants, in a very fragile sector in particular, but it would also lead to an improvement in macroeconomic conditions, balance-of-payments, monetary reserves, etc. that would enable Paraguay to be more reliable in meeting its international financial commitments.
26. For the above reasons, and because it does not consider that the provisions of the Agreement on Agriculture 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.
27. 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.
28. Finally, Paraguay respectfully requests the Panel to conclude that the measure applied by the United States is inconsistent with its WTO obligations under various provisions of the Agreement on Agriculture, the GATT 1994 and the Agreement on Subsidies and Countervailing Measures.
The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu is pleased to be here as a third party in this case. We have a systemic interest in the particular question of the burden of proof required by Article 13 of the AOA, and would like to focus on this issue in our remarks. We have previously submitted our views in writing accordingly.