1.4. Challenges to Actionable Subsidies under Article 5 and 6 of the SCM Agreement and Article XVI of GATT 1994 Are Not Limited to the Marketing Year in which a WTO Panel Is Established 27. The United States argues that the Panel may only count current US non-green box support in determining whether the United States enjoys peace clause exemption under Article 13(b). Applying a strict “statute of limitations” approach, the United States argues that Brazil (1) cannot challenge any US trade and production-distorting agricultural support for MY 2001 (or MY 2000, or MY 1999) because it did not ensure that the Panel was established during MY 2001 (or MY 2000, or MY 1999), and (2) it cannot challenge all of the trade and production-distorting support for all of MY 2002 because it did not ensure that the Panel was established by 31 July 2003 – the last day of the 2002 marketing year. The United States goes so far as to argue that the Panel may only compare MY 1992 support decided with partial MY 2002 data through 18 March 2003 – the date the Panel was established. According to the US theory, the only date the Panel could have been established to ensure comparison with full MY 2002 data would have been 31 July 2003 – the last day of MY 2002.
28. Brazil has demonstrated that the United States has constructed an irrational interpretation of Article 13(b)(ii). It is bizarre to interpret Article 13(b)(ii) in a way that requires Members to carefully “time” a request for establishment of a panel to maximize the amount of support to be counted for the “current” marketing year. Nothing in the “present tense” of Article 13(b)(ii) compels this result. The Panel must interpret Article 13(b)(ii) according to its ordinary meaning and with regard to its context. The relevant context is Articles 1(h)(ii) and 6.3 of the Agreement on Agriculture. The Korea – Beef dispute exemplifies that a Member can challenge violations of “Current Total AMS” at any time after a marketing year ends. The ability of challenging Current Total AMS violations in later years by analogy suggests that non-conformity with the peace clause requirements in much the same way leads to lifting the peace clause exemption also for marketing years other than the current marketing year. Thus, the proper interpretation of Article 13(b)(ii) permits actionable subsidy challenges under the SCM Agreement and GATT Article XVI:1 for any marketing year for which peace clause exemption does not exist – under either its chapeau (Current Total AMS) or the proviso of Article 13(b)(ii).
2. The GSM 102, GSM 103 and SCGP Export Credit Guarantee Programmes Constitute Export Subsidies in Violation of Articles 10.1 and 8 of the Agreement on Agriculture, and Item (j) and Articles 3.1(a) and 3.2 of the SCM Agreement 29. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP export credit guarantee programmes administered by the CCC constitute export subsidies within the meaning of Articles 10.1, 1(e) and 8 of the Agreement on Agriculture, Article 3.1(a) of the SCM Agreement, and item (j) of the Illustrative List of Export Subsidies attached as Annex I to the SCM Agreement. Brazil also demonstrated that those export subsidies circumvent, or threaten to circumvent, the United States’ export subsidy reduction commitments, in violation of Articles 10.1 and 8 of the Agreement on Agriculture. Additionally, because they violate the Agreement on Agriculture, these programmes are not exempt from actions by Article 13(c)(ii) of the Agreement on Agriculture, and constitute prohibited export subsidies within the meaning of item (j) and Articles 3.1(a) and 3.2 of the SCM Agreement.
30. Article 10.2 does not, as the United States asserts, carve out export credit guarantees from the general export subsidy disciplines of the Agreement on Agriculture, including the anti-circumvention provisions of Article 10.1. The Appellate Body concluded that exemptions and carve-outs from general obligations must be provided for explicitly in the text of an agreement. Article 10.2 includes no such explicit carve-out or exemption. Rather, Article 10.2 announces Members’ intent to work toward negotiations on specific disciplines for export credits. In the meantime, the general disciplines on export subsidies included in the Agreement on Agriculture apply to export credits.
2.1. CCC Export Credit Guarantees Constitute Export Subsidies under Articles 1 and 3.1(a) of the SCM Agreement
31. Brazil notes that CCC export credit guarantees are “financial contributions” within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. Since CCC export credit guarantees are unique financing vehicles for agricultural commodity transactions that are not available on the commercial market, let alone on terms consistent with the market, they confer “benefits” within the meaning of Article 1.1(b) of the SCM Agreement. Brazil presents the affidavit of Marcelo Pinheiro Franco from the Brazilian Export Credit Insurance Agency who confirms that no
comparable market-based export credit guarantees or financing instruments for international transactions involving agricultural commodities [exist] that provide these same terms [as the GSM and SCGP programmes].
32. Further, the United States compares agricultural export credit guarantees to export credit insurance for agricultural commodities, which it asserts is available on the private commercial market. However, it acknowledges that insurance coverage is structured altogether differently from guarantee coverage. Thus, even if the United States had proven its assertion with evidence, it acknowledges that the market for private insurance cannot serve as a benchmark against which to determine whether CCC guarantees confer “benefits”.
33. Finally, CCC guarantees are contingent in law on export performance and therefore constitute prohibited export subsidies under Article 3.1(a) of the SCM Agreement.
34. Lastly, Brazil recalls that since the United States surpassed its quantity commitment levels, Article 10.3 of the Agreement on Agriculture allocates the burden to the United States to prove that its excess exports did not benefit from export subsidies, including export credit guarantees.
2.2. The CCC Export Credit Guarantee Programmes Constitute Export Subsidies under Item (j) of the Illustrative List of Export Subsidies
35. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP programmes also constitute export subsidies because they charge premium rates that are inadequate to cover the long-term operating costs and losses of the programmes, within the meaning of item (j) of the Illustrative List. Item (j) does not require the Panel to endorse any particular methodology or formula for determining whether the CCC programmes cover their long-term operating costs and losses, or to decide by precisely how much those costs and losses exceed premiums collected. Rather, Brazil has provided the Panel with numerous alternatives, each of which demonstrates that long-term operating costs and losses for the GSM 102, GSM 103 and SCGP programmes outpace premiums collected, including data under the FCRA, Brazil’ constructed formula, data from CCC’s 2002 financial statements reporting large uncollectible amounts on post-1991 and pre-1992 guarantees, among others.
36. The United States criticizes the FCRA cost formula as inappropriate because it allegedly relies on “estimated” rather than “actual” data about the costs of the programmes. It is not true that the FCRA cost formula reflects only “an estimate of the long-term costs to the Government”. A significant portion of the inputs into the FCRA cost formula reflect actual historical experience with borrowers, and actual contract terms such as interest rates, maturity, fees and grace periods.
37. Moreover, the results of the FCRA cost formula are modified throughout the lifetime of a cohort, pursuant to the “reestimation” process. The results of the reestimate process demonstrate that CCC has “los[t] money” during the period 1992-2002. When these total lifetime reestimates for all cohorts of guarantees disbursed since 1992 are netted against the total original subsidy estimates adopted each budget year during the period 1992-2002, the resulting loss is nearly $1.75 billion.
38. The implication of the United States’ position concerning “estimated data” is that it is impossible to judge whether premiums for the GSM 102, GSM 103 and SCGP programmes have covered operating costs and losses until all guarantee cohorts for a period constituting the “long term” are closed, so that purely “actual” rather than partial “estimate” data are available. Because all cohorts disbursed since the inception of federal credit reform remain open, the United States effectively argues that it is impossible for this Panel to judge whether the CCC guarantee programmes satisfy the elements of item (j). Brazil notes however that the US Congress and the President have endorsed the use of the FCRA cost formula as the principal way to “measure more accurately the costs of Federal credit programmes”, even in the budget year column of the US budget, let alone several years out, when cohorts have been subject to successive rounds of reestimates.
39. In closing, Brazil reminds the Panel that the US criticism regarding the use of “estimated” data does not address the many other bases apart from the FCRA formula on which Brazil has demonstrated that the long-term operating costs and losses of the GSM 102, GSM 103 and SCGP programmes exceed premiums paid.
2.3. The CCC Export Credit Guarantee Programmes Threaten to Circumvent US Export Subsidy Reduction Commitments
40. At paragraphs 295-305 of its First Submission, Brazil demonstrated that with respect to both unscheduled and scheduled commodities, the GSM 102, GSM 103 and SCGP export subsidy programmes result in, or threaten to lead to, circumvention of the United States’ export subsidy commitments, in violation of Article 10.1 of the Agreement on Agriculture. For the same reason, the United States violates Article 8, which requires a Member not to provide export subsidies otherwise than in conformity with the Agreement on Agriculture and with its scheduled commitments. The threat of circumvention for scheduled commodities is further enhanced by the fact that CCC is exempt from the requirement in the FCRA that a programme receive new Congressional budget authority before it undertakes new loan guarantee commitments. Mandatory programmes like the CCC export credit guarantee programmes must be available to all eligible borrowers, without regard to appropriations limits. In an important sense, this resembles the United States’ FSC regime, which the Appellate Body found is available without limit. The Appellate Body considered that the unlimited nature of the regime posed a significant threat, under Article 10.1, that the United States would surpass its agricultural export subsidy reduction commitments.
2.4. The GSM 102, GSM 103 and SCGP Export Credit Guarantee Programmes Constitute Export Subsidies in Violation of Item (j) and Articles 3.1(a) and 3.2 of the SCM Agreement 41. Since the CCC export credit guarantee programmes violate Articles 10.1 and 8 of the Agreement on Agriculture, the United States is not entitled to the “peace clause” exemption. Therefore, GSM 102, GSM 103 and SCGP programmes constitute prohibited export subsidies, in violation of item (j) of the Illustrative List of Export Subsidies, and of Articles 3.1(a) of the SCM Agreement.
3. The Step 2 Export and Domestic Subsidies Are Prohibited Subsidies in Violation of Articles 3.1(a) and 3.1(b) of the SCM Agreement
42. The United States asserts that all US upland cotton is eligible to receive Step 2 payments and that this removes the export and local content contingency. Brazil refutes the US assertion both as a matter of law as well as fact. The Step 2 export provisionsare not, as the United States now argues, simply domestic support payments made to US producers of upland cotton. Brazil again emphasizes that the US – FSC and Canada – Aircraft Appellate Body decisions are relevant jurisprudence and apply to the facts of the two situations set out in the regulations to Section 1207(a) of the 2002 FSRI Act. Thus, even if all US production since 1990 or even during MY 1999-2002 received Step 2 payments – which the United States has failed to document with any data – it would not remove the export and local content contingencies mandated by those regulations that violate SCM Agreement Articles 3.1(a) and (b).
43. 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 Agreement on Agriculture. The United States argues that there is an inherent conflict between Annex 3, paragraph 7 and Article 6.3 of the Agreement on Agriculture with Article 3.1(b) of the SCM Agreement because in the view of the United States, there can be no payments to processors of agricultural products included within AMS that do not violate Article 3.1(b) of the SCM Agreement. Brazil demonstrates that this is not true and that there are subsidies to agricultural processors that do not violate Article 3.1(b) and presents various examples to that respect.
44. Finally, Brazil notes the EC argument that applying Article 3.1(b) of the SCM Agreement “would lead to stricter disciplines being applied to domestic subsidies than are applicable for industrial goods”. Local content subsidies – whether for agricultural and industrial products – are prohibited by Article 3.1(b). As “prohibited” subsidies, they are subject to the ultimate discipline – they cannot legally exist. The two packages of disciplines for agricultural and industrial products have both been negotiated during the Uruguay Round. The resulting rules have to be interpreted according to the customary rules of treaty interpretation as contained in the Vienna Convention. This interpretation results in agricultural local content subsidies being prohibited. Whether that results in there being more or less strict disciplines than would be applicable to industrial subsidies is not a relevant consideration for the interpretation of the disciplines.
4. The ETI Act Subsidies Violate Articles 10.1 and 8 of the Agreement on Agriculture and Are Prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement
45. Brazil has made a prima facie case with respect to its claims against the ETI Act. Brazil challenges exactly the same measure based on the same claims asserted by the EC that the panel and the Appellate Body in US – FSC (21.5) held to violate the Agreement on Agriculture and the SCM Agreement. The sole difference is that Brazil limits its claims to ETI Act subsidies benefiting the export of upland cotton only.
EXECUTIVE SUMMARY OF THE REBUTTAL SUBMISSION
OF THE UNITED STATES
Introduction and Overview 1. The comparison under the Peace Clause proviso in Article 13(b)(ii) must be made with respect to the support as “decided” by those measures. In the case of the challenged US measures, the support was decided in terms of a rate, not an amount of budgetary outlay. The rate of support decided during marketing year 1992 was 72.9 cents per pound of upland cotton; the rate of support granted for the 1999 2001 crops was only 51.92 cents per pound; and the rate of support that measures grant for the 2002 crop is only 52 cents per pound. Thus, in no marketing year from 1999 through 2002 have US measures breached the Peace Clause.460
2. Brazil has claimed that additional “decisions” by the United States during the 1992 marketing year to impose a 10 per cent acreage reduction programme and 15 per cent “normal flex acres” reduced the level of support below 72.9 cents per pound. However, the 72.9 cents per pound rate of support most accurately expresses the revenue ensured by the United States to upland cotton producers. Even on the unrealistic assumption that these programme elements reduced the level of support by 10 and 15 per cent, respectively (that is, the maximum theoretical effect these programme elements could have had), the 1992 rate of support would still be 67.625 cents per pound, well above the levels for marketing years 1999 2001 and 2002.
3. Although such a comparison would not conform to the text, the result of the Peace Clause comparison is no different if one compares the support via an Aggregate Measurement of Support calculation. Using the price gap methodology (as provided under Annex 3 of the Agriculture Agreement) for US price based deficiency payments and marketing loan payments, the upland cotton Aggregate Measurement of Support (in US $, millions) for these years is MY1992: 1,079; MY1999: 717; MY2000: 484; MY2001: 264; MY2002: 205. Again, in no marketing year from 1999 through 2002 have US measures breached the Peace Clause.
4. Finally, the analysis presented by Brazil’s expert at the first panel meeting actually supports the United States, not Brazil. Removing the non product specific support that Brazil erroneously tries to pass off as support to upland cotton, Brazil’s own expert calculates the total support per unit (cents/lb.) as MY1992: 60.05; MY1999: 53.79; MY2000: 55.09; MY2001: 52.82; MY2002: 56.32. Again, in no marketing year from 1999 through 2002 have US measures breached the Peace Clause.
5. Thus, whether gauged via the rate of support decided by US measures (whether or not adjusted for the acreage reduction programme and normal flex acres), or via the AMS for upland cotton (calculated through a price gap methodology), or via the calculations of Brazil’s expert (limited to product specific support), the result is exactly the same: in no marketing year from 1999 through 2002 have US measures breached the Peace Clause.
US Green Box Measures are "Exempt from Actions" Pursuant to Article 13(a)(ii)
6. A measure shall be deemed to meet the “fundamental requirement” of the first sentence of Annex 2 if it meets the basic criteria of the second sentence plus any applicable policy specific criteria. As suggested by the use of the word “fundamental” (“from which others are derived”) and the structure of Annex 2 (that is, beginning the second sentence with the word “accordingly”), compliance with the requirement (“something called for or demanded”) of the first sentence will be demonstrated by conforming to the basic criteria of the second sentence plus the applicable policy specific criteria of paragraphs 6 through 13.
7. Direct Payments: Eligibility for direct payments under the 2002 Act is based on criteria in a “defined and fixed base period ” (paragraph 6(a)) in the ordinary meaning of those terms: a base period that is “definite” (set out in the 2002 Act) and “stationary or unchanging in a relative position” (does not change in relative position for the six year duration of the 2002 Act).
8. Paragraph 6(a) establishes that eligibility for payments under a decoupled income support measure shall be determined by clearly defined criteria in “adefined and fixed base period,” not “the base period” (as in paragraph 9 of Annex 3, which is defined in that same paragraph as “the years 1986 to 1988”). Brazil’s reading of “a defined and fixed base period” would read into that text the term “unchanging”, language Brazil has proposed in the ongoing WTO negotiations but is not currently found in the Agreement.
9. Annex 2, by its terms, sets out the fundamental requirement and basic and (if applicable) policy specific criteria to which green box “domestic support measures” must conform. Other provisions in the Agreement similarly establish that the criteria set out in Annex 2 apply to “domestic support measures”. Thus, with respect to a given decoupled income support measure, eligibility for payments must be determined by criteria in a “defined and fixed base period”.
10. Brazil argues that a new decoupled income support measure must be based on the same base period as a previous measure if the new measure “is essentially the same” or “[i]f the structure, design, and eligibility criteria have not significantly changed.” There is no provision in Annex 2 or the Agreement on Agriculture that supports Brazil’s approach. It is thus irrelevant whether two decoupled income support measures are “essentially the same”.
11. Brazil would read paragraph 6(b) as requiring a Member to make support available for any type of production; a Member could not preclude a recipient from producing certain crops.461 While direct payments are reduced if certain crops are produced, a recipient need not produce any “type of” crop in particular in order to receive the full payment for which a farm is eligible; the recipient need merely refrain from producing the forbidden fruit or vegetable. Thus, it is not any “type . . . of production . . . undertaken by the producer” that results in the full direct payment but rather production not undertaken by the producer – that is, ceasing certain production.
12. Production Flexibility Contract Payments: Production flexibility contract payments (now expired) were made with respect to farm acreage that was devoted to agricultural production in the past, including acreage previously devoted to upland cotton production. The payments, however, were made regardless of whether upland cotton was produced on those acres or whether anything was produced at all. As with direct payments, because production flexibility contract payments were decoupled from production, they met the five policy specific criteria set out in paragraph 6 for decoupled income support measures.
13. Brazil has failed to make a prima facie case that US green box measures do not satisfy the fundamental requirement of Annex 2.462 In fact, Brazil’s “evidence” consists simply of selectively quoting and emphasizing conceptual and theoretical statements from the economic literature. None of the papers Brazil cites concludes that these payments in particular, or decoupled income support measures in general, have more than “minimal trade-distorting effects or effects on production.”
14. The Agreement on Agriculture does not define a numerical threshold on what degree of effects will be considered “minimal trade-distorting effects or effects on production”. However, given that no study has found that these payments have effects on production of more than one per cent, it would appear that direct payments have and production flexibility contract payments had no more than “minimal trade distorting effects or effects on production”. Thus, not only has Brazil failed to present a prima facie case, but the United States has affirmatively shown that these payments satisfy the fundamental requirement of the first sentence of Annex 2.
US Non-Green Box Domestic Support Measures are not in Breach of Article 13(b)(ii) 15. : Peace Clause Proviso – Support was "Decided" During Marketing Year 1992 Using a Rate, Not a Budgetary Outlay: The Peace Clause proviso requires a comparison to the product specific support “decided” during the 1992 marketing year. A Member cannot “decide” world market prices or actual production or any other element outside a government’s control. Yet Brazil would read the Peace Clause as though Members were omnipotent and could “decide” every factor influencing support.
16. Brazil lists nine different “decisions taken by the United States in relation to MY 1992 upland cotton support programmes”. At least three of these “decisions” relate to the rate of support and not a single decision relating to budgetary outlays or market prices. Thus, Brazil’s own answer confirms that the proper analysis of the support “decided” by US measures is to look to the terms of the US measures, which set a rate of support.
17. The use of the term “grant” in the Peace Clause proviso with respect to challenged measures does not compel an examination of budgetary outlays. The ordinary meaning of “grant” is to “bestow as a favour” or “give or confer (a possession, a right, etc.) formally”. Thus, the use of the term “grant” would permit an evaluation of the rate of support that challenged measures “give or confer . . . formally”. Members did not choose to use the word “granted” in place of “decided,” and a valid interpretation must make sense of that choice rather than reading it out of the Agreement. In addition, had Members intended the Peace Clause comparison to be made solely on the basis of budgetary outlays, they could have used that term, which is a defined term in Article 1(c) and used frequently in the Agreement.
18. Peace Clause Proviso – "Support to a Specific Commodity" Means Product-Specific Support: The phrase “support to a specific commodity” means “product specific support”. That the Peace Clause does not use the phrase “product specific support” is neither surprising nor telling. The basic definition of product-specific support is given in Article 1(a), as “support . . . provided for an agricultural product in favour of the producers of the basic agricultural product.” Article 1(h) also refers to the concept but does not use the exact phrase “product specific support”; in fact, the language this provision uses ("support for basic agricultural products") is strikingly similar to the Peace Clause proviso ("support to a specific commodity"). Neither Article 1(a) nor 1(h) even uses the term “specific” whereas the Peace Clause contains all three elements of that phrase (product, specific, and support).