19. Brazil Simply Ignores the Definition of Product Specific Support in the Agreement on Agriculture: Brazil argues that certain challenged US measures are not “non product specific” and therefore must be “support to a specific commodity.” Brazil focuses on the definition of “non product specific” support in Article 1(a) but simply fails to interpret that definition in light of the definition of product specific support that immediately precedes it. The universe of domestic support measures under Article 1(a) consists of product specific support and non product specific support; these two parts must be read together and in harmony.
20. The definition of product specific support consists of two elements: First, the support must be provided “for an agricultural product,” that is, the subsidy is given “in favour of” a product and not in respect of criteria not related to the product or in respect of multiple products. Second, such support is “in favour of the producers of the basic agricultural product”, which suggests that subsidy benefits those who produce the product – that is, production is necessary for the support to be received. Both of these elements must be present for support to be product specific since, should either be missing, the definition would not be satisfied.
21. The second category of support in Article 1(a) is defined as “non product specific support provided in favour of agricultural producers in general.” The ordinary meaning of “in general” is “in general terms, generally”. Non product specific support cannot be interpreted as support provided “for an agricultural product in favour of the producers of the basic agricultural product” because to do so would reduce the first half of the Article 1(a) definition to redundancy or inutility. Thus, non product specific support is support in favour of agricultural producers “generally” – that is, a residual category of support covering those measures that do not fall within the more detailed criteria set out in the definition of product specific support.
22. Counter-Cyclical Payments are Non-Product-Specific Support:Counter cyclical payments are non product specific support. The payment formula for counter cyclical payments demonstrates that these payments are not “provided for an agricultural product” because a recipient need not currently produce upland cotton (or any other crop) to receive payment. In addition, it is not “the producers of the basic agricultural product” – that is, current upland cotton growers – that are entitled to receive the counter cyclical payments but rather persons (farmers and landowners) on farm acres with past histories of producing covered commodities, including upland cotton, during the base period. Thus, counter cyclical payments satisfy neither element of the definition of product specific support and do not form part of the Peace Clause comparison.
23. Despite Brazil’s attempts to mischaracterize the two as similar, counter cyclical payments and deficiency payments differ in crucial respects. To receive a deficiency payment, a producer was required to plant upland cotton for harvest and would be paid on the acres planted to upland cotton for harvest up to the maximum payment acreage. Thus, deficiency payments were support for an agricultural product (upland cotton) in favour of the producers of the product. By contrast, to receive the counter cyclical payment a person with “upland cotton base acres” need not plant for harvest or produce upland cotton (nor any other crop nor any crop at all). Thus, counter cyclical payments do not provide support for “an agricultural product” in favour of “ the producers” of the basic agricultural product and do not form part of the Peace Clause comparison under the proviso in Article 13(b)(ii).
24. Crop Insurance Payments Provide Non-Product-Specific Support: Crop insurance is not support “provided for an agricultural product”. For marketing year 2002, crop insurance payments are available to approximately 100 agricultural commodities, representing approximately 80 per cent of US area planted and greater than 85 per cent of the value of all US crops. Support which is provided to a number of crops is not “support to a specific commodity”; it is ‘ support to several commodities’ or ‘support to more than one commodity’ and does not form part of the Peace Clause comparison. The United States notifies crop insurance as non product specific “amber box” domestic support subject to US reduction commitments. No WTO Member has notified crop insurance programmes as product specific; in fact, Hungary, Canada, the EC, and Japan have notified crop insurance programmes as non product specific support. The United States is not aware of any other Member’s crop insurance programme that has as broad product coverage as the US programme.
25. Market Loss Assistance Payments are Non-Product-Specific Support: As indicated in the US 1999 WTO domestic support notification (G/AG/N/USA/43), the expired market loss assistance payments were non product specific support. As with production flexibility contract payments, market loss assistance payments were made to persons with farm acres that previously had been devoted to production of certain crops, including upland cotton, during an historical base period. A recipient was not required to produce upland cotton or any other crop in order to receive payment, and no production was required at all. Thus, these payments are not product specific support and would not form part of the Peace Clause proviso comparison.
26. Direct Payments: Were the Panel to conclude that direct payments do not conform fully to the provisions of Annex 2, direct payments would be non product specific support. As with counter cyclical payments, direct payments are based on quantities of acreage that historically produced cotton, and there is no requirement to produce upland cotton (or any other crop) to receive these payments. Thus, direct payments would not be product specific support.
27. Production Flexibility Contract Payments: Were the Panel to consider that these payments are within its terms of reference, the United States has explained that they would be green box support. Were the Panel to conclude further that production flexibility contract payments do not conform fully to the provisions of Annex 2, these payments would also be non product specific support for the reasons given with respect to direct payments. As such, they would not form part of the Peace Clause proviso comparison.
28. Cottonseed Payments: The Agricultural Assistance Act of 2003 and the cottonseed payment made pursuant to it is not within the Panel’s terms of reference because the legislation authorizing the payments had not even been enacted at the time of Brazil’s panel request, much less its consultation request. The “legal instruments” pursuant to which prior cottonseed payments were made, moreover, do not appear in Brazil’s consultation or panel requests. Thus, it would appear that cottonseed payments for the 1999 and 2000 crops of cottonseed also do not form part of the Panel’s terms of reference.
29. Peace Clause Comparison – The Product Specific AMS for Upland Cotton Also Demonstrates That Challenged US Measures Do Not Breach the Peace Clause: The United States believes the Peace Clause compels comparing the rate of support decided by US measures, whether or not adjusted for the acreage reduction programme and normal flex acres, with the current rate of support. Were the Panel to determine to use an Aggregate Measurement of Support calculation, however, the price gap methodology is the only appropriate one for Peace Clause purposes.
30. The price gap methodology eliminates the effect of prevailing market prices on the calculation of support. Instead, paragraphs 10 and 11 of Annex 3 designate that the support be calculated by multiplying the quantity of eligible production by the gap between the applied administered price (for example, the marketing loan rate) and the fixed reference price (that is, the actual price for determining payment rates for the years 1986 to 1988). Thus, by holding the reference price “fixed”, support measured using a price gap calculation shows the effect of changes in the level of support (applied administered price) decided by a Member, rather than changes in outlays that result from movements in market prices that a Member does not control. In fact, the United States has calculated an AMS for upland cotton using the price gap methodology for both deficiency payments and marketing loan payments (marketing loan gains, certificate exchange gains, and loan deficiency payments) and using budgetary outlays for all other payments. The result is exactly the same as a rate of support comparison: in no marketing year from 1999 through 2002 is the support US measures grant in excess of the 1992 marketing year level.
US Export Credit Guarantee Programme
31. The Negotiating History of Article 10.2 Reveals that the Negotiators Explicitly Deferred the Application of All Export Subsidy Disciplines on Export Credit Guarantees: The GATT/WTO negotiating history regarding export credits and export credit guarantees in agriculture supports the US interpretation of Article 10.2. On 24 June 1991, Chairman Dunkel circulated a Note on Options in the Agriculture Negotiations requesting decisions by the principals on “whether subsidized export credits and related practices . . . would be subject to reduction commitments”. Subsequently, on 2 August 1991, he circulated a proposed “Illustrative List of Export Subsidy Practices.” Item (h) is explicitly “Export Credits provided by governments or their agencies on less than fully commercial terms.” Similarly, item (i) is “Subsidized export credit guarantees or insurance programmes.”
32. On 20 December 1991, the “Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations” was issued. Article 10.2 of the Draft Final Act states: “Participants undertake not to provide export credits, export credit guarantees or insurance programmes otherwise than in conformity with internationally agreed disciplines” (emphasis added). This draft text would clearly prohibit the use of export credit guarantees except in conformity with agreed disciplines. Such internationally agreed disciplines would include those contemplated by the SCM Agreement. This would be precisely the language necessary to support Brazil’s reading.
33. Ironically, Brazil’s interpretation would require export credit guarantees in agriculture to be subject to greater disciplines than any other practice addressed in the Agreement on Agriculture. Under Brazil’s view, not only would export credit guarantees constitute export subsidies and be subject to all of the export subsidy disciplines, but Members would also be specifically obligated to work toward and then apply additional disciplines.
34. Brazil’s approach would result in gross injustice: As part of the negotiations, the parties had to prepare and submit schedules of quantities and budget outlays during a base period to derive the export subsidy reduction commitments ultimately reflected in the respective schedules of the Members. Had Members’ export credit guarantees been considered export subsidies for these purposes from the outset, then the export credit guarantee activity during the base period would also have to have been added to the base figures from which each Member’s export subsidy reduction commitments were calculated. For example, the United States has no export subsidy reduction commitment with respect to corn, yet during the 1986 1990 base period an average of over 5.5 million tons of corn were exported each year under the GSM 102 and GSM 103 programmes. The United States would have reduction commitments for many more products than currently and would have had significantly increased commitments for the 13 products that are scheduled. However, Brazil would have the Panel impose the disciplines now but deny Members the corresponding changes in reduction commitments. Brazil’s approach would be grossly inequitable and the Panel should reject it.
35. The Application of Government Wide Accounting Rules Indicates that the Export Credit Guarantee Programmes are Covering Long Term Operating Costs and Losses: The application of the Federal Credit Reform Act of 1990 (“FCRA”) over time to the export credit guarantee programmes as a whole currently indicates that the net result of all activity associated with export credit guarantees issued in fiscal years 1994 and 1995 is a total net receipt to the United States of $29 million. The experience of 1994 and 1995 is viewed as representative, and the United States expects that the net results for other years will be similar to the experience for 1994 and 1995. Re estimates thus far have resulted in a net reduction in the estimated costs of these programmes of over $1.9 billion since the inception of credit reform budgeting in fiscal year 1992. Based on those results, the Brazilian claim that "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" is not supportable.
36. The United States has gathered cumulative reestimates on a cohort basis: For example, for cohort 1992 (not yet closed) the current data reflects an estimate of a profit to the United States of approximately $124 million; for 1993 (not yet closed), the corresponding current figure is a profit of approximately $56 million; and, as indicated, cohorts 1994 and 1995 together project a profit of $29 million. With the exception of 2002, for which only very recent data is necessarily available, the Panel will note that the trend for all cohorts is uniformly favourable as compared to the original subsidy estimate.
37. Brazil asserts that “historically, the majority of GSM support that is rescheduled is ‘in arrears’” and that this increases costs. Brazil largely relies, however, on a 1990 government report that is dated and precedes FCRA itself. No rescheduling applicable to export credit guarantees issued in fiscal year 1992 or later is in arrears.
38. Brazil’s Suggestion to Use Estimated Data to Determine Long Term Costs and Losses Supports the View that the Export Credit Guarantees Do Not Provide Export Subsidies: The United States notes Brazil’s statement that “a certain degree of estimated data would be perfectly acceptable in an analysis of the costs and losses of guarantee programmes under item(j)” for two reasons. First, the re estimate process for fiscal years 1994, 1995, and virtually every other year since fiscal year 1992 indicates a very strong net positive trend with respect to the programmes and that therefore current premium rates do cover long term operating costs and losses. Second, it is relevant with respect to Brazil’s reliance on the significant losses that the United States admittedly incurred with respect to Poland and Iraq. Presumably, to attempt to recover such losses in any practical time frame would require such a prohibitive fee increase that few, if any, exporters would take advantage of the program. Consequently, the United States would be whipsawed by a prohibition on the export credit guarantee as currently constituted because of the large losses incurred between 10 and 20 years ago, and the inability to create a conforming programme because the fee structure necessary to compensate for such historical losses would foreclose use of the programme. Item (j) cannot be reasonably interpreted to require an examination of all activity since the beginning of a programme, no matter how old it may be. The data provided with respect to fiscal years 1994 and 1995 and for the programmes as a whole indicates that current premium rates are presently adequate to cover long term operating costs and losses as currently projected. The United States is also in a net positive position with respect to cotton transactions in the ten years commencing with fiscal year 1993.
39. The Export Credit Guarantee Programmes Are Not Applied in a Manner which Results in or which Threatens to Lead to, Circumvention of Export Subsidy Commitments: Brazil has challenged the export credit guarantee programmes, GSM 102, GSM 103, and SCGP, as such. Brazil has failed, however, to demonstrate that these programmes as such mandate a violation of US WTO obligations. It is well established under GATT and WTO jurisprudence that legislation of a Member violates that Member’s WTO obligations only if the legislation mandates action that is inconsistent with those obligations or precludes action that is consistent with those obligations. If the legislation provides discretion to administrative authorities to act in a WTO consistent manner, the legislation, as such, does not violate a Member’s WTO obligations. This distinction has continued under the WTO system.
40. The Commodity Credit Corporation (“CCC”) has complete statutory and regulatory discretion at any time not to issue guarantees with respect to any individual application for an export credit guarantee or to suspend the issuance of export credit guarantees under any particular allocation. This is in marked contrast to the situation in US FSC, in which the Appellate Body found a threat of circumvention because the FSC legislation created a legal entitlement to the payment. There is no statutory legal entitlement to an export credit guarantee. Furthermore, even if an application and fee are received, the applicant is not necessarily entitled to receive the guarantee. Issuance is discretionary.
41. Finally, Brazil has alleged that the United States has exceeded its quantitative export subsidy reduction commitments during the period July 2001 June 2002. Even if the export credit guarantee programmes were deemed export subsidies, the United States would be in compliance with the quantitative reduction commitments for that period with respect to wheat, coarse grains, butter and butter oil, skim milk powder, cheese, other milk products, bovine meat, live dairy cattle, and eggs. This may also be true with respect to vegetable oil. In fiscal year 2002, it would also be true for poultry meat. The United States did not use the GSM 102 or GSM 103 programmes during 2001 2002 with respect to butter and butter oil, skim milk powder, cheese, other milk products, or eggs.
42. Financial Arrangements Analogous to the CCC Export Credit Guarantee Programmes are Available in the Marketplace: In light of Article 10.2, it is neither appropriate nor necessary to analyze the export credit guarantees with respect to Article 1.1(b) of the SCM Agreement. However, we note that financing is available in the marketplace that is analogous to export credit guarantees. A prominent example in the commercial market would be “forfaiting.” It would appear, then, that a competitive marketplace exists for trade financing even in emerging markets where more conventional financing is not available. The United States is not privy to the precise terms at any time available in forfaiting transactions because those terms can vary by country, commodity, bank risk, size of transaction and numerous other factors. In addition, like most private financial activity, that information is ordinarily held confidentially by the parties.
The Step 2 Programme is not Contingent on Export Performance
43. Brazil apparently does not contest that all uses of upland cotton are eligible for the Step 2 subsidy. Instead, Brazil suggests, erroneously, that not the entire universe of users of upland cotton is eligible for the subsidy. First, the requirement that a recipient must be “regularly engaged” in the use of cotton is simply an anti fraud provision to preclude an attempt to receive a payment with respect to cotton on which a payment has already been made. Brazil also correctly notes that “the eligible domestic user criteria exclude all firms that are domestic cotton brokers or simple resellers”. These parties are not using the cotton and are therefore ineligible. Brazil suggests a third category of persons who are users but are not eligible to receive the payment: “firms that have not entered into CCC contracts” as either manufacturers or exporters. It is true that CCC cannot pay parties that choose to remain unknown to it, but this requires an assumption of economic irrationality and does not diminish the point that all who use cotton have it entirely within their power to receive the subsidy.
BRAZIL’S COMMENTS ON US REBUTTAL SUBMISSION
1. Pursuant to the Panel’s ruling of 23 August 2003, Brazil presents the following comments on the paragraphs listed below relating to the Rebuttal Submission of the United States of America. In addition, Brazil offers comments on Question 67a posed to the United States by the Panel’s Communication of 25 August 2003.
Paragraph 43 2. In paragraph 43 of its Rebuttal Submission, the United States argues that “Brazil’s reading would seemingly require a Member to make payments even if the recipient’s production was illegal, for example the production of narcotic crops such as opium poppy or the production of unapproved biotech varieties or environmentally damaging production.” The United States claims this would have “potentially far reaching results.” This new argument has no merit.
3. The two examples provided by the United States involving the growing of illegal plants/crops are, by definition, situations in which a national (or state/regional) domestic criminal (or civil) law would prohibit or regulate the growing of such plants/crops. The criminal (or civil) law would operate separately from any de-coupled direct payment to prohibit or regulate all forms of such production. There would be no reason in that situation to have a further statute limiting the payment if such illegal plants (or illegal production methods) – the activity would already be illegal. That is exactly the case with the 1996 FAIR Act and the 2002 FSRI Act regarding PFC and direct payments respectively. Neither limits the amount of payments for the growing of plants that would be illegal under US law. There is no need to because US federal and/or State law already prohibits such activity.
4. In addition, the US example in paragraph 43 about a restriction on “environmentally damaging production” is not relevant because such a restriction does not relate to the “type” of production (i.e., the type of crop) but rather the “manner” of production.463 Therefore, Annex 2, paragraph 6(b), which focuses on the “type” of production related to the “amount” of payment, it does not address the manner in which production is conducted. The context of Annex 2, paragraph 6(b) includes Annex 2, paragraph 12 (“Payments under environmental programmes”) which permits Members to impose specific conditions on the growing of crops in order to receive environmentally related direct payments.
5. Thus, the “potentially far-reaching results”464 from Brazil’s text-based approach to the ordinary meaning of “the amount of such payments” related to or based on the “type of production ” do not and will not exist. Brazil further notes that in the extraordinary situation in which one Member could theoretically seek to challenge a de-coupled direct payment limiting payments for growing plants such as opium poppy as an actionable subsidy, the Member restricting the “type” of production of such plants could, for instance, assert defences under Article XX(b) or (d) of GATT 1994.465 Paragraphs 96-98
6. The United States raises the new argument that “no other WTO Member has notified crop insurance programmes as product-specific.”466 At the outset, Brazil notes that it is the US crop insurance programmes and the detailed record of the product-specific nature of the US crop insurance programmes that is at issue in this dispute – not those of other WTO Members.
7. None of the WTO notifications of the EC, Canada, or Japan cited by the United States reflect the existence of the type of special product-specific policies or special treatment for certain crops within a broader insurance programme. In particular, there is no indication that these Members provide any specific crop insurance provisions for a specific crop, such as the insurance programmes provided by the United States for upland cotton.467 For example, while Canada appears to have a similar programme for “crops” as the United States, there is no indication that Canada provides special polices or groups of policies within its broader programme for individual crops. Thus, in contrast to the evidence of other Member’s insurance policies, the nature, type, value, and participation rate of the crop insurance policies provided by the United States differs widely among commodities. As Brazil has explained, it is simply not a “one size fits all” programme. The EC agrees. It has argued before the Committee on Agriculture that the US crop insurance programme is product-specific support.468
8. The United States further argues that it “is not aware of any crop insurance programme maintained by any other Member” that covers as many commodities as the United States.469 However, the Article 13(b)(ii) test is whether a specific commodity receives support from a domestic measure identified in the chapeau and whether there is some sort of a link between the support measure and the specific commodity. Evidence of such a link in the case of crop insurance exists, as with the US crop insurance programme, when particular commodities are provided special policies, coverage, or additional subsidies compared to other commodities covered by the crop insurance programme. There is no such evidence reflected in the notifications of Mexico whose notification states that “insurance premium subsidy [is] available for all producers.”470 Japan’s “Agricultural Insurance Scheme” also includes subsidies for policies covering all crops (except vegetables), all livestock (except poultry) and sericulture.471 By contrast, the US insurance programmes challenged by Brazil do not provide subsidies for any insurance for livestock or many other commodities. Indeed, the commodities not covered by the US 2000 ARP Act and relevant regulations represent more than half of the value of US farm cash receipts.472 9. Finally, as the United States recognizes, more than half of the notifications (which include part of Japan’s) cited by the United States refer to insurance programmes as green box support.473 Members so notifying are not obliged to make a determination under Article 6 of the Agreement on Agriculture whether such support is product-specific or not because it is exempt from any reduction commitments. The United States has not provided evidence suggesting these green box categorizations are incorrect. For these reasons, these notifications are also irrelevant.