Paragraphs 147-152 53. The United States argues that it did not include the quantities exported under the CCC programmes in its calculation of average export subsidies during 1986-1990 (the base period from which export subsidy reduction commitments were calculated during the Uruguay Round)520 because it did not consider that CCC export credit guarantees are export subsidies subject to reduction commitments.521According to the United States, subjecting export credit guarantee programmes to export subsidy reduction commitments in the Agreement on Agriculture would therefore lead to “gross injustice.”522
54. This is not the logical conclusion to be drawn, however. It appears that during the Uruguay Round negotiations the United States took the same position as it has taken in this dispute – that CCC export credit guarantee programmes do not constitute export subsidies within the meaning of item (j) and Articles 1.1 and 3.1(a) of the SCM Agreement and that CCC export credit guarantees are, therefore, not subject to the general export subsidy disciplines included in the Agreement on Agriculture.523 The United States did not feel compelled to include the CCC export credit guarantees in its calculation of export subsidy reduction commitments because it did not consider that they constituted export subsidies under those provisions. Brazil agrees that not all export credit guarantees are export subsidies and that, therefore, not all export credit guarantees are subject to export subsidy reduction commitments. However, if those guarantees meet the criteria of item (j) or constitute subsidies contingent upon export performance under Articles 1.1 and 3.1(a) of the SCM Agreement, they are export subsidies.524 (Brazil has demonstrated that the GSM 102, GSM 103 and SCGP programmes are export subsidies. It follows that GSM 102, GSM 103 and SCGP are subject to reduction commitments and, in fact, circumvent or threaten to circumvent the US export subsidy commitments.)
Paragraphs 156-157, 160-162 and Exhibits US-31 and US-32 55. The United States argues that it would not give an accurate picture to compare the reestimates made in any given year (and recorded in the US budget) with the cohort-specific subsidy estimates for guarantees disbursed in that year. Specifically, the United States argues that “upward reestimates and downward reestimates reflected in a single budget cannot necessarily be applied against each other for a notional ‘net reestimate.’”525 Brazil has never argued otherwise. In the chart included in paragraph 115 of its 22 August Rebuttal Submission, Brazil compares cohort-specific original subsidy estimates to cohort-specific reestimates, cumulated over the period 1992-2002, to give a picture of the long-term operating costs and losses of the “programmes,” as required by item (j) (rather than costs and losses for a particular cohort). The United States itself uses this same method (albeit with different data) in paragraph 161 of its 22 August Rebuttal Submission.
56. With respect to FCRA-related data, it would in fact only be inappropriate to attempt to tie a cohort-specific subsidy estimate for one year to fiscal year, non-cohort-specific reestimates recorded in the budget for any one year. Brazil has never made this comparison. As the United States notes, this would be inappropriate because reestimates recorded in the budget as made in a year do not necessarily relate to subsidy estimates for guarantees disbursed in that year. If the data is presented cumulatively over a period constituting the long term, however, and does not purport to tie cohort-specific subsidy estimates to fiscal year, non-cohort-specific reestimates recorded in the budget for any one year, a comparison is perfectly acceptable. Specifically, comparing the cumulative subsidy estimates to the cumulative reestimates shows whether the “programme” is loss-making or profit-generating over the long term. Making a comparison of the cumulative figures does not require that the estimates and reestimates recorded in the budget for any year correspond.
57. For example, this approach can be applied to the data included in Exhibit US-31 to the United States’ 22 August Rebuttal Submission. The “subsidy” column included in Exhibit US-31 lists the subsidy estimate from the “prior year” column of the US budget for each cohort during the period 1992-2003. Subtracting cumulative annual downward reestimates from and adding cumulative annual upward reestimates to the cumulative original subsidy amount yields a positive subsidy of $500 million.526 Adding administrative expenses over the period 1992-2003 increases this amount by a further $43 million.527 Taking the data provided by the United States in Exhibit US-31 at face value demonstrates that the CCC guarantee programmes are losing money. This result is not tainted by the “apples-to-oranges” criticism levied in paragraph 160 of the United States’ 22 August Rebuttal Submission.
58. Nor does Brazil’s treatment of the data included in the chart at paragraph 165 of its 11 August Answers to Questions suffer from an “apples-to-oranges comparison” between fiscal year and cohort-specific data, as the United States alleges at paragraph 160 of its 22 August Rebuttal Submission. The chart at paragraph 165 is wholly unrelated to the FCRA cost formula. It tracks the results of a formula Brazil has constructed to verify, by alternative means, that long-term operating costs and losses for the CCC export guarantee programmes outpace premiums collected. The data in that chart are not FCRA-related subsidy estimates that are recorded on a cohort basis or that are subject to reestimates mandated by the FCRA. Instead, the left-hand column of that chart records revenue collected on a fiscal year (not a cohort-specific) basis, and the right-hand column of that chart records costs incurred on a fiscal year (not a cohort-specific) basis. Over the period 1993-2002, total revenue in the left-hand column is significantly less than total costs in the right-hand column. This entails no “apples-to-oranges comparison,” and demonstrates that the CCC export guarantee programmes constitute export subsidies under item (j) of the Illustrative List of Export Subsidies.
59. In the chart included at paragraph 161 of its 22 August Rebuttal Submission, the United States nets cumulative reestimates on a cohort basis against the original, cohort-specific subsidy estimate from the US budget. There are some factual problems with the US data.528 Resolving these problems is not particularly important, however, since the chart included at paragraph 161 of the United States’ 22 August Rebuttal Submission itself shows a cumulative positive subsidy for the programmes of over $381 million for the period 1992-2002.529 This positive subsidy is consistent with CCC’s 2002 financial statements, which provide a cumulative, running tally of the subsidy figure for all post-1991 CCC export credit guarantees in the amount of $411 million.530 The CCC export guarantee programmes have lost money over the period 1992-2002.
60. The United States’ point seems to be that because subsidy reestimates are generally downward, the CCC programmes generate profits over the long term. However, all this means is that CCC’s original estimates were too high.531 The real test is the result when cohort-specific reestimates are netted against the original subsidy estimates for each cohort and cumulated over a period constituting the long term, so that the long-term costs and losses of the programmes can be determined, as required by item (j). Netting reestimates against original subsidy estimates on a cohort-specific basis yields a positive subsidy, revealing that over the long term, the CCC is losing money with its export guarantee programmes. This result is obtained whether the Panel accepts the chart at paragraph 161 of the United States’ 22 August Rebuttal Submission, the chart at paragraph 115 of Brazil’s 22 August Rebuttal Submission,532 or the cumulative subsidy figure included in CCC’s 2002 financial statements.533
61. The United States may be suggesting that reestimates will always, eventually, result in negative subsidies and profits. The data shows that this is not the case, however. Netting reestimates against original subsidy estimates does not consistently yield a negative subsidy, or profits, on a cohort basis. The charts included at paragraph 161 of the United States’ 22 August Rebuttal Submission and at paragraph 115 of Brazil’s 22 August Rebuttal Submission demonstrate this. Nor is it even relevant to focus on the results of individual cohorts, since item (j) require an analysis of the “long-term” costs and losses of export guarantee “programmes,” rather than cohorts. That is why Brazil, and presumably the United States, has calculated cumulative results for the charts included at paragraph 161 of the United States’ 22 August Rebuttal Submission and at paragraph 115 of Brazil’s 22 August Rebuttal Submission.
62. In any event, if CCC considered that it would eventually make money on its guarantees on a cohort basis, why does it continue to offer original estimates that are so high? While some factors included in the estimation process are dictated by the FCRA and the US Office of Management and Budget, the original subsidy estimate is primarily driven by CCC’s historical experience with its guarantees. Brazil has elsewhere noted that according to the US Federal Accounting Standards Advisory Board, the Government-Wide Audited Financial Statements Task Force on Credit Reform, the Office of Management and Budget and the Department of Agriculture itself, “[m]ethods of estimating future cash flows for existing credit programmes need to take account of past experience,”534 “[a]ctual historical experience of the performance of a risk category is a primary factor upon which an estimation of default cost is based,”535 and technical assumptions underlying subsidy calculations reflect “historical cash reports and loan performance.”536 If historical experience dictated that CCC would consistently make profits, CCC would reflect that historical experience in its subsidy estimates. Actual historical experience is, after all, a “primary factor” on which those estimates are based. That CCC continues to provide significant positive original subsidy estimates demonstrates that its actual historical experience does not suggest that it will make money on its loan guarantees. Since those estimates are calculated and recorded on a net present value basis, CCC apparently continues to consider that it will incur significant net costs at the time the cohorts are closed.
63. CCC’s apparent views regarding its historical experience with the export guarantee programmes are justified. Evidence regarding CCC’s actual historical experience confirms that the long-term operating costs and losses for the CCC guarantee programmes outpace premiums collected. At paragraph 109 of its 22 August Rebuttal Submission, Brazil summarizes this evidence.537 Although, the United States implies at paragraph 172 of its 22 August Rebuttal Submission that Brazil’s evidence is all “between 10 and 20 years” old, a cursory review of the evidence, which includes data from the 2004 US budget and CCC’s 2002 financial statements proves otherwise. Therefore, even if the Panel agrees with the United States’ conclusion, at paragraph 162 of its 22 August Rebuttal Submission, that the FCRA cost formula is not an ideal way to determine the costs of the CCC export guarantee programmes, Brazil has established by alternative means that CCC premiums fail to meet the long-term operating costs and losses of the programmes.
Paragraph 169 and Exhibit US-33
64. The United States has asserted that there are no “arrearages” with respect to debt reschedulings.538 Brazil has two comments. First, the United States does not state the source of the data it included at Exhibit US-33. Second, Brazil maintains that it is not appropriate to treat rescheduled debt as recoveries.539 The US assumption that there will be no arrearages not only ignores the cost of rescheduling but also the fact that there may be further defaults on rescheduled debt.540 Although rescheduled debt is treated as a receivable, CCC acknowledges in its financial statements that not all receivables are deemed collectible.541 Moreover, Brazil presumes that rescheduled debt is subject to the FCRA estimation or reestimation process, which involves calculations of net present value of what the CCC expects to lose (or gain) on the rescheduled debt. The CCC does not assume that all rescheduled debt will be collected.
Paragraphs 172, 174-175 65. The United States has argued that Brazil improperly relies on CCC losses incurred via Iraqi and Polish defaults. The United States implies that these defaults occurred between 10 and 20 years ago.542 This is incorrect. The US General Accounting Office (“GAO”) reports that the losses in Iraq occurred over the period 1990-1997.543 (The United States makes no specific challenge to the $2 billion in Polish defaults.) Thus, defaults and losses did not occur as long ago as the United States suggests.
66. Moreover, the United States argues that the Panel should only look into the question whether “current” premium rates are adequate to cover the long-term operating costs and losses of the programmes.544 The United States relies on a “present tense” argument to exclude major defaults in Iraq and Poland that occurred in the recent past. Even if the Panel only looks to “current” premiums, item (j) calls for an analysis of “long-term” operating costs and losses.545 The United States apparently agrees, since it looks to the performance of the CCC programmes in such years as 1994 and 1995 (a time period even longer ago than part of the defaults in Iraq546) to claim that premium rates charged were adequate to meet costs,547
67. If the United States believes that it is only appropriate to look at current premiums, given the present tense of the term “are” in item (j), then the FCRA cost formula is useful. The FCRA cost formula measures the net present value “of the following cash flows: (i) payments by the Government . . . and (ii) payments to the Government” of guarantees at the time they are disbursed.548 In other words, it measures the amount CCC expects today to lose (or gain) on a guarantee cohort at the time the cohort is closed tomorrow. Even if this involves some estimates, the United States has noted that those estimates are acceptable.549 In fact, the US budget for fiscal year 2004 demonstrates that current premiums paid for guarantees disbursed in fiscal years 2002-2004 will generate losses worth hundreds of million of dollars.550 Thus, current premiums are inadequate to cover the long-term operating costs and losses of the CCC export credit guarantee programmes. These programmes constitute export subsidies.
Paragraphs 186-191 and Exhibits US-34 through US-37 68. Brazil has argued that since CCC export credit guarantees from the GSM 102, GSM 103 and SCGP programmes are unique financial instruments for agricultural commodity transactions that are not available on the commercial market – certainly not for terms longer than the marketing cycles of the eligible commodities – they confer “benefits” within the meaning of Article 1.1(b) of the SCM Agreement.551The United States asserts that “financing is available in the marketplace that is analogous to the export credit guarantee programmes” – namely, forfaiting.552 69. The United States’ assertion should be rejected. As discussed below, the two instruments are not “analogous,” and are, in fact, different.
70. Brazil begins with a very rough sketch of the role a forfait can play in a typical transaction involving agricultural commodities. In a typical transaction, an importer will issue a promissory note to an exporter for the agreed price. The exporter will generally demand that the note be backed by a guarantee (or an aval) from the importer’s bank and/or, as the United States points out in paragraph 187 of its 22 August Rebuttal Submission, by a guarantee from the importer’s government export credit agency.
71. A forfait comes into play because, while both the exporter and the importer want the transaction to occur, they have different interests. The exporter wants to get paid immediately on a cash basis, and the importer wants credit that it can repay on a deferred basis. Even with a guarantee from the importer’s bank or a government export credit agency, the exporter bears responsibility for collecting the receivables (in the absence of default). A forfaiter (which could be the exporter’s own bank) will step in and purchase the promissory note at a discount to face value, without recourse to the exporter.553 The exporter will receive payment immediately from the forfaiter. The forfait essentially enables the exporter to convert a credit sale into a cash sale.
72. A forfaiter will generally demand that the importer’s obligation is backed by a guarantee from a bank or the importer’s government export credit agency.554 Rather than substituting for a guarantee, therefore, guarantees and forfaiting are complementary instruments. For this reason alone, the US assertion that the two instruments are analogous is incorrect.
73. There are other differences between the two instruments. The importer realizes a tangible and extremely valuable benefit from a CCC guarantee; namely, the bank prices financing to the importer based on the credit rating of the United States, rather than the credit rating of the importer itself. Importantly, the CCC guarantee allows the importer to secure financing in the first place. As the regulations for the GSM and SCGP programmes state, the programmes operate in cases where banks “would be unwilling to provide financing without CCC’s guarantee.”555 Forfaiting helps an exporter accept deferred payment terms for the importer, but does not otherwise beneficially affect the price for the financing secured by the importer. Nor would a bank require that forfaiting be involved in a transaction as a prerequisite for it to provide financing to the importer.
74. As a further distinction between the two instruments, while there is a secondary forfaiting market,556 there is no secondary market for CCC guarantees.557 Purchasers in the secondary market for forfaiting instruments assume that forfaited promissory notes will yield more at maturity than the purchaser paid for them in the secondary market.558 Since no secondary market exists for CCC guarantees, apparently no such assumption can be made with respect to CCC guarantees (which itself reveals much about the quality of those guarantees).
75. Most importantly, the pricing for forfaiting instruments is substantially different than pricing for CCC guarantees. As noted above, a forfaiter purchases an exporter’s trade receivables at a discount to face value. The discount rate and associated commitment fees are driven by the risks involved – country risk, political risk, currency risk, entity risk (essentially, the risk of the guarantor), etc., and by the length of the underlying credit.559 76. Brazil has attached as Exhibit Bra-199 a list of indicative forfaiting rates that vary greatly from market to market.560 In contrast, the United States has confirmed that country risk “has no impact on the premiums payable” under the GSM 102, GSM 103 and SCGP programmes.561 Brazil provided the Panel with evidence documenting that GSM and SCGP fees were the same whether guarantees were for transactions with the Dominican Republic, Ghana, Japan, South Korea or Vietnam (among others).562
77. Moreover, the very lowest rate in the forfaiting rate list included in Exhibit Bra-199 is 1.6638 per cent (6-month tenor). The rates for GSM 102 and GSM 103 guarantees are prohibited by law from being greater than 1 per cent,563 and are currently (as they have been at least since 1994)564 no greater than 0.663 per cent for GSM 102 (36-month tenor)565 and 0.05 per cent for GSM 103 (120-month tenor).566
78. Furthermore, although the United States’ assertion that the tenor of forfaiting instruments can range from six months to 10 years is accurate, forfaiting instruments for agricultural commodities will not exceed tenors of 360 days, or in other words will not exceed a tenor “matching the typical period of consumption of most commodities.”567 This is consistent with Brazil’s statement that commercial financing for exports of agricultural goods that exceeds the marketing cycles of the agricultural good is not available on the marketplace.568 79. Under Article 10.3 of the Agreement on Agriculture, the United States bears the burden of demonstrating that no export subsidies have been granted in respect of quantities of agricultural commodities exported in excess of its reduction commitments.569 Although it is not its burden to do so, Brazil has demonstrated that CCC export credit guarantees are financial contributions that confer benefits and are contingent on export, within the meaning of Articles 1.1 and 3.1(a) of the SCM Agreement. With respect to “benefit,” CCC regulations concerning the GSM and SCGP programmes demonstrate that the programmes grant better-than-market terms per se.570 Brazil has also demonstrated that CCC export credit guarantees confer benefits per se since they are unique financial instruments for agricultural commodity transactions that are not available on the commercial market – and certainly not for terms longer than the marketing cycles of the eligible commodities.
80. The United States has not established that forfaiting is analogous to CCC export credit guarantees. Even if it had done so, and the market terms for forfaiting instruments could theoretically serve as a benchmark against which to judge whether CCC export credit guarantees confer “benefits,” the United States has not: (i) established the terms on which forfaiting is provided on the market; or, (ii) demonstrated that CCC export credit guarantees do not provide terms better than those provided for forfaiting instruments. The United States acknowledges, at paragraph 191 of its 22 August Rebuttal Submission, that it has not provided market terms for forfaiting instruments that could serve as a benchmark. Thus, the United States has not met its burden under Article 10.3 of the Agreement on Agriculture.
Brazil’s Comment on Question 67a posed by Panel to the United States 81. While Brazil obviously does not know how the United States will ultimately respond, Brazil offers the following information supporting Brazil’s calculations of the amounts provided to these four crops as “support to upland cotton.”
82. First, to the extent that the United States criticizes Brazil’s calculations made to determine the different per acre payments for direct payment and CCP crops in paragraph 42 of its Rebuttal Submission, Brazil notes that these calculations are confirmed by the Food Agricultural Policy Research Institute at the University of Missouri (FAPRI).571 As Brazil further notes that the FAPRI baseline itself and FAPRI analysis has often been influential in US policy formation process, including in analysis of the FSRI Act of 2002, for which FAPRI won the USDA’s highest honour.572
83. Second, FAPRI’s 2003 US Baseline is a long-run scenario projecting what would happen to various elements of US agriculture under the 2002 FSRI Act. In this analysis, FAPRI includes all of the different types of support provided by the 2002 FSRI Act into its projections of, inter alia, upland cotton planted acreage, production, exports, prices, revenue, costs, etc. In doing so, the FAPRI economists assume that, inter alia, upland cotton producers were holding upland cotton base acreage and receiving upland cotton CCP and direct payments.573 These CCP payments and direct payments are reflected in their analysis of “Gross Market Revenue” to upland cotton producers on page 79 of their report, which constitutes the sum of LDP (marketing loan), CCP revenue, and direct payments.574 84. In addition, FAPRI states that “US cotton producers do not benefit from the projected price increases. Higher prices are offset by lower payments from the loan programme and the CCP programme.”575 This reflects the FAPRI economists’ assumption that upland cotton producers receive upland cotton direct and CCP payments.