1. Brazil Has Failed to Demonstrate that Crop Insurance Payments Are “Specific”. The United States reiterates that the subsidy to any agricultural producer is the premium subsidy paid by the US Government, which is common to all commodities at a chosen coverage level. Thus, Brazil’s repetition that certain policies are not available to all commodities is in part true but wholly irrelevant: the particular policies offered to growers of different commodities are issued by private insurers but the subsidy by the US Government on the premiums remains the same. Crop insurance subsidies are available to the US agricultural sector as a whole. It is the position of the United States (reflected in domestic law) that such a widely available subsidy does not satisfy the specificity requirement of Article 2. Thus, pursuant to Article 1.2 of the Subsidies Agreement, US crop insurance payments are not “subject to the provisions of . . . Part III” of the Subsidies Agreement, including Articles 5 and 6 on serious prejudice.
2. Brazil Has Failed to Demonstrate that Challenged US Measures Caused the Decline in World Upland Cotton Prices Because It Simply Ignores Key Factors Behind Those Price Movements. Brazil has failed to make a prima facie case on its claims on the basis of the mere assertion that large US outlays during marketing years with low prevailing upland cotton prices necessarily establishes causation. Brazil has failed to explain to the Panel key factors that affected world cotton markets during the marketing year 1999 marketing year 2002 period. These factors and not US subsidies were the causes of the dramatic plunge in cotton prices experienced in recent years.
3. – Persistent weakness in world demand for cotton due to competing, low priced synthetic fibres and weak world economic growth. The production of competing, synthetic fibres exploded during the 1990’s, putting downward pressure on world cotton prices. Asian countries added more polyester production capacity between 1991 and 2001 than existed in the entire world in 1990. Asian polyester prices remained below world cotton prices from 1990 to 2001. By 2002, cotton lost the position as the world’s dominant fibre and slipped below polyester’s market share. Consumer purchases outside the United States added over 40 million bales to textile fibre consumption since 1990 but virtually the entire amount was claimed by polyester. Consumers outside the United States buy no more cotton today than they did in 1990.
4. In addition to the price pressure from synthetic production, the world economy grew more slowly since 1997 than any time for many years. Clothing is a semi durable good, and when income growth slows consumers cut back on current purchases, and postpone replacing clothing until incomes rise more rapidly. Cotton consumption can decline even while income growth remains positive. The 2001 2002 decline in world income occurred just as world cotton production was increasing because of good weather, severely pressuring world prices.
5. – Burgeoning US textile imports, reflecting the strong US dollar and declining US competitiveness in textile and apparel production, have fundamentally shifted the disposition of US cotton production from domestic mills to export markets. The United States has supported world cotton prices through its huge demand for cotton textiles and apparel. Imported textile and apparel products continue to displace US mill use of cotton fibre. From 1997 to 2002, US mill use of cotton dropped 32 per cent. For 2002, US cotton textile and apparel imports rose for the 14th consecutive year, while exports remained essentially unchanged for the fifth straight year. This huge trade deficit in textiles and clothing has fundamentally changed the pattern of how US grown cotton is used. As domestic mill use has fallen drastically, more US cotton has been available for use by foreign mills, which then comes back to the US in the form of cotton products.
6. – China, the world’s largest cotton producer and consumer, released 14 million bales of government stocks between 1999 and 2002, equalling as much as 7 per cent of world consumption in crop year 2000/01. China’s policies were strongly correlated to world cotton price movements through the late 1990’s and early 2000’s. Through the mid 1990’s the Chinese Government was concerned with maintaining farmers’ income and directed the state marketing organization to maintain cotton procurement prices at high levels, causing stocks to grow rapidly. At the beginning of the 1999/2000 marketing year, China announced a policy of auctioning cotton from these stockpiles, with the central government accepting the financial loss. China auctioned 11.6 million bales over August 1999 to July 2002 (3 million bales in 1999/2000, 6.5 million in 2000/01, and 2.1 million in 2001/02). Over the entire marketing year in 2000/01, China’s auctions equalled 7 per cent of world consumption that year.
7. – Factors Affecting US Cotton Production. Cotton planting decisions are driven by numerous factors, including the expected price of cotton, prices of competing crops, farm programme benefits, technological factors and input costs. Contrary to Brazil’s claims, US cotton producers have been responsive to world price movements and are not insulated from the world market. Changes in production technology can affect both the risk and the expected returns from cotton production. In recent years, the boll weevil eradication programmes and the introduction and adoption of genetically modified varieties of cotton have lowered production costs, increased yields, and increased net returns for US cotton production.638
8. Since 1994 there have only been 2 years when US harvested acres changed from one year to the next in a different fashion than growers in the rest of the world. Those 2 years, 1998 and 1999, are specific to severe drought in the United States. In 1998, US harvested area fell, largely due to disastrous conditions across much of Texas; in 1999, weather was more normal and US harvested acres increased by almost exactly the acres lost in the previous year.
9. In early calendar year 2000, the futures price for cotton had fallen from the previous year’s level while corn and soybean prices had risen on the year. US and world cotton growers reduced harvested acreage from the level in 1999 by virtually identical proportions. While cotton harvest futures prices again declined on the year from 2000 to 2001, soybean and corn harvest futures prices fell by a greater per cent. As a result, US and world cotton growers saw an increase in cotton harvested acres in 2001. In considering planting in 2002, growers saw soybean and corn harvest futures prices showing greater percentage increases than cotton. Thus, both US growers and growers in the rest of the world saw harvested acres of cotton decline from the previous year’s level.
10. Brazil Has Not Established a Prima Facie Case With Respect to US Decoupled Income Support Measures Because These Measures Have No More than Minimal Effects. With respect to US green box measures, namely direct payments under the 2002 Act and expired production flexibility contract payments under the 1996 Act, Annex 2 of the Agriculture Agreement makes clear that these payments have no, or at most minimal, trade distorting effects or effects on production. Under Article 21.1 of the Agriculture Agreement, the Subsidies Agreement applies “subject to” the Agriculture Agreement. Accordingly, Annex 2 makes it clear that US green box measures do not cause serious prejudice. Income payments that vary in amount with market prices, such as counter cyclical payments under the 2002 Act and expired market loss assistance payments, are also decoupled in the sense of not being linked to current production. Because (according to the economic literature on decoupled payments) the effect on production is negligible, these payments can have no “effect” for purposes of Subsidies Agreement Article 6.3 nor operate to increase exports under GATT 1994 Article XVI:3.
11. Finally, because no production of upland cotton (or any other crop) is necessary to receive these payments, it would be erroneous to attribute to “upland cotton” or “upland cotton producers” all decoupled payments made with respect to upland cotton base acreage. Those acres may be planted to alternative crops or may be growing no crops at all. Accordingly, there is no basis to include those payments in an analysis of whether “subsidies provided to US producers, users and/or exporters of upland cotton” have caused serious prejudice.
12. Brazil Has Failed to Demonstrate that Challenged US Measures Have Caused Serious Prejudice to Brazil’s Interests Within the Meaning of Article 5(c) and 6.3(c). – “Serious Prejudice . . . May Arise”: The introductory sentence of Article 6.3 establishes that serious prejudice “may arise” if “one or more” of four specific circumstances is found, indicating that serious prejudice need not arise even if they are found. As serious prejudice “may” arise if one or more of the four conditions under Article 6.3 are satisfied, Brazil must first show that at least one of those conditions is met. Second, if Brazil demonstrates one or more of the criteria in Article 6.3 is met, Brazil must then demonstrate “serious prejudice.” In this dispute, Brazil has not established that any prong of Article 6.3 is met.
13. – The “Effect of the Subsidy”: Brazil has not made a prima facie case that “the effect of the subsidy” was significant price suppression or depression. Brazil’s argument on causation fails because Brazil has simply not demonstrated the causal connection between the US measures and the price effects. Brazil has not even shown there is a necessary correlation between the measures and the effects it claims, let alone that there is a genuine and substantial link between the US measures and the effects claimed. Brazil has failed to separate and distinguish all the different effects from the various factors at play during the marketing year 1999 marketing year 2002 period and has erroneously attributed to the US measures the effects of these other causes.
14. – “Significant price suppression”. The Agreement does not define “significant”. The ordinary meaning of significant is “important, notable; consequential,” which suggests that the price suppression must reach a level at which it is important, notable, and consequential in order to be inconsistent with Article 6.3(c). The United States further notes that the term “significant” modifies “price suppression or depression”; therefore, it is the effect on prices that must be “significant” and not the direct effect on producers, as Brazil argues.
15. Under Brazil’s interpretation price suppression would be significant at a level of even 1 cent per pound because this could still “meaningfully affect” producers. Brazil’s interpretation, however, collapses the concept of “significant price suppression or depression” with the concept of “serious prejudice”. It would also greatly expand the effect of Article 6.3(c), which falls under Part III of the Subsidies Agreement on “Actionable Subsidies” rather than Part II on “Prohibited Subsidies”, to encompass any subsidy with any production and therefore price effect. Members agreed, however, that any theoretical price effect would not suffice to satisfy Article 6.3(c); they accomplished this by stating that the price suppression or depression had to be “significant” in order to create a situation in which serious prejudice may arise.
16. Brazil’s theory would also create two sets of subsidy rules: one for widely traded products, such as most agricultural products, and another for more differentiated products. The more widely traded a product is, the more any price effect could be deemed to “meaningfully affect” producers. There is no basis in the text of the Agreement for creating such a distinction. Where Members intended a particular rule to apply to a particular type of product – such as a “subsidized primary product or commodity” (Article 6.3(d)) – they said so explicitly.
17. – “In the Same Market”: Article 6.3(c) requires that the “significant price suppression [or] depression” that is the “effect of the subsidy” occur “in the same market”. The use of the same “in the same market” phrase as in the price undercutting portion of this Article suggests that the significant price suppression or depression must occur when “the subsidized product” is found “in the same market” as “a like product of another Member”. That is, “in the same market” is meant to require identification of a particular market in which price effects are alleged to have occurred so as to allow a comparison in that market. If a complaining party could merely assert price suppression or depression in the world market, the word “same” in the phrase “the same market” would be rendered inutile because the subsidized and non subsidized products could always be deemed to be in the same “world market”.
18. – Time Period for Demonstrating Causal Effects: The “appropriate representative period” for demonstrating present serious prejudice will depend on the nature of the challenged subsidies. Normally, the most recent period for which data are available will be the appropriate period. In the case of recurring subsidies such as those under the 1996 Act and the 2002 Act, moreover, a past subsidy no longer exists as of the time a new subsidy payment in respect of current production is made and can have no “effect” within the meaning of Article 6.3. As a result, the period for which Brazil must demonstrate present serious prejudice is marketing year 2002. None of the provisions cited by Brazil, moreover, say that the effect of a subsidy 1, 2, or 3 years ago is presently being felt. Thus, at a minimum, the effect of the subsidy must be demonstrated in each year and for each year in which Brazil has alleged effects.
19. Brazil Has Failed to Demonstrate that Challenged US Measures Have Caused Serious Prejudice to Brazil’s Interests Within the Meaning of Article 5(c) and 6.3(d) – "World Market Share": Contrary to Brazil’s interpretation, Article 6.3(d) does not use the phrase “world market for exports”; it uses the phrase “world market share . . . in a particular subsidized primary product or commodity”. This broad term would appear to encompass all consumption of upland cotton, including consumption by a country of its own cotton production. Context supports reading “world market share” as distinct from “world export share”. In fact, GATT 1994 Article XVI:3 uses the phrase “world export trade”, and Brazil interprets Article 6.3(d) and GATT 1994 Article XVI:3 both as applying to “world export trade”. Had Members intended that “world export trade” be the relevant concept to apply in Article 6.3(d), one would have expected use of that phrase. Because Brazil has misinterpreted “world market share”, and all of Brazil’s evidence goes to a comparison of the “world export share” of the United States, Brazil has failed to make a prima facie case.
20. – Appropriate Time Period for Showing Present Serious Prejudice: Brazil has limited its claim under Article 6.3(d) to “the increased US world market share for MY 2001”. Thus, there can be no finding that subsidies under the 2002 Act or marketing year 2002 subsidies presently cause serious prejudice. As the United States has previously noted, to demonstrate the “effect of the subsidy” it would normally be appropriate to look to the subsidy provided in the most recent year. Brazil has not explained why it challenges marketing year 2002 subsidies (in addition to 1999 2001) under Article 6.3(c) but only marketing year 2001 under Article 6.3(d). Brazil has stated that the 1996 Act introduced a new subsidy scheme; at a minimum, Brazil should demonstrate that in fact there is a “consistent trend” over a period when subsidies have been granted (1996 2001).
21. – Causation: “The Effect of the Subsidy”: Brazil has simply not demonstrated the causal connection between the US measures and the effects on world market share. As explained above, Brazil has failed to separate and distinguish other factors that drove prevailing upland cotton prices to historically low levels.
22. Brazil Has Failed to Demonstrate any Inconsistency with GATT 1994 Article XVI:3 – "More than Equitable Share: Brazil argues that in determining what is an "equitable" share, the Panel must look at what the US share of world export trade would have been in the absence of subsidies. Brazil cites to no textual basis for its approach, nor could it since the text does not contain one. There is nothing in Article XVI:3 that says that a Member is banned from using any subsidies, let alone that a Member is denied the ability to have any share in world markets if the Member employs subsidies. Any consideration of what is an “equitable” share needs to take into account the fact that Members are generally permitted to provide subsidies. However, any subsidy that has a production effect may increase exports; if so, according to Brazil, the resulting export share would be “inequitable”. This interpretation would turn Article XVI:3 into a prohibition on subsidies that potentially could increase exports. Rather than imposing a prohibition, Article XVI:3 states only that Members “should seek to avoid” export subsidies on primary products, with additional conditions if inequitable shares result.
23. In considering the difficulties inherent in applying the "more than equitable world market share" language, the United States recalls the discussion of the Tokyo Round Subsidies Code panel on Wheat Flour on the "more than equitable world market share" language. The panel’s enumeration of difficulties associated with this concept are the types of considerations that led to the negotiation of the Subsidies Agreement. Brazil now would have the Panel believe that these negotiations were unnecessary, that the disciplines it seeks were all in the language of Article XVI:3 all along. Brazil’s approach is in error and should be rejected.
24. – "Any Special Factors": Brazil considers that one “special factor” that may be affecting trade or that may have affected trade is the low level or even absence of domestic support in other supplying countries. Again, Brazil’s proposed rule would suggest that where no other Member were subsidizing (each because of its own sovereign choice not to use resources in that way), a Member would be prevented from subsidizing in any amount that results in increased exports. However, Article XVI does not contemplate a prohibition on agricultural subsidies, even on export subsidies: under Article XVI:3, Members “should seek to avoid” use of export subsidies on primary products. Therefore, “any special factors” should not be interpreted in a way that introduces a meaning that the provision itself avoids.
25. Brazil Has Failed to Demonstrate a Threat of Serious Prejudice: Brazil argues that there is no explicit standard for threat of serious prejudice in the Subsidies Agreement nor guidance in WTO reports. The United States considers that the first standard articulated by Brazil is incorrect. Brazil’s proposed rule would seemingly transform Articles 5(c) and 6 from actionable subsidy provisions into prohibited subsidy provisions. That is, Brazil’s approach would produce a threat determination wherever “subsidies by a large exporter have no effective production or export limitations”. There is no such per se threat rule in the Subsidies Agreement, however; a finding of serious prejudice requires a fact intensive demonstration.639
26. The United States believes the second standard proposed by Brazil is correct. To demonstrate a threat of serious prejudice a complaining party must show a clearly foreseen and imminent likelihood of future serious prejudice. The use of the elements of serious prejudice set out in Article 6.3 ensures that a complaining party come forward with sufficient credible evidence.640 27. – Threat of Serious Prejudice Via Price Suppression: In addition to the reasons just given, the United States notes that price developments over the past several months and expected price movements do not support a conclusion of a clearly foreseen and imminent likelihood of future serious prejudice. Brazil claims that “[b]ase[d] on MY 2002 prices, current prices in August 2003 and price levels projected by FAPRI’s baseline, it is likely that marketing loan and CCP payments will be made during MY2003 2007”. However, current market and futures prices (not reflected in Brazil’s submission) already indicate that the baseline projection of low prices is wrong.641 Thus, current prices and futures prices do not suggest any clearly foreseen and imminent likelihood of future serious prejudice.
28. Threat of Serious Prejudice Via Price Suppression: Brazil again reads “world market share” in Article 6.3(d) as the equivalent of “world export share”. Thus, Brazil ’s threat analysis is wrong for the same reason as its serious prejudice analysis, and Brazil has not established a prima facie case of threat of serious prejudice under Article 6.3(d).
29. GATT 1994 Articles XVI:1 and XVI:3. Brazil asserts that the 2002 Act and 2000 Agricultural Risk Protection Act threaten a high and inequitable share of world exports between MY2003 07. Brazil nowhere cites the text of GATT 1994 Article XVI:3 (or of the Subsidies Agreement) that would support the notion that there is a valid cause of action for “threat” of a “more than equitable share of world export trade”. In the absence of any text relating to Article XVI:3, Brazil’s claim of a “threat” of a “more than equitable share” must be rejected.
30. Brazil Has Failed to Demonstrate that Challenged US Measures Are Per Se Inconsistent with US WTO Obligations. Brazil argues that the marketing loan, counter cyclical, direct, and step 2 payments as well as the crop insurance subsidies are per se inconsistent with US WTO obligations because they threaten to cause serious prejudice at price levels that require the payment of marketing loan and CCP payments (that is, below 52 cents per pound). For all the reasons set out with respect to Brazil’s present serious prejudice claims and its threat of serious prejudice claims, Brazil’s argument is in error.
31. Brazil also argues that even at high price levels where only direct payments and crop insurance payments would be made, there is necessarily a threat of serious prejudice because these payments necessarily will keep marginal land in production because producers face no down side revenue risk. Brazil has presented no evidence on the extent of any alleged effect of these two subsidies in keeping marginal production on line at a time of high prices (as the market currently expects). Second, that some marginal lands may be kept in production cannot alone suffice to demonstrate a per se threat of serious prejudice. Otherwise, any subsidy with any production effect would be found to pose a threat, transforming actionable subsidies into prohibited subsidies. Thus, Brazil has not demonstrated that these subsidies per se present a real, clear, and imminent threat of serious prejudice.
32. Export Credit Guarantees – 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 negotiating history of Article 10.2 of the Agreement on Agriculture reveals the explicit deferral by the drafters of the application of export subsidy disciplines on export credit guarantees. In particular, the plain difference between the language of the Draft Final Act and that of Article 10.2 shows that the negotiators specifically opted not to impose the disciplines that Brazil now seeks to impose through litigation. The earlier version was an unambiguous prohibition, unless permitted under internationally agreed disciplines. The latter – and current – version imposes no such prohibition. It only requires Members to work toward the development of yet to be agreed disciplines, and only upon agreement on such disciplines are export credit guarantee programmes required to adhere to them.
33. Brazil’s interpretation of Article 10.2 would require export credit guarantees in agriculture to be subject to more 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. Brazil’s argument would require an interpretation that the negotiators viewed export credits, credit guarantees, and insurance programmes as more malign than the recognized export subsidies themselves. This implausible conclusion is nowhere manifest in the text of the negotiating history.
34. To the contrary, the text indicates that export credits, credit guarantees, and insurance programmes were not considered export subsidies, because they were explicitly excluded from Article 9.1 of the Agreement on Agriculture, despite their inclusion in negotiating documents culminating in the current text. Brazil argues that the same is true of “[e]xport performance related taxation concessions or incentives other than the remission of indirect taxes”, and yet the Appellate Body has ruled the FSC and ETI measures are subject to the export subsidy disciplines of the Agreement on Agriculture. With respect to those measures, however, no provision like Article 10.2 exists. Export credits, credit guarantees, and insurance programmes were not only removed from the illustrative list evident in Article 9.1 but received the explicit commitment to negotiate disciplines set forth in Article 10.2.
35. – The Application of Government-Wide Accounting Rules under the Federal Credit Reform Act Indicates that the Export Credit Guarantee Programmes are Covering Long-Term Operating Costs and Losses: The United States has demonstrated that over time, as indicated by the government wide accounting rules mandated under the Credit Reform Act, with respect to those years for which nearly complete experiential data is available, programme revenues exceed operating costs and losses. In those years for which the accounting books are nearest to closing (1994 and 1995), the operation of the programme shows a profit. Similarly, current data for 1992, 1993, 1996, and 1999 also indicate a profit. All of this data is on a cohort specific basis, a methodology with which Brazil agrees.642
36. The United States has repeatedly noted that CCC has complete 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. In addition, the authorizing statute prohibits CCC from making credit guarantees available in connection with sales of agricultural commodities to any country that the Secretary of Agriculture determines cannot adequately service the debt associated with such sale. Third, availability of export credit guarantees is governed by allocations in effect at any one time for specific commodities and specific destinations. Fourth, the ability of CCC to issue guarantees is constrained by the apportionment process of the President’s Office of Management and Budget.
37. – Forfaiting is Analogous to the CCC Export Credit Guarantee Programmes: Brazil’s argument that forfaiting transactions and CCC export credit guarantee transactions are dissimilar illustrates the comparability of the financing available in these transactions. As Brazil points out, in both cases “the exporter wants to get paid immediately on a cash basis, and the importer wants credit that it can repay on a deferred basis”. From the importer’s perspective, the export credit guarantee transactions are less favourable than forfaiting, because although the importer’s bank can repay its obligation over time, the CCC has no control over the terms of the arrangement between the importer and its bank, which may not extend the deferred payment terms to the importer. In forfaiting, the importer “can repay on a deferred basis”. In both cases, the transaction (in Brazil’s words) “enables the exporter to convert a credit sale into a cash sale.” Brazil recognizes that as the complaining party it carries the burden of demonstrating that a “benefit” is conferred with respect to the GSM 102 programme. Brazil has failed to carry this burden.
38. The Step 2 Programme Does Not Violate Article 3.1(b) of the Subsidies Agreement or Article III:4 of GATT 1994: Brazil has rotundly stated: “There are no circumstances in which a ‘local content subsidy’ would comply with Article 3.1(b)”. In effect, Brazil’s argument would delete the application of the introductory clause of Article 3 to Article 3.1(b) entirely. But the phrase “except as provided in the Agreement on Agriculture” by its terms applies to both export subsidies under Article 3.1(a) and local content subsidies under Article 3.1(b).
39. Brazil would require the Step 2 programme to permit payments for the use of all cotton, whether domestic or imported, but only payments for domestic cotton would be included in the AMS. Such a programme would no longer be in favour of domestic producers. The Step 2 programme provides a benefit to producers because it serves to maintain the price competitiveness of US cotton vis a vis foreign cotton through a payment to capture some differential between prevailing foreign and domestic cotton prices. Brazil’s hypothetical programme would cause the benefit to US producers to evaporate. Rather than a subsidy “in favour of agricultural producers”, the programme would become a simple input subsidy in favour of textile manufacturers outside the coverage of the Agreement on Agriculture altogether. Brazil’s interpretation would render Paragraph 3 of Annex 7 of the Agreement on Agriculture inutile.
40. Brazil argues that since the Peace Clause provisions for domestic subsidies do not reference Article 3, the Agreement on Agriculture envisioned that local content subsidies would be prohibited. Brazil’s conclusion does not necessarily follow from the structure of the text. Indeed, a contrary conclusion is more appropriate. Article 13(b) does not refer to Subsidies Agreement Article 3 because the substantive obligation of Article 3.1(b) does not apply in the case of domestic content subsidies in favour of agricultural producers. Article 13(b) applies to “domestic support measures that conform fully to the provisions of Article 6 of this Agreement”. The character of the domestic subsidy is not relevant to the disciplines. The Agriculture Agreement never defines “domestic support”, which is permitted in any form so long as the Member adheres to its reduction commitments.
SECOND WRITTEN THIRD-PARTY SUBMISSION
3 October 2003
TABLE OF CONTENTS
I. INTRODUCtION 17
II. IMPACT OF THE uS SUBSIDIES ON THE WORLD COTTON market SITUATION 18
III.4 Threat of Serious Prejudice: Article 6.3(c) and (d) 25
IV. CONCLUSION 26
1.Argentina thanks the Panel for the renewed opportunity to present its views as a third party to these proceedings.
2.Argentina reaffirms the arguments put forward in its written Third-Party Submission and at the meeting of the Panel with the third parties, of 15 and 24 July respectively. It accordingly reiterates its position that the United States has no basis for claiming protection under Article 13 of the Agreement on Agriculture (AoA) and that the US subsidies are therefore actionable under Article XVI of the GATT 1994 and Articles 3, 5 and 6 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Argentina further reiterates that the US cotton export subsidies are inconsistent with Articles 3.3, 8 and 10.1 of the AoA and constitute prohibited subsidies within the meaning of Article 3.1(a) and (b) and 3.2 of the SCM Agreement.
3.Argentina will now address the claims put forward by Brazil in its recent Further Submission dated 9 September, regarding the inconsistency of the US cotton subsidies643 with Articles 5(c) and 6.3(c) and (d) of the SCM Agreement to the extent that, in the case of the subsidies provided in marketing years (MY) 1999-2002, they cause serious prejudice to the interests of other Members, including Argentina. Argentina further proposes to argue that such subsidies threaten to cause serious prejudice644 in MY 2003-2007.
4.Given the little time available between the receipt on 30 September of the responding party submission of the United States and the date fixed for this third-party submission, Argentina will comment on the US submission at the meeting of the Panel with the parties and third parties scheduled on 8 October next.
II. IMPACT OF THE US SUBSIDIES ON THE WORLD COTTON MARKET SITUATION 5.In the first line of the Introduction to its Further Submission of 9 September, Brazil points out that this is a case involving basic economic principles of supply and demand. Indeed, according to the basic principles of a market economy, in an open market prices would follow the costs of the more efficient producers. Thus, higher-cost (i.e. less efficient) producers are gradually compelled to reduce production. In the world cotton market, however, these principles are turned on their head: many highly efficient global producers have been cutting production, while the less efficient US producers are insulated from changes in market prices. Worse still, there is an inverse relationship between the world price of cotton and US production.
6.In the words of US Senator Fred Thompson,
"These policies defy logic and they defy the most basic laws of economics. The result is that farmers know that they are guaranteed to receive a certain price regardless of market conditions, so they ignore market signals and overproduce. The overproduction further depresses commodity prices, leading to the need for ever increasing government subsidies".645
7.Argentina already emphasized this point in the consultations held in December of last year when it addressed the following questions, inter alia, to the United States:
Could the US explain the reasons behind the fact that in 2001 -fifth year of falling prices- US cotton producers did obtain a record harvest of 20.3 million tons -an increase of 42 per cent compared to 1998- and that the cotton planted area did increase by 6 per cent during the same period? Why does the USDA estimate a 10 per cent drop in the world production for 2002 -reflecting the impact of world prices in investment-, and at the same time estimates for this year another record harvest in the U.S. -the fourth biggest ever recorded-?
Could the US please explain the reasons for the increase in the volume of US exports from 946,000 tons in 1998 to 1.8 million tons in 2001, while there is a drop in the international prices?
According to international standards, the US is not a low-cost producer646. Additionally, US productivity levels are lower than those of other exporting countries647. However, while international prices fell about 54 per cent since the mid-1990s, the US did expand its cotton area and did increase the production: Could the US please explain the lack of correlation between world price for cotton and US production?
8.At the time, the United States' only response to Argentina's questions was that production was affected by a multiplicity of factors, including the development of fibres, biotechnology, demand, quality, technical progress, the price of inputs, and so forth, without in any way explaining how it could achieve such expansion amidst such a spectacular fall in international cotton prices and high domestic production costs.
9.In this respect, Argentina has already extensively discussed the impact of the decline in international cotton prices on its own cotton economy. As already mentioned, since 1997/98 slumping international prices and increased US government support have consistently driven cotton producer prices down, which in turn has entailed ongoing reductions in cultivated acreage and production.648
10.As Argentina stated at the 61st Plenary Meeting of the International Cotton Advisory Committee649 (ICAC), planted and harvested acreage in MY 2001/02 plummeted to its lowest level since MY 1933/34 – that is, the lowest in the past 68 years – as a result of the continuing fall in international prices.
11.Argentina believes that without the subsidies granted by the United States to its cotton sector, U.S. cultivated acreage and production would diminish, as would US exports, and that there would be an ensuing rise in international prices.
12.Argentina further believes that if the United States – being one of the world's leading suppliers – had not increased its world market share as a result of the subsidies, the international price of cotton would have been higher, and hence third-country producers, including in Argentina, would not have been so adversely affected by artificially depressed prices.
13.The following table shows the steady increase in US cotton exports since 1995, whereas Argentina's cotton exports have been shrinking in a general context of declining world cotton prices, as discussed in paragraphs 23 to 25 below.
(in 1,000 metric tons)
(in 1,000 metric tons)
Source: ICAC and Instituto Nacional de Estadística y Censos (INDEC) (National Institute of Statistics and Censuses).
III. INCONSISTENCY WITH ARTICLES 5(C) AND 6.3(C) AND (D) OF THE SCM AGREEMENT III.1 ARTICLE 5(C) OF THE SCM AGREEMENT
14.Argentina contends that the United States has failed to meet its obligations under Article 5(c) of the SCM Agreement, which stipulates that "[n]o Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.: ... serious prejudice to the interests of another Member...".
15.In fact Argentina contends that through the granting of subsidies – understood in the sense of paragraphs 1 and 2 of Article 1 of the SCM Agreement650 – the United States has caused and is threatening to cause serious prejudice to the interests of other Members, including Argentina.
III.2 ARTICLE 6.3(C) OF THE SCM AGREEMENT
16.Article 6.3(c) establishes that "[s]erious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where... the effect of the subsidy is a significant... price suppression, price depression...".
17.Thus, the existence and threat of serious prejudice to the interests of other Members – including Argentina – is based on the fact that, as established in Article 6.3(c) of the SCM Agreement, the effect of the subsidies provided by the United States to its cotton sector is and will be significant suppression and depression of international cotton prices.
18.Argentina fully concurs with Brazil that the sheer magnitude and percentage of U.S. cotton subsidization suggests a de facto presumption that the cotton subsidies are the decisive factor for the high levels of US production and exports as well as the low international cotton prices.651 Argentina emphasizes that such was precisely the presumption implicit in its questions to the United States during the consultations. (See paragraphs 7 and 8 above.)
19.Argentina also agrees that there is a strong temporal link between the increase in the US subsidies over the MY 1999-2002 period and the significant suppression and depression of international cotton prices during that period.652
20.Argentina believes that but for the US subsidies international cotton prices would have been higher in MY 1999-2002. By stimulating US cotton production653 and exports, the subsidies drove international prices down through excess, low-priced US supply – not in fact generated by efficient low-cost production but precisely thanks to the distorting effect of the subsidies.
21.It should be noted in this respect that Argentina (like or perhaps to an even greater extent than Brazil) is a "price-taker" in the world cotton market, which is heavily influenced by the enormous US subsidies that generate a growing world supply.
22.It should also be emphasized that the price movements of US, Cotlook "A" Index and third country (e.g. Brazilian and Argentine) market prices are directly interconnected. US – as indeed Brazilian – cotton forms part of Cotlook's "A" Index "basket". Likewise, US – as indeed Brazilian and Argentine – cotton forms part of Cotlook's "B" Index "basket".654 Moreover, US, Brazilian and Argentine cotton are varieties of the same species, namely Gossypium hirsutum.
23.As in the Brazilian market, domestic price quotes for cotton have suffered a significant downturn.
24.The table below shows the direct relationship between the decline in the "A" Index world price of cotton and the drop in the domestic price quotes for cotton issued by the Cámara Algodonera Argentina (CAA) for the MY 1995/96-2001/02 period (in US cents/lb):
CAA Price Quote**
* CIF Northern European ports
** FREE MILL, grade C 1/2
25.The following chart clearly shows the trends in the "A" Index world price of cotton and the domestic price quotes for cotton in recent years:
26.The similarity in the trends in world prices and domestic price quotes for cotton further supports Brazil's point655 that the US subsidies have a suppressing and depressing effect on international cotton prices. In other words, in the absence of US subsidies that generate excess global supply, international cotton prices would have been higher, as would the domestic price quotes for cotton in Argentina, which are entirely influenced by the former.
27.To an even greater extent than Brazil because of the smaller scale of its cotton economy, Argentina is basically a "price-taker" in the international cotton market, unlike the United States, which, given the size and global impact of the US cotton market and its 41.6 per cent world market share, is the international market "price-setter" par excellence.
28.In concrete terms, the amount of the US cotton subsidies and the scale of US production and exports are decisive when it comes to determining the extent to which the subsidies impact the fixing of both international and third market prices.
29.As economic theory would suggest and Brazil points out, increased supplies of US cotton in the world market tend to lower international prices since demand remains relatively inelastic.656
30.The chart below illustrates the relationship between US cotton exports and the international price of cotton:
31.According to a study carried out by the Brazilian National Cotton Exporters' Association (ANEA),657 the impact of the US subsidies is one of the reasons why cotton production in Argentina has dropped by more than 60 per cent.
32.The study reinforces Brazil's view that an increase in the world price of cotton would enable least-developed and developing countries such as Argentina, Brazil, Benin, Burkina Faso and Chad, inter alia, to recover the historically competitive position they enjoyed in the international market.
33.As Argentina indicated previously, the present collapse of the Argentine cotton sector is reflected in the extremely high level of indebtedness of producers, estimated at US$600 million and equivalent to twice the size of agricultural GDP of Chaco Province, the country's largest cotton producing region, which accounts for between 60 and 65 per cent of domestic cotton production.658
34.As regards the effects of the US subsidies on the international price of cotton, Argentina considers that the number and quality of the empirical and econometric analyses presented by Brazil, which were carried out by both international organizations and various prestigious US economic research institutions such as the USDA, provide irrefutable evidence of the collective and individual effects of each subsidy programme on the price of cotton.
35.Argentina agrees with the conclusions reached by various studies presented by Brazil in its Further Submission659and repeats that an increase in the world price of cotton would enable countries such as Brazil and Argentina to recover their competitive position in the world cotton market.
36.Over and above any endorsement that may be given to the conclusions of any one of those studies (and each study's estimate of the price effect of the subsidies), Argentina emphasizes Brazil's point660 that the suppressing and depressing effect on international cotton prices is significant, even if international prices were to decrease by only 1 cent per pound, for even such a level of decline implies highly prejudicial consequences for the cotton economies of many countries, including Argentina.
III.3 ARTICLE 6.3(D) OF THE SCM AGREEMENT
37.The existence and threat of serious prejudice to the interests of other Members, including Argentina, is also based on the following provision of the SCM Agreement:
Article 6.3"Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply:
(d) the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted."
38.As regards the serious prejudice claim, Argentina proposes on the one hand to refer to the U.S. levels of domestic support for cotton, as detailed at paragraph 64 of Argentina's first Third-Party Submission of 15 July 2003. Thus, the US budgetary outlays for support for the cotton sector in marketing years 1999 to 2002 were US$3.445 million, 2.311 million, 4.093 million and 3.113 million respectively, according to data supplied by the USDA.661
39.Such being the US levels of domestic support for cotton, Argentina will now give the US level of cotton exports over that same period, in order to demonstrate that the effect of the subsidies has been to increase the US world export market share for cotton.
40.The US level of cotton exports in recent years – according to data drawn from a USDA report other than the documents on which Brazil based its Article 6.3(d) claim662 – is as follows:
(in 1,000 metric tons)
US WORLD SHARE
41.In chart form, the US share of world cotton exports is as follows:
WORLD AND US COTTON EXPORTS (in 1,000 metric tons)
42.Argentina thus contends that there has been an increase in the world market share of the United States as compared to the average share it had during the previous period of three years and that this increase has followed a consistent trend over a period when the subsidies have been granted, since the average world market share of the United States was 22.73 per cent between 1998/99 and 2000/01 and 37.87 per cent in MY 2001/02, recording a more than 15 percentage point increase over the average share during the immediately preceding three-year period.
43.In conclusion, Argentina asserts that, in the absence of subsidies, US cotton production would naturally have been lower than that actually recorded and consequently the volume of US exports and ultimately the impact of the US world market share would also have been smaller.
III.4 THREAT OF SERIOUS PREJUDICE: ARTICLE 6.3(C) AND (D)
44.Having established the existing serious prejudice caused by the US cotton subsidies, Argentina agrees with Brazil that the threat of serious prejudice is clearly foreseeable and imminent because of the effects of the even larger subsidies provided under US legislation for the MY 2003 2007 period.
45.As discussed in detail by Brazil,663 the marketing loan payments, crop insurance subsidies, CCP, direct payments and Step 2 Payments programmes are mandatory in terms of the US budget for the MY 2003-2007 period, with no limitations on the volume of production and exports or on budgetary expenditure for cotton.
46.By way of example that confirms the above, and subsequently to Brazil's Further Submission, the USDA announced on 17 September 2003 that it would begin issuing counter-cyclical payments for final 2002-crop cotton.664 The counter-cyclical payment rate for cotton is U$S303.09/ton. This is the amount by which the target price (U$S1,596.1/ton665) exceeds the effective price (the national average market price producers received or the loan rate – whichever is higher).
As can be seen from the table below, these payments represent a major portion of the price.
Current price (US$/t)
Counter-cyclical payment rate (US$/t)
Percentage (counter-cyclical payments)
47.Counter-cyclical payments for 2002-crop cotton are at their maximum levels because of this season's low market prices. In other words, the reason why counter-cyclical payments are so high is because this MY's prices are very low. The fact that the target price is maintained regardless of market price fluctuations confirms Argentina's point that US producers are insulated from such changes in market prices (see paragraph 5 above).
48.Argentina contends that this guaranteed flow of subsidies will undoubtedly lead to a higher level of US cotton production and exports. This will inevitably result in price suppression and depression as well as an increasing and inequitable US world market share for cotton, thus creating a source of permanent uncertainty that confirms the threat of serious prejudice generated by the subsidies.
49.Moreover, Argentina also agrees with Brazil666 that the link between the US cotton subsidies and the threat of significant price suppression and depression and of an increase in the US world market share for cotton stems from the fact that that the future subsidies will be as necessary as the current ones for U.S. producers to bridge the gap between market prices and their total production costs. This will enable U.S. producers to continue competing with more efficient third-country producers, especially considering that the USDA forecasts an increase in total production costs.667