Figure 1. Cotton prices in Northern Europe (A-Index)
Source: USDA, 2002; USDA, 2001.
Note: The A-Index is the average of the five lowest prices of cotton in Northern European markets for middling 1 3/32 inch fiber length. For June and July 1995, there was no A-Index quotation; the dotted line represents a simple linear interpolation.
Figure 2. Short-run impact of lower cotton prices on the cumulative distribution of income
Figure 3. Long-run impact of a 40% reduction in cotton prices on the cumulative distribution of income
CANADA'S FURTHER THIRD PARTY SUBMISSION
3 October 2003
Canada’s systemic interest in this case lies in the interpretation of the provisions of Article 13 and Annex 2 of the Agreement on Agriculture, as they related to certain US domestic support measures. It also lies in the interpretation of the export subsidy provisions of both the Agreement on Agriculture and the SCM Agreement, as they related to US export credit guarantee programmes.
Regarding US domestic support measures, were the Panel to accept the evidence presented by Brazil, it would find that US PFC payments and direct payments do not satisfy the policy-specific criteria in paragraph 6 of Annex 2 of the Agreement on Agriculture. The Panel should also count US counter-cyclical payments going to US producers of upland cotton as “support to a specific commodity” under Article 13(b)(ii) of the Agreement.
Regarding US export credit guarantees, were the Panel to find that the programs provide export subsidies within the meaning of Article 1(e) of the Agreement on Agriculture, then it would also find that the United States has violated Articles 8 and 10.1 at the very least in respect of exports of upland cotton. In this respect, the Panel should confirm that neither the Agreement on Agriculture nor the SCM Agreement contain an exemption for any US export credit guarantee subsidy found to exist in this case.
Canada has no further views to provide to the Panel at this point in the proceedings.
FURTHER THIRD PARTY SUBMISSION
OF THE EUROPEAN COMMUNITIES
3 October 2003
TABLE OF CONTENTS
1. Introduction 57 2. The meaning of “significant” in Article 6.3 (c) of the SCM Agreement 57 3. Continuing effects of recurring subsidies 58 4. World Market Share in Article 6.3(d) 59 5. Threat of injury 59 6. Per se claims 62 1. Introduction 1. The European Communities (the “EC”) makes this submission because of its systemic interest in the correct interpretation of the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”), the Agreement on Agriculture (the “AA”) and the General Agreement on Tariffs and Trade 1994 (the “GATT”).
2. This submission provides the views of the EC with respect to Brazil’s further submission of 9 September 2003. Due to the short deadline imparted to third parties, this submission does not address the further submission made by United States on 30 September 2003. The EC intends to provide its comments on the US submission at the meeting with the Panel.
3. Many of the issues raised in Brazil’s further submission concern factual matters on which the EC is not in a position to comment. Accordingly, the EC will limit itself to provide its views with respect to a number of issues of legal interpretation to which it attaches particular importance. More specifically, the EC will argue in this submission that:
in assessing the “significance” of price depression or suppression for the purposes of Article 6.3 (c) of the SCM Agreement, only their impact on the producers concerned is relevant;
Brazil cannot complain about the continuing effects of recurring subsidies while expensing the full amount of such subsidies to the year in which they were granted;
the phrase “world market share” in Article 6.3(d) of the SCM Agreement includes also the market of the subsidising Member;
the mere fact that a subsidy is not subject to “pre-established limitations” is not sufficient for a finding of “threat of serious prejudice”;
Articles 5 and 6 of the SCM Agreement do not prohibit per se legislation that mandates subsidies that threaten serious prejudice “in certain circumstances”.
4. The EC reserves the right to address other issues raised by Brazil’s further submission at the meeting with the Panel.
2. The meaning of “significant” in Article 6.3 (c) of the SCM Agreement 5. Brazil argues that, in assessing the “significance” of price depression or suppression for the purposes of Article 6.3 (c), it is relevant to consider not only their impact on the producers concerned, but also on the Government of the complaining Member. Specifically, Brazil contends that
A developing country Government facing foreign reserve or fiscal problems may find the loss of foreign exchange or tax revenue from its producers to be significant even if the level of price suppression is relatively small. In this regard, the amount of actual and potential revenue losses suffered by a complaining Member as a result of price suppression may be evidence of the significance of the price suppression.4
6. The EC takes issue with this interpretation. As rightly argued by Brazil elsewhere in its submission5, the existence of serious prejudice must be presumed whenever it is established that the effect of the subsidy is to cause inter alia significant price depression or suppression, without it being necessary to show, as an additional and separate requirement, that such price depression or suppression causes a serious prejudice to the interest of the Member concerned. Brazil’s interpretation, however, amounts to reading such a separate requirement into the term “significant”.
7. In Indonesia – Autos, which is cited with approval by Brazil, the panel held that
Although the term ‘significant’ is not defined, the inclusion of this qualifier in Article 6.3(c) presumably was intended to ensure that margins of undercutting so small that they could not meaningfully affect suppliers of the imported product whose price was undercut are not considered to rise to serious prejudice …6
8. The above interpretation takes into account only the effects of price undercutting on the performance of the domestic producers of the complaining party, to the exclusion of any indirect effects on Government revenue. By the same token, where serious prejudice takes the form of price suppression or price depression, its significance should be evaluated only with respect to the producers concerned.
9. In any event, the EC rejects Brazil’s suggestion that the threshold for establishing the existence of serious prejudice should be lower when the complaining party is a developing country Member. Article 6.3 (c) is not a provision on Special and Differential Treatment. There is no basis for giving different meanings to the term “significant” depending on the identity of the parties to a dispute.
3. Continuing effects of recurring subsidies 10. Brazil alleges that the effects of the subsidies paid during Marketing Years (“MY”) 1999-2002 continue after they have been provided. More precisely, according to Brazil, by providing farmers with a significant source of income, these payments result in increased investment and production.
11. The EC finds it difficult to understand what point, if any, Brazil is trying to make. Brazil does not seem to be arguing that part of the benefit conferred by the subsidies granted during MY 1999-2002 should be allocated to subsequent years. That position would depart from the usual practice of most countervailing duty authorities, which is to consider that recurring subsidies must, in principle, be deemed “expensed” during the time period in which they are made. Similarly, the report of the Informal Group of Experts concerning Article 6.1(a) of the SCM Agreement recommended that subsidies should be expensed rather than allocated unless: (1) the purpose of the subsidy is linked to the purchase of fixed assets; (2) the subsidy is non-recurring or large; (3) the subsidy is oriented towards future production; (4) the subsidy consists of equity; or (5) is carried forward in the recipient’s accounting records.7
12. Elsewhere in its submission Brazil appears to have expensed the full amount of the subsidies paid during each marketing year to that marketing year, rather than allocate it over a number of marketing years. Brazil cannot have it both ways. If it considers that part of the benefit should be allocated to subsequent marketing years, it should justify that position in light of the criteria outlined above and provide the Panel with a detailed allocation. Moreover, Brazil should deduct the amounts allocated to subsequent years from the yearly amounts for the period 1999-2001, so as to avoid any “double counting” of benefits. Needless to say, this could make more difficult for Brazil to establish that the subsidies paid during MY 1999 – 2001 have caused serious prejudice during that period.
13. In any event, while Brazil claims that the subsidies continue to have effects after MY 1999-2001, the alleged continuing effects (increased investments and production) do not of themselves amount to “serious prejudice” within the meaning of Article 5. Brazil has not explained, let alone proved, how those effects translated into one of the categories of ”serious prejudice” described under Article 6.3 after 2001.