Initial briefs of parties and third parties


World Market Share in Article 6.3(d)



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4. World Market Share in Article 6.3(d)
14. Brazil contends that the phrase “world market share” in Article 6.3(d) of the SCM Agreement means the “share of world market for exports”.8 The EC sees no basis for this proposition. The ordinary meaning of “world market” is the sum of all the geographical markets for the product concerned, including also the domestic market of the subsidising Member.
15. This reading is supported by the context. As evidenced by paragraph (a) of Article 6.3, the notion of “serious prejudice” may include also the prejudice suffered in the market of the subsidising Member. There is no reason, therefore, why the effects of a subsidy in that market should be excluded from the analysis under paragraph (d).

16. The phrase “world market share” may be contrasted with the phrase “share of world export trade”, which is used in Article XVI:3 of the GATT. Surely, if the drafters of Article 6.3(d) had meant the “share of world market for exports”, as argued by Brazil, they would have used the same terms as in Article XVI:3. Moreover, in the context of Article XVI:3, it makes perfect sense to use as a benchmark the “share of the world market for exports” because that provision is concerned exclusively with export subsidies, which have no direct effect on the domestic market of the subsidising Member. In contrast, the disciplines on “serious prejudice” contained in Articles 5 and 6 of the SCM Agreement apply equally to both export and domestic subsidies and, in practice, are meant to address primarily the effects of the latter, since export subsides are prohibited by Article 3 (except where provided in conformity with the Agreement on Agriculture or Article 27 of the SCM Agreement).

5. Threat of injury
17. Brazil sets forth two legal standards in order to analyse the existence of threat of serious prejudice. According to the first standard, there is threat of serious prejudice whenever “the legislation and practice of granting subsidies has no effective limits in terms of the volume of exports or domestic subsidies production eligible to receive subsidies”.9 Brazil contends that this standard can be “distilled” from the two GATT panel reports in EC – Sugar and from the Appellate Body report in US – FSC.10
18. For the reasons explained below, the EC considers that, while the fact that a subsidy is not subject to any “pre-established limitations” is certainly a relevant factor in considering the existence of threat of serious prejudice, it is not necessarily dispositive.
19. The two GATT reports in EC – Sugar are of questionable authority on this point. Neither of the panels made any attempt to provide a generally applicable interpretation of the notion of “threat of serious prejudice”. The findings cited by Brazil are just bare assertions, without any supporting reasoning. Furthermore, other passages of the reports indicate that both panels took the view that the unlimited availability of subsidies could not be, of itself, a cause of serious prejudice. Thus, the panel in EC – Sugar (Australia) noted that

The Panel felt that since the Community sugar exporters were leading the world market for white sugar, traditionally covering more than half of the world market for refined sugar, the availability of exportable Community surpluses of sugar combined with the possibility of non-limited amounts available to cover export refunds, may well have had a depressing effect on world market prices for both white and raw sugar.11

Similarly, the panel in EC – Sugar (Brazil) observed that

The Panel concluded that in view of the Community sugar made available for export with maximum refunds and the non-limited funds available to finance export refunds, the Community system of granting export refunds on sugar had been applied in a manner which in the particular situation prevailing in 1978 and 1979contributed to depress sugar prices in the world market, and that this constitutes a serious prejudice to Brazilian interests, in terms of Article XVI:1.12

20. The above passages suggest that both panels considered that the unlimited availability of the EC subsides was a cause of serious prejudice only because, in conjunction with the availability of supplies of sugar in the EC and with the “particular situation” prevailing during the years 1978 and 1979, it had a depressing effect on prices. It follows that, unless the same or similar circumstances were also present or imminent in this case, the mere availability of subsidies could not be considered to pose, as such, a threat of serious prejudice.

21. Brazil’s arguments based on US – FSC are also without merit. Unlike Articles 5 and 6 of the SCM Agreement, Article 10.1 of the Agreement on Agriculture is not subject to a “trade effects” test. It prohibits any export subsidies not covered by Article 9, which exceed, or threaten to exceed, a Member’s reduction commitments (in terms of budgetary outlays or exported volumes), regardless of the trade effects of the subsidy. In contrast, Articles 5 and 6 do not stipulate any limitations on the volume or value of subsidies. Rather, they prohibit the granting of subsidies in so far as they have certain “adverse effects” for the interests of another Member. Whether or not a subsidy has such effects will depend not only on the amount of the subsidy or the volume of subsided goods but also on other circumstances. For that reason, the mere fact that a subsidy is not subject to “pre-established limitations” is not a sufficient reason to conclude that it threatens to cause serious prejudice.

22. Brazil appears to agree with the view that the elements of a threat of serious prejudice injury are the same as those of a serious prejudice case, the only difference between the two being that “in a serious prejudice case, all the elements already exist, whereas in a threat of serious prejudice case, all of the elements need not have come to pass.”13 Yet that view cannot be reconciled with Brazil’s first standard. Article 6 of the SCM Agreement makes it clear that the existence of “serious prejudice” cannot be established by looking only at the value of the subsidy (with the exception of the no-longer operational presumption in Article 6.1 (a)) or to the absolute volume of subsidised goods (as opposed to their market share). Therefore, a determination of threat of serious prejudice cannot be based on those factors alone either.
23. The EC considers that Article 15.7 of the SCM Agreement provides relevant context for the interpretation of the notion of “threat of serious prejudice”. Both “injury to the domestic industry” and “serious prejudice” are “adverse effects” within the meaning of Article 5. There is no good reason why the threshold for establishing the existence of “threat of injury” should be higher than the threshold for establishing the existence of “threat of serious prejudice”. The EC is of the view, therefore, that the requirements set out in Article 15.7 of the SCM Agreement must be deemed implicit in the notion of “threat of serious prejudice”. Accordingly, a determination of threat of serious prejudice, like a determination of injury, must “be based on facts and not merely on allegation, conjecture or remote possibility”. Also, the relevant “changes in circumstances” must be “clearly foreseen and imminent”.

24. As recalled by Brazil, Article 15.7(i) of the SCM Agreement provides that the “nature of the subsidy or subsidies in question and the trade effects likely to arise therefrom” is one of the factors that should be considered for the purposes of a threat of injury determination.14 The EC agrees that this is also one of the factors that should be considered for the purposes of a determination of threat of serious prejudice. But it is not the only relevant factor. Brazil glosses over the last sentence of Article 15.7, which provides that no one of the factors listed in that provision “can necessarily give guidance”. Rather, “the totality of the factors considered must lead to the conclusion that further subsidised exports are imminent and that, unless protective action is taken, material injury would occur”. This confirms that, while the absence of “pre-established limitations” is a relevant factor, it is not necessarily dispositive.

25. Brazil further asserts that the other factors listed in Article 15.7 “are not directly relevant to a threat of serious prejudice case because they address the situation of imports that would harm the domestic industry in the country of importation.”15 This is, of course, correct. Nonetheless, Article 15.7 suggests that analogous factors may be relevant for a determination of serious prejudice. For example, the following factors could be relevant for establishing the existence of serious prejudice in an export market:


  • a significant rate of increase of subsidised exports to the export market;




  • sufficiently freely disposable, or an imminent, substantial increase in, capacity of the exporter indicating the likelihood of substantially increased subsidised exports, taking into account the availability of other export markets to absorb any additional exports;




  • whether subsidised exports are entering into the export market at prices that will have a significant depressing or suppressing effect in prices, and would likely increase demand for further imports; and




  • inventories of the product investigated.

26. In sum, the EC is of the view that, while the fact that a subsidy is not subject to any “pre-established limitations” as regards the value of the subsidies or the volume of subsidised goods is a relevant factor in order to establish the existence of threat of serious prejudice, it is not necessarily dispositive. Other factors, including in particular factors analogous to those listed in Article 15.7 (ii)-(v) of the SCM Agreement, may also be relevant and should be examined as well.

6. Per se claims

27. Brazil claims that the US legislation conferring the subsidies at issue in this case is inconsistent per se with Article 5(c) of the SCM Agreement and Article XVI:3 of the GATT because it mandates the payment of subsidies that will necessarily threaten serious prejudice in certain circumstances. This claim is based on the assumption that
It is established under WTO law that a Member can challenge measures of another Member on a per se basis when those measures mandate, in certain circumstances, a violation of its WTO obligations.16

28. The above proposition, however, is nowhere stated in the WTO Agreement and, as noted already in its first submission17, the EC disputes its validity. True, some panels have asserted this position on the basis of an erroneous interpretation of the panel report in US - Superfund. Other panels, however, have taken a contrary, or at least more qualified view.18 In particular, the panel in US – Section 301 observed that

we believe that resolving the dispute as to which type of legislation, in abstract, is capable of violating WTO obligations is not germane to the resolution of the type of claims before us. In our view the appropriate method in cases such as this is to examine with care the nature of the WTO obligation at issue and to evaluate the Measure in question in the light of such examination. The question is then whether, on the correct interpretation of the specific WTO obligation at issue, only mandatory or also discretionary national laws are prohibited. We do not accept the legal logic that there has to be one fast and hard rule covering all domestic legislation. After all, is it so implausible that the framers of the WTO Agreement, in their wisdom, would have crafted some obligations which would render illegal even discretionary legislation and crafted other obligations prohibiting only mandatory legislation? Whether or not Section 304 violates Article 23 depends, thus, first and foremost on the precise obligations contained in Article 23.19

29. The Appellate Body has not pronounced itself yet clearly on this issue. Thus, in US – 1916 Act, which is sometimes cited erroneously as an endorsement of the principle invoked by Brazil, the Appellate Body noted that

… the 1916 Act is clearly not discretionary legislation, as that term has been understood for purposes of distinguishing between mandatory and discretionary legislation. Therefore, we do not find it necessary to consider, in these cases, whether Article 18.4, or any other provision of the Anti-Dumping Agreement, has supplanted or modified the distinction between mandatory and discretionary legislation.20

30. The Appellate Body was even more cautious in a subsequent case, US – Lead and Bismuth II, where it noted that


We are not, by implication, precluding the possibility that a Member could violate its WTO obligations by enacting legislation granting discretion to its authorities to act in violation of its WTO obligation. We make no finding in this respect.21

31. The EC agrees with the panel in US – Section 301 that whether or not discretionary legislation may be subject to challenge depends on the specific obligations imposed by each provision of the WTO Agreement. Thus, for example, it is arguable that Article XI:1 of the GATT prohibits not only mandatory legislation, but also legislation which authorises expressly the executive branch to apply an import restriction under well specified circumstances, because such authorisation, of itself, may have a chilling effect on imports.

32. For the same reasons, it would be mistaken to assume, as Brazil does, that legislation which mandates action that would result in a violation of a WTO provision in certain circumstances is necessarily inconsistent with that provision. As illustrated by the present case, this notion would have absurd and unacceptable results when applied to WTO provisions which, like Article 5(c) of the SCM Agreement and Article XVI:3 of the GATT, incorporate a “trade effects” test. The EC considers that, once again, whether or not legislation that mandates a violation in certain circumstances can be challenged per se will depend on the specific obligations impose by the WTO provision at issue.
33. It is often overlooked that in US– Superfund the panel justified its finding that the tax legislation at issue could be challenged, even though it had not entered into effect, by reasoning that Article III of the GATT is not concerned with trade volumes, but rather with competitive opportunities22:
The Panel noted that the United States objected to an examination of this tax because it did not go into effect before 1 January 1989, and - having no immediate effect on trade and therefore not causing nullification or impairment – fell outside the framework of Article XXIII. […]

[…] The general prohibition of quantitative restrictions under Article XI, which the Panel on Japanese Measures on Imports of Leather examined, and the national treatment obligation of Article III … have essentially the same rationale, namely to protect expectations of the contracting parties as to the competitive relationship between their products and those of the other contracting parties. Both articles are not only to protect current trade but also to cerate the predictability needed to plan future trade. That objective could not be attained if contracting parties could not challenge existing legislation mandating actions at variance with the General Agreement until the administrative acts implementing it had actually been applied to their trade. Just as the very existence if a regulation providing for a quota, without it restricting particular imports, has been recognized to constitute a violation of Article XI;1, the very existence of mandatory legislation providing for an internal tax, without it being applied to a particular imported product, should be regarded as falling within the scope of Article III:2, first sentence. …

34. It is also a common mistake to assume that, like Articles III or IX of the GATT, all other WTO provisions are concerned also with competitive opportunities. Some WTO provisions, however, are not concerned with competitive opportunities, but instead with trade effects. Article 5(c) of the SCM Agreement and Article XVI:3 of the GATT fall within that category. They prohibit the granting of subsidies only to the extent that the subsidies cause “adverse effects” in the form of “serious prejudice”. Such effects must be actual or threatened, not just theoretical.

35. The “mandatory” standard invoked upon by Brazil would result in the creation of third category of prohibited adverse effects in addition to actual and threatened serious prejudice, which is nowhere mentioned in Article 5(c): the mere possibility of threat of serious prejudice in certain circumstances. Furthermore, as a result, Brazil’s interpretation would render redundant the two categories of effects which are mentioned in Article 5(c). As explained above, threat of serious prejudice must be imminent and foreseeable. Yet, on Brazil’s interpretation, it would be sufficient, in order to establish a per se violation, to show that the legislation at issue mandates action that threatens serious prejudice in certain circumstances, no matter how remote the likelihood that such circumstances will ever materialise. For example, on Brazil’s interpretation, it would be enough to show that the legislation mandates the payment of subsidies that will threaten serious prejudice in a purely hypothetical situation where world prices fall to an extremely low level, even if the chances that prices may actually fall to such level are negligible in practice.
36. In sum, Brazil’s per se claim is an ingenious but misguided attempt to avoid the requirements of Article 5(c) of the SCM Agreement, which should be rejected by the Panel.
Annex E-7

FURTHER THIRD PARTY SUBMISSION OF NEW ZEALAND


3 October 2003

TABLE OF CONTENTS

I. INTRODUCTION 66
II. PRESENT SERIOUS PREJUDICE 66

1. The effect of the United States subsidies is significant price suppression 67


(i) Interpretation of Article 6.3 68

(a) "Significant" 70

(b) Time-period for Demonstrating Causal Effects 72


2. The effect of the United States subsidies is an increase in the

United States world market share 73
3. The United States has a "more than equitable share" of world export

trade in upland cotton 73
4. Issues relating to particular United States subsidies 74
(i) Market Loan Payments 74

(ii) Step 2 Payments 74

(iii) Market loss assistance/Counter-cyclical payments 74
III. THREAT OF SERIOUS PREJUDICE 75
IV. EXPORT CREDIT GUARANTEE PROGRAMMES 76
V. CONCLUSION 77

I. INTRODUCTION

1.01 Although New Zealand is not a producer or exporter of cotton, New Zealand has a systemic interest in ensuring the continued integrity of important WTO disciplines applicable to agricultural trade and has therefore joined this dispute as a third party. As outlined in New Zealand’s First Submission to the Panel23, New Zealand is concerned to ensure that Members are able to utilise their rights under the Agreement on Subsidies and Countervailing Measures (the SCM Agreement) and GATT 1994 to take action in respect of domestic support measures and export subsidies where the requirements of the “peace clause” have not been respected.

1.02 New Zealand believes that Brazil has demonstrated that the “peace clause” has not been respected in relation to domestic support and export subsidies provided by the United States to upland cotton in the marketing years (“MY”) 1999, 2000, 2001 and 2002, and that accordingly Brazil is entitled to bring actionable and prohibited subsidy claims against the United States under the GATT 1994 and the SCM Agreement.
1.03 In its Further Submission to the Panel,24 Brazil has provided the legal and factual basis upon which the Panel should conclude that the United States subsidies cause or threaten to cause serious prejudice to the interests of Brazil within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement and violate GATT Article XVI. New Zealand therefore considers that the Panel should make the findings and recommendations requested by Brazil.
1.04 This submission addresses issues raised in the Further Submissions of Brazil and the United States25 and should be read in conjunction with New Zealand’s First Submission. As recognised by the Panel in its communication of 24 September 2003, New Zealand has had only limited time to consider the Further Submission of the United States and therefore reserves the right present arguments in addition to those set out in this written submission in its oral statement to the Panel on 8 October 2003.
II. PRESENT SERIOUS PREJUDICE
2.01 Brazil has demonstrated that the United States subsidies26 cause serious prejudice to the interests of Brazil within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement and violate GATT Article XVI.

2.02 Brazil has demonstrated that the United States subsidies during marketing year (MY) 1999-2002:



  • cause present significant price suppression27 in the world and Brazilian markets, as well as in markets where Brazilian producers export, within the meaning of Article 6.3(c) of the SCM Agreement;

  • had the effect of increasing the United States share of the world upland cotton market within the meaning of Article 6.3(d) of the SCM Agreement, and




  • contributed significantly to the United States having more than an equitable share of world export trade within the meaning of GATT Article XVI:3.

New Zealand will focus in particular on Brazil’s claim that the United States subsidies cause “significant price suppression”.


1. The effect of the United States subsidies is significant price suppression
2.03 Brazil has demonstrated that the United States subsidies during marketing year (MY) 1999-2002 cause present significant price suppression in the Brazilian and world markets, including in markets where Brazilian and United States producers export, within the meaning of Article 6.3(c) of the SCM Agreement and thus cause serious prejudice. Brazil has demonstrated that the United States subsidies suppressed A-index prices by an average of 12.6% over MY 1999-2002.28 That translates into a total amount of lost revenue for Brazilian producers of $478 million29 and suppressed revenue worldwide of $3.587 billion.30

2.04 With subsidisation at levels of 95 per cent on average31, subsidies are the greater part of farmers’ incomes and have a major impact on farmers’ production decisions. Producers of upland cotton in the United States are thereby largely insulated from the effects of the market. Thus, when prices for upland cotton were falling32, and the value of the United States dollar33 and costs of production were rising34, production of upland cotton and United States exports of upland cotton significantly increased.35 United States farmers planted 13.5 per cent more acres with upland cotton.36 United States production hit a record high.37 United States exports and the United States share of the world market increased.38

2.05 Professor Sumner estimates that if all United States government support to upland cotton were eliminated, United States exports would have been 41 per cent less in MY 1999-2002.39 By contrast, with the subsidies the United States world market share in fact more than doubled over that period.40
2.06 This subsidy-fuelled production and export growth resulted in significant price suppression within the meaning of Article 6.3(c). Prices were suppressed by the increased world supply of upland cotton and increased competition from United States upland cotton in world markets. Brazil has also outlined the influence that the United States has on world prices for upland cotton41 - the sheer size of the United States share of total world production42 and of world exports magnifies the trade distorting effects of the United States subsidies. Any doubt about the impact that United States subsidies have on the world market for upland cotton should be quickly dispelled by the graphic demonstration of United States dominance of the world market illustrated by Brazil in Figure 26.
2.07 New Zealand agrees with Brazil that the absolute size and average subsidisation level of the United States subsidies creates a strong de facto presumption of production, export and price effects.43 However Brazil has not simply relied on such a presumption. Brazil has produced econometric analysis demonstrating that the United States subsidies caused significant price suppression, as actual market prices throughout MY 1999-2002 would have been higher but for the effects of the United States subsidies.44

2.08 At no point in its submission does the United States dispute the accuracy of this econometric analysis. Instead, in response to Brazil’s claims, the United States seeks to argue that Brazil’s case “suffers from a failure of factual proof”45 and that Brazil has failed to make a prima facie case of serious prejudice or more than equitable market share because Brazil has done no more than assert that causation is established because there were large United States outlays during marketing years with low prevailing upland cotton prices.46 According to the United States, factors other than United States subsidies “were the causes of the dramatic plunge in cotton prices experienced in recent years,”47 namely: competition from low price polyester; flat retail consumption of cotton outside of the United States; slow world economic growth; burgeoning United States textile imports leading to more United States cotton exports; a stronger United States dollar leading to weakened commodity prices and China’s trade position.

2.09 However Brazil’s argument is not that declining cotton prices were due solely to the impact of the United States subsidies. Nor does Article 6.3(c) require that to be the case. It is Brazil’s contention, backed up by sound econometric analysis, that the United States subsidies have a significant price-suppressing effect. And that effect exists regardless of whether cotton prices are rising or falling.48 Nor did Brazil’s analysis fail to take into account the impact of other adverse factors affecting upland cotton prices as alleged by the United States.49 The econometric models used by Brazil, in particular FAPRI, hold other relevant factors affecting the price of cotton constant while cotton subsidies are removed, thereby isolating the effect of those subsidies. Therefore Brazil’s analysis did not attribute to cotton subsidies the effects of other factors affecting cotton prices. As noted above, at no point in its submission does the United States question the integrity of the models referred to by Brazil and upon which the estimated impacts of the removal of United States cotton subsidies is based.
(i) Interpretation of Article 6.3(c)

2.10 New Zealand disagrees with the United States interpretation of Article 6.3. Essentially the United States reached the wrong conclusion from its comparison of the language of Article 6.1 with that of Article 6.3. The United States concluded that because Article 6.3 used the phrase “may arise in any case where one or several of the following apply”, whereas Article 6.1 states “serious prejudice shall be deemed to exist in the case of …”, that this means that serious prejudice “need not arise even under Article 6.3 even where one of the listed effects is found”.50 The United States goes on to infer from this difference in language that a complainant, in addition to demonstrating the existence of one of the listed effects, must also meet a separate “serious prejudice” standard – the content of which is undefined by the SCM Agreement. The United States states that a complainant must show that the “prejudice” suffered is “serious”.51

2.11 First, the example given by the United States in footnote 43 seems to be covered by the terms of Article 6.4. Second, and more importantly, there is no basis for drawing from a comparison of language used in Articles 6.1 and 6.3 the conclusion that there is some other standard, independent of Article 6, that must be demonstrated in order to show “serious prejudice”. In fact, as New Zealand will show, a comparison of both the language and substance of Articles 6.1 and 6.3, in the context of Articles 5 and 6 of the SCM Agreement, supports the contrary conclusion – that if a complainant has demonstrated the existence of one or more of the effects enumerated in Article 6.3 there is “serious prejudice” that is an adverse effect of the subsidy within the meaning of Article 5.
2.12 That is because the difference in language simply reflects the different way in which both Article 6.1 and Article 6.3 give meaning to the term “serious prejudice”. Both must be seen in the context of concern in this part of the SCM Agreement with the effects of subsidies on other Members. In relation to Article 6.1, “serious prejudice” was given meaning by reference to specific types of subsidies or qualities of a subsidy that were “deemed” to have effects that were adverse to the interests of other Members. However, it was open to a subsidising Member under Article 6.2 to overturn that presumption by showing that in fact the subsidy did not cause serious prejudice – i.e. that the subsidy had not resulted in any of the effects enumerated in Article 6.3.

2.13 The terms of Article 6.2 make it clear that the effects enumerated in Article 6.3 equate to “serious prejudice” and that nothing more than demonstration that one of those effects exists is necessary to find serious prejudice.

2.14 Further, by contrast with Article 6.1, Article 6.3 looks more broadly at the effects of the subsidy, rather than its specific characteristics. There is thus no need to “deem” certain effects to arise from certain types or characteristics of a subsidy as there was in Article 6.1. Instead Article 6.3 is more broadly cast to take an effects-based approach – in essence it is designed to encompass any kind of subsidy that has the adverse effects enumerated and is therefore “actionable”. However there is no basis to draw from this difference in approach, and therefore in language, the conclusion that more is required under Article 6.3 than simply demonstrating that one or more of the prescribed effects exists in order show that there is serious prejudice. Such an interpretation undermines the careful structure of Article 6 and the clear intent of Article 5 and must be rejected.
2.15 Nor does the use of the word “may” in Article 6.3 lead to any other conclusion. In that respect it is important to note that Article 5(c) incorporates, as specified in Footnote 13 to the Agreement, GATT Article XVI.1 which includes inter alia the threat of serious prejudice. Therefore it was appropriate to state that serious prejudice in the sense of paragraph (c) of Article 5 may arise where any of the listed effects exists because there may be other circumstances in which serious prejudice can be demonstrated, including, for example, where there is a threat of serious prejudice. If the word “shall” had been used this would have been taken to mean that Article 6.3 provides the definitive set of circumstances in which serious prejudice can arise. By virtue of Footnote 13 that is not the case.

2.16 Consideration of Article 6.3 in the context of the rest of Article 6 provides further support for the interpretation outlined above. First, it makes little sense to have gone to such detail in Article 6.4 to describe what is required to meet the requirements of Article 6.3(b) if there is another set of undefined requirements that must also be demonstrated in order to find serious prejudice.

2.17 Second, in terms of Article 6.2, if there were other elements outside those in Article 6.3 that had to be demonstrated to show serious prejudice, why would a subsidising Member not also have had to show that those elements were not present in order to avoid the presumption in Article 6.1?
2.18 Third, Article 27.8 (although now defunct because Article 6.1 is no longer in effect), also provides that serious prejudice arising from subsidies by developing country Members “shall be demonstrated by positive evidence, in accordance with the provisions of paragraphs 3 through 8 of Article 6”. This makes it clear that serious prejudice need only be determined by reference to Articles 6.3–6.8 of the SCM Agreement.
2.19 Finally, Article 6.8 provides that “in the absence of circumstances referred to in paragraph 7, the existence of serious prejudice should be determined on the basis of the information submitted in accordance with the provisions of Annex V”. This confirms that paragraph 7 of Article 6 outlines the only set of circumstances in which it is not possible to make a determination as to the existence of serious prejudice when one of the situations in Article 6.3 is demonstrated to exist. The direction in Article 6.8 to determine the “existence” of serious prejudice on the basis of the record would be deprived of meaning if a determination of serious prejudice also had to be made by reference to additional criteria not specified by the SCM Agreement that could lead to a materially different outcome as a matter of fact and law.

2.20 Serious prejudice is not the abstract concept the United States attempts to portray it as. Serious prejudice refers to the concrete adverse effects of a subsidy on the interests of another Member that are clearly elaborated in Article 6.3. However, even if the United States is right and a complainant, having demonstrated the existence of significant price suppression within the meaning of Article 6.3(c), must also meet a separate test of “serious prejudice” under Article 5(c), Brazil has demonstrated that serious prejudice exists by providing the Panel with additional information outlining the harm caused to its upland cotton producers as well as to the Brazilian economy.52

(a) “Significant”
2.21 Article 6.3(c) of the SCM Agreement requires that the level of price suppression caused by the United States subsidies must be “significant”, that is, it may not be so small as to have no meaningful effect on other producers or suppliers of the same product.53 Logically, price suppression that is so small as to have no meaningful effect could not give rise to serious prejudice. However, such an interpretation does not mean that a very small level of price suppression may not have a meaningful effect, for example where large volumes of a product may be traded.54 As Brazil demonstrates, even a 1 cent per pound price-suppressing effect can reduce worldwide export revenue by $552 million. Average price declines of 12.6 per cent for upland cotton clearly have a meaningful affect on Brazilian producers of upland cotton. New Zealand fully agrees with Brazil that such price suppression is thus “far beyond any legitimate threshold of ‘significance’”.55
2.22 The United States argues that Brazil’s interpretation of “significant” collapses the concept of “significant price suppression or depression” with the concept of “serious prejudice” because Brazil’s assessment of the significance of the price suppression has wrongly focussed on the effect of the subsidy on producers rather than on prices. As outlined in paragraphs 2.10–2.20 above, in New Zealand’s view the construction of Articles 5 and 6 makes it clear that “significant price suppression or depression” is simply a form or manifestation of “serious prejudice” and therefore it is artificial to make into two separate inquiries what is clearly meant to be only one.

2.23 In any event the United States argument that the significance of the price suppressive effect of the subsidy can only be determined by reference to the effect on ‘price’ should be rejected. Articles 5 and 6 are concerned with the adverse effects of a subsidy – Article 5 states that “no Member should cause, through the use of any subsidy … adverse effects to the interests of other Members.” Therefore it is entirely appropriate under Article 6.3(c) to consider whether price suppression is “significant” by reference to the effect of the price suppression on the Member alleging adverse effects to its interests. In other words, what renders price suppression significant or insignificant is whether or not it causes adverse effects to the Member concerned, not whether or not an arbitrary level of numeric significance is achieved as implied by the United States. Under the United States approach, a numerically small suppressive effect on prices could be disregarded, even though it may have significant adverse effects on the complainant Member. Thus, using the example given by Brazil, price suppression by only 1 cent per pound may not be “significant” enough under the United States standard and therefore could not give rise to serious prejudice, even though that level of price suppression would reduce worldwide export revenue by $552 million.56

2.24 Nor does the United States explain how ‘significance’ is to be determined under its proposed approach. That is because such an approach would require Panels to apply some kind of arbitrary standard of significance – would 5 per cent be significant? Would 10 per cent or 20 per cent? Would the level of required significance vary from case to case, and if so how is a Panel to determine what that level should be?
2.25 By contrast, the approach taken by Brazil of interpreting “significant” as requiring the level of price suppression to be “meaningful” in its effect, reflecting the Panel’s reasoning in Indonesia – Automobiles, provides a more logical and consistent basis upon which to determine whether the price suppression is “significant”. It is also consistent with the objective of Articles 5 and 6 which is to address subsidies that have an adverse effect on the interests of other WTO members. Nor is such an approach inconsistent with the United States assertion that the drafters of Article 6.3(c) used the term “significant” to create a threshold to ensure that not just “any theoretical price effect”57 would suffice. In fact the Panel in Indonesia – Automobiles appears to have made the same assessment of the intention of the drafters when it stated that

the inclusion of this qualifier (ie “significant”) 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 being undercut are not considered to give rise to serious prejudice.58

2.26 Nor does the United States argument find support in the reference to the price suppression being “in the same market” in Article 6.3(c). The United States argues this means that the price suppression must be significant in “market terms” and therefore the question is the effect of the price suppression on the market and not on the Member concerned.59 While New Zealand agrees that the effect of the price suppression on the market may be relevant to considering whether that price suppression is “significant”, New Zealand notes that the phrase “in the same market” simply serves to locate the price suppressive effects rather than define their substance. In fact the United States acknowledges as much further on it in its submission.60 Further, the United States has not attempted to claim that its exports are not to the same market as exports from Brazil. And of course it cannot, because, as Brazil has demonstrated, Brazilian upland cotton and United States upland cotton are like products and are treated by upland cotton traders as interchangeable and substitutable.61

2.27 Finally, New Zealand notes that the United States arguments do not seek to suggest that the level of price suppression found to exist in the present case - 12.6 per cent - is not “significant” within the meaning of Article 6.3(c). Therefore the Panel should find that “significant price suppression” exists as a result of the United States subsidies and that therefore the United States subsidies cause serious prejudice to the interests of Brazil.
(b) Time Period for Demonstrating Causal Effects
2.28 The United States argues that “a past subsidy no longer exists as of the time a new subsidy payment in respect of current production is made”.62 Therefore, argues the United States, subsidies prior to the most recent period, MY 2002, can have no “effect” within the meaning of Article 6.3 and the “effect of the subsidy must be demonstrated in each year and for each year that Brazil has challenged”.63

2.29 By the United States reasoning a complainant may only take a serious prejudice case in the year in which the serious prejudice is caused. To say that a “past subsidy no longer exists” once a further payment is made under the same subsidy scheme is entirely artificial. Leaving aside the practical difficulties the United States approach would pose given the nature of the evidence that is required and the timelines for WTO dispute settlement – which would effectively preclude any Members from ever taking serious prejudice cases – this approach ignores that fact that the subsidy programmes are in existence for a period of years and have effects on the decisions of producers beyond simply the year in which they have been paid.64 Producers expectations of continued subsidies are integral to planting decisions and it is clear that United States producers expect ongoing subsidies as these have been legislatively mandated until MY 2007.
2.30 Similarly the serious prejudice caused to a WTO Member over the lifetime of a subsidy programme is not easily compartmentalised into a particular year and such an artificial constraint on the appropriate time period for consideration by a Panel would seem to undermine the object and purpose of the disciplines on actionable subsidies in the Agreement. New Zealand therefore agrees with Brazil that MY 1999-2002 is a reasonable period for the Panel to use for the present serious prejudice claims.


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