Initial briefs of parties and third parties


The effect of the United States subsidies is an increase in the United States world market share



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2. The effect of the United States subsidies is an increase in the United States world market share
2.31 Brazil has demonstrated that the United States subsidies resulted in an increase in the United States world market share for upland cotton in MY 2001 within the meaning of Article 6.3(d). The data provided by Brazil shows that the United States world market share in MY 2001 of 38.3 per cent is considerably higher than the previous three-year average,65 and that this was due to the effect of the United States subsidies.66
2.32 The United States argues that the term “world market share” refers to “all consumption” of upland cotton and thus would include “consumption by a country of its own cotton production”. The United States appears to suggest that Article 6.3(d) is thus concerned with the effect of the subsidy on world consumption of cotton.
2.33 It is true that GATT Article XVI:3 uses the phrase “world export trade”. However it is quite a leap of logic to then conclude that because Article 6.3(d) uses the term “world market share” then it must refer to a Member’s share of world consumption. The United States makes this leap on the basis that the relevant context for determining what “world market share” means is GATT Article XVI:3. However the first point of reference should in fact be Article 6.3 itself, and Article 5 to which it is so integrally related. Thus the appropriate context in which to give meaning to “world market share” is the aim of Articles 5 and 6, ie to address the adverse effects of subsidies on the interests of other Members.

2.34 Subsidies are the concern of WTO members to the extent that they distort trade – hence the differentiation in treatment of trade-distorting and non-trade distorting subsidies. Therefore the adverse effects with which Article 6.3 is concerned is the effect of subsidies on trade in the world market. Specifically, it is concerned with adverse effects to other Members caused when one Member uses subsidies in order to increase its share of the world market for a particular product. To construe “world market share” as referring to a Member’s share of world consumption of a product would therefore completely subvert the underlying rationale of Article 6.3(d).

3. The United States has a “more than equitable share” of world export trade in upland cotton
2.35 Brazil has demonstrated that the United States subsidies have operated to increase United States exports of upland cotton resulting in the United States having a “more than equitable share” of world export trade in upland cotton within the meaning of GATT Article XVI:3 and has thus caused serious prejudice to the interests of Brazil within the meaning of GATT Article XVI:1.67
2.36 The United States seeks to dismiss the relevance of GATT Article XVI:3 by reference to pre-Uruguay Round comment by the Panel on Wheat Flour68, addressing the Tokyo Round Subsidies Code, in an unadopted report, that there are “difficulties inherent in the concept of ‘more than equitable share’.”69 The United States also seeks to assert that “Members are generally permitted to provide subsidies.”70 That is true up to the point at which those subsidies cause serious prejudice to the interests of the other Members. And in this context the Panel should consider whether, as the world’s largest exporter of upland cotton with average levels of subsidisation of 95 per cent, the United States has a “more than equitable” share of world export trade. New Zealand submits that Brazil has demonstrated that the United States does.
4. Issues relating to particular United States subsidies

2.37 Brazil sets out arguments relating to the full complement of United States subsidies and the serious prejudice they cause both individually and collectively. New Zealand will comment only on marketing loan payments, Step 2 payments and market loss assistance/counter-cyclical payments.

(i) Marketing Loan Payments
2.38 Brazil has highlighted that these payments are considered by the USDA and by other economists as having the greatest production and export enhancing effects and thus the greatest A-Index price suppressing effects of all the United States subsidies.71 Brazil has described how the effect of the marketing loan programme is to increase production, increase exports of upland cotton, and suppress upland cotton prices (on average by 5.75% in MY 1999-2002).72 The marketing loan programme is thus responsible for almost half of the estimated average price suppressing effects of the United States subsidies.
(ii) Step 2 Payments
2.39 The availability of Step 2 payments increases production in the United States, displaces imports of lower priced foreign upland cotton and enables additional United States exports of upland cotton. The Step 2 payment programme is specifically designed to stimulate export demand for United States upland cotton. Brazil has shown that the trade distorting effect of the Step 2 payments is widely acknowledged.73 Professor Sumner estimates that Step 2 payments suppressed world prices between MY 1999-2002 by 3.04 per cent.74
2.40 Brazil has demonstrated that Step 2 domestic payments are a prohibited subsidy under Article 3.1(b) of the SCM Agreement in that the payments are contingent on the use of domestic over imported upland cotton and thus also violate Article III.4 of GATT 1994.
(iii) Market loss assistance/Counter-cyclical payments

2.41 The United States continues to argue that market loss assistance payments and counter-cyclical payments (CCP) are not linked to production and accordingly cannot have “effects” for the purposes of Article 6.3(c) nor operate to increase exports as required by GATT Article XVI:3.75 The United States implies that their production effects are less than one percent.76 However Professor Sumner’s analysis shows that although their production effects were less than one percent in 1999, since then they have been significantly higher and are projected to increase in the future.77 He concluded that these payments have a production impact because their effect is to keep land in the production of upland cotton that would not be otherwise because of low prices.78

2.42 As outlined by New Zealand in its First Written Submission to the Panel, the CCP payments create incentives for farmers with upland cotton base acreage to maintain upland cotton production.79 New Zealand pointed out that in fact under the CCP programme the only way a farmer can guarantee a particular income is to continue to grow the same crop, otherwise the farmer runs the risk of missing out. For example, if he or she chooses to produce wheat and cotton prices are high enough that no CCP payment is made but wheat prices fall, the farmer will make a loss they would not have made had they stayed with cotton production. This, combined with other factors set out by Brazil,80 for example the investment by farmers in cotton-specific machinery, virtually guarantees farmers will continue to produce cotton. The CCP payments are thus far from “de-coupled” in effect.
2.43 In fact Professor Sumner concluded that the CCP payments (as the institutionalised marketing loss assistance payments are now known under the Farm Security and Rural Investment Act 200281) create more production incentive than the market loss payments, through base and yield updating and the increased per pound amount of support.82 Professor Sumner determined that the market loss assistance payments and the CCP payments stimulated production by an average of 1.34% during MY 1999-2002.83 And, as noted by Brazil, the full effects of the greater production incentives inherent in the CCP programme will only be realised in MY 2003.
III. THREAT OF SERIOUS PREJUDICE

3.01 Brazil has brought evidence to show that the United States subsidies are not only causing serious prejudice to Brazil’s interests today, but also threaten to cause serious prejudice to Brazil’s interests in the future. Brazil has demonstrated that the United States subsidies cause a threat of serious prejudice to Brazil’s interests within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement, as well as GATT Article XVI:3 in the period MY 2003-2007 because of the continued operation of the Farm Security and Rural Investment Act 2002 and the Agricultural Risk Protection Act 2000.

3.02 Brazil has demonstrated that the very same factors creating present serious prejudice also create a threat of serious prejudice in the future. The United States subsidies are mandated to continue until MY 2007. They are effectively unlimited. Brazil has demonstrated that they have already caused serious prejudice to Brazil’s interests. Their continued operation for a further four years cannot but be considered to threaten further serious prejudice to Brazil’s interests.
3.03 The United States argues that the two standards proposed by Brazil are incorrect and that Brazil has, in any event, met neither of them.
3.04 To take Brazil’s first proposed legal standard, Brazil argues, drawing on the findings of the GATT Panel in EC – Sugar Exports I84 and EC – Sugar Exports II85 and the Appellate Body in US – FSC,86 that where there is effectively no limit on the provision of a subsidy a permanent source of uncertainty exists that threatens serious prejudice to other WTO Members. In such circumstances there is no check on the provision of a subsidy that would prevent it from causing adverse effects to the interests of other Members.

3.05 That is the precise situation in the present case. United States legislation requires the provision of the subsidies irrespective of whether or not those subsidies have adverse effects on other Members. In that respect it is important to bear in mind that the present case involves a level of subsidisation of, on average, 95 per cent, with a dollar value of US$12.9 billion, being provided by a country that currently has a 41.6 per cent share of the world market for upland cotton. The possibility that United States subsidies will continue to cause serious prejudice to the interests of Brazil in the future, is a real one – it is well removed from the realm of “allegations, conjecture or remote possibility” alluded to by the United States.87

3.06 In that respect Brazil’s second proposed legal standard for determining whether such a threat exists is highly relevant. As Brazil has demonstrated, all of the factors that currently exist that mean that the United States subsidies cause serious prejudice to their interests will continue to exist in the future. Furthermore, United States producers of upland cotton will act in the expectation of future subsidy payments and will make their planting decisions accordingly. Therefore the fact that the legislation creating those subsidies will continue until 2007, and United States producers know that those subsidy programmes will continue until 2007, creates a very strong prima facie case that those subsidies will continue to cause serious prejudice to Brazil for the full term of their existence.
3.07 Finally New Zealand supports Brazil’s request that if the Panel makes a finding of present serious prejudice, it should not feel constrained in making a further finding that the subsidies also create a threat of serious prejudice in the future.88 Firstly, even though the present effects of the subsidies are already being felt, their future effects have not yet eventuated and therefore necessarily remain a threat. Secondly, the purpose of dispute settlement is to assist Members in the resolution of disputes – in this case a finding by the Panel on the threat of future serious prejudice is important to resolve this dispute.
IV. EXPORT CREDIT GUARANTEE PROGRAMMES

4.01 New Zealand notes that the United States raises further arguments in relation to the negotiating history and appropriate interpretation of Article 10.2 of the Agreement on Agriculture in order to support its claim that there are currently no export subsidy disciplines on the use of export credit guarantee programmes.

4.02 However the United States does not address the applicability of Article 10.1. As outlined by New Zealand in its First Submission, Article 10.2 does not in any way suggest that it provides an exception from the disciplines of Article 10.1. While Article 10.1 currently provides the only discipline on the use of export credits, it is expected that the work envisaged in Article 10.2 will elaborate further and more specific disciplines that will presumably make identification of the extent to which such export credit programmes constitute export subsidies more straightforward. However it is incorrect to assume that there is a vacuum in the meantime. Item j of the Illustrative List of the SCM Agreement clearly already provides guidance on when export credit guarantee or insurance programmes are to be considered to be ‘export subsidies’ and beyond this the general definition in Articles 1.1 and 3.1(a) of the SCM Agreement also applies.
V. CONCLUSION
5.01 In conclusion, New Zealand considers that 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 requests the Panel to make the findings and recommendations requested by Brazil.

Annex E-8

SECOND WRITTEN SUBMISSION OF PARAGUAY

(THIRD PARTY)
3 October 2003

1. Paraguay is grateful for the opportunity to express its views in this dispute.

2. As already stated, Paraguay maintains that the subsidies and support granted to cotton production of the type at issue are inconsistent with the Agreement on Subsidies and Countervailing Measures and other WTO rules.

3. The agricultural subsidies cause serious prejudice to the domestic industries of many WTO Members, in violation of Articles 5 and 6 of the Agreement on Subsidies and Countervailing Measures. Indeed, these measures involve a financial contribution which, by conferring a benefit, could adversely affect the determination of the world price of the product.
4. Article 5(c) stipulates that "no Member should cause, through the use of any subsidy [ specific and not exempted under the Agreement –] adverse effects to the interests of other Members, i.e.: … (c) serious prejudice to the interests of another Member."
5. The threat of serious prejudice takes the form of price undercutting and unfairness in international trade, particularly as regards developing countries like Paraguay, which is highly dependent on its cotton production.
6. Article 6, which concerns serious prejudice, states that serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in the case of subsidies to cover operating losses sustained by an enterprise, other than one-time measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long term solutions and to avoid acute social problems; and direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment.
7. Paraguay submits that the measures adopted by the United States do not fit these descriptions and cause injury to its economy, Paraguay being a predominantly agricultural country.

8. Because of the amounts involved, the subsidies granted to the cotton industry have a significant impact on the world market as reflected in increased production and export and price variations on the global market.

9. In the International Cotton Advisory Committee (ICAC) as in other forums, governments have remarked on the critical situation that the world cotton industry is going through and its link to subsidies, stressing the need to submit complaints before the WTO for violation of the applicable rules. The Committee considers that without the subsidization, the average world cotton price would undergo a reasonable increase.
10. Paraguay's cotton trade is affected by such measures because cotton production has a considerable impact on its economy, and especially on its rural populations which depend on cotton for their livelihood. In the sectors involved, such as transport and related industries, the impact is considerable, with approximately 30 per cent of the population affected.

11. Thus, the impact on trade in countries like Paraguay is devastating and causes the migration of rural populations to the urban areas, further aggravating the economic situation of a country dependent on its agriculture.


12. As shown in the attached table, cotton fibre exports to the United States was 518 tons, for a value of US$898,000.
13. The effect is clear: in 2001, the volume of exports to the same market practically doubled, reaching 924 tons, and yet the price decreased in equal proportions, with exports generating US$830,000. The world cotton trade figures reflect the same trend.
CONCLUSION
14. There is sufficient evidence to prove that the subsidies are causing problems to the international marketing of cotton and that the American subsidies are further aggravating the situation of cotton exports from Paraguay.

15. We respectfully request the Panel to find that the measure applied by the United States is inconsistent with the obligations laid down by the WTO in various provisions of the GATT 1994 and the Agreement on Subsidies on Countervailing Measures, and to take account of the arguments put forward by Brazil.






PARAGUAYAN COTTON EXPORTS BY DESTINATION




(Tons / ThUS$)











































1997




1998




1999




2000




2001




2002







VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

GERMANY

0

0

0

0

193

179

1,215

1,229

6,029

4,594

2,877

1,981

ARGENTINA

150

46

4,623


6,594

649

759

1,250

1,460

250

231

5,001

4,132

BANGLADESH

0

0

0

0

0

0

461

532

630

568

155

119

BELGIUM

0

0

0

0

0

0

0

0

266


215

149

128

BERMUDA

473

757

0

0

0

0

0

0

0

0

0

0

BOLIVIA

0

0

0

0

0

0

1,200

1,084

0

0

0

0

BRAZIL

39,898

64,492

47,267

64,914

47,115


55,933

56,726

61,113

31,063

29,465

29,599

22,877

COLOMBIA

0

0

0

0

0

0

1,660

1,556

200

224

0

0

SOUTH KOREA

0

0

79

102

0

0

0

0

98

92

0

0

NORTH KOREA


0

0

0

0

0

0

0

0

605

557

0

0

CHILE

845

1,509

624

938

1,107

1,208

1,183

1,309

424

404

1,675

1,262

NATIONALIST CHINA (TAIWAN)

0

0

191

219

0


0

0

0

2,126

1,865

579

450

CHINA, PEOPLE'S

REPUBLIC OF

0

0

0

0

0

0

698

769

1,310

1,230

0

0

DENMARK

0

0

0

0

0

0

0

0

0

0

128

102

SLOVAKIA


0

0

0

0

0

0

0

0

100

76

0

0

SPAIN



















313

364

18

19

0

0

UNITED STATES

518

898

0

0

0

0

60

67

924

830

0

0

PHILIPPINES


0

0

0

0

102

119

33

39

569

616

155

132

FRANCE

0

0

0

0

0

0

0

0

231

187

104

83

HONG KONG

0

0

0

0

0

0

1,116

1,188

148


111

185

123

NETHERLANDS

0

0

0

0

500

606

0

0

62

41

0

0

INDIA

0

0

0

0

0

0

526

408

33,463

28,267

3,088

2,738

INDONESIA

0

0

0

0

0


0

120

116

2,461

2,295

582

453

ITALY

0

0

462

550

0

0

25

23

360

345

363

271

MALAYSIA

0

0

0

0

0

0

500

449

130

109

0


0

NIGERIA

0

0

0

0

0

0

0

0

241

229

0

0

PAKISTAN

0

0

0

0

0

0

68

65

1,006

790

0

0

PANAMA

0

0

0

0

0

0

0

0

0

0

48

29





1997




1998




1999




2000




2001




2002







VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

VOLUME

VALUE

PORTUGAL

0

0

0

0

0

0


0

0

989

702

200

133

UNITED KINGDOM

0

0

0

0

0

0

0

0

2

1

0

0

SWITZERLAND

0

0

0

0

0

0

200

216

592

551

251

169

THAILAND

0

0


0

0

0

0

397

403

2,298

1,959

294

198

TURKEY

0

0

0

0

0

0

819

886

2,244

2,431

0

0

URUGUAY

2,684

3,927

1,165

1,453

501

601

475


529

198

200

65

53

VENEZUELA

720

1,227

459

649

1,942

2,140

4,403

4,687

4,035

3,731

632

528

VIETNAM

0

0

0

0

0

0

0

0

602

533

0

0


TOTAL

45,288

72,856

54,870

75,419

52,109

61,545

73,448

78,492

93,674

83,468

46,130

35,961







































Prepared by the Paraguayan Directorate of Foreign Trade.

Source: Central Bank of Paraguay.


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