Annex F-1 Executive Summary of the Opening Statement of Brazil
Annex F-2 Executive Summary of the Closing Statement of Brazil
Annex F-3 Executive Summary of the Opening Statement of the United States
Annex F-4 Executive Summary of the Closing Statement of the United States
Annex F-5 Third Party Oral Statement of Argentina
Annex F-6 Third Party Oral Statement of Benin
Annex F-7 Third Party Oral Statement of Chad
Annex F-8 Third Party Oral Statement of the European Communities
Annex F-9 Third Party Oral Statement of India
Annex F-10 Third Party Oral Statement of New Zealand
STATEMENT OF BRAZIL AT THE
RESUMED FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES
1. Brazil’s Claims of Present Serious Prejudice Relating to Subsidies Provided in MY 1999-2002 1. Brazil’s present serious prejudice claims relate to US subsidies provided for the production, export and use of US upland cotton during the period MY 1999-2002. This period covers the measures challenged by Brazil and represents the relevant period of investigation to examine present serious prejudice caused by the US subsidies under Articles 5(c) and 6.3 of the SCM Agreement. This four-year period is long enough to allow the Panel to make a determination (in the words of the Appellate Body in the recent EC – Pipe Fittings decision) “that is less likely to be subject to market fluctuations or other vagaries that may distort a proper evaluation.”
2. Brazil Has Established That the US Subsidies between MY 1999-2002 Caused Significant Price Suppression within the Meaning of Article 6.3(c) of the SCM Agreement
2. Brazil has shown in its Further Submission the amount and the subsidization rate of the US subsidies which cause serious prejudice to Brazil as well as demonstrated that all of the US subsidies are specific within the meaning of Article 2 of the SCM Agreement. The United States asserts that crop insurance subsidies provided to upland cotton producers by the 2000 Agricultural Risk Protection (“ARP”) Act are not specific. In seeking to rebut Brazil’s evidence that more than 50 per cent of the value of US agricultural commodities did not benefit from crop insurance benefits, the United States now argues that livestock is covered in “pilot programmes”. Yet, a close examination of the “pilot” programmes indicates that the great majority of livestock production was not covered by the crop insurance programmes during the period of investigation. Therefore, the crop insurance programme is specific.
3. Contrary to the US arguments, the Panel is required by Article 5 of the SCM Agreement to examine the collective and interactive effects of all US subsidies. While different economists have estimated varying degrees of acreage, production, export and price effects of the US subsidies, no economist has ever found or suggested that removing all of the US subsidies would have only minimal effects.
4. The conditions of competition in the upland cotton market that existed during MY 1999-2002 (and that exist today) explain why: First, upland cotton is a basic fungible commodity that is widely traded throughout the world; Second, demand for upland cotton is relatively price-inelastic and consumption increased steadily during MY 1999-2002, whether upland cotton prices rose or fell; Third, world market prices for upland cotton as reflected in the New York futures price and the A-Index are sensitive to changes in supply – prices tend to rise when world supply decreases and fall when world supply increases; Fourth, US producers in MY 2002 supplied 41.6 per cent of world export market demand – the next largest exporter (Uzbekistan) had only 13 per cent of the world market share. Fifth, US producers of upland cotton are among the world’s highest cost producers and total average costs between MY 1999-2002 were 77 per cent higher than market revenue received for upland cotton lint; and Sixth, US upland cotton subsidies covered the cost-revenue gap with subsidies averaging 95 per cent which are 19 times greater than the five per cent subsidization rate formerly deemed to create a presumption of serious prejudice under Article 6.1(a) of the SCM Agreement.
5. US subsidies are a key element of the conditions of competition in the world market for upland cotton. The US subsidies create a situation in which USDA’s Chief Economist has acknowledged that many US upland cotton producers are immune from market forces. This is readily illustrated by the extensive record provided by Brazil.
6. The United States now argues that US upland cotton farmers are sensitive to changes in market prices. Yet, US planted acreage increased as prices declined between MY 1999-2001. There can be little doubt that without the US subsidies, many US upland cotton producers would have to switch to crops providing a higher market return or take marginal land out of production. This means that without subsidies, US acreage and production would fall considerably. In addition to falling US production, the removal of US subsidies would also result in significant reductions in US exports contributing to increased world prices. Professor Sumner found that, but for the US subsidies between MY 1999-2002, US exports would fall from the annual actual average exports of 8.62 million bales by 41.2 per cent to 5.07 million bales. This reduction of 3.55 million bales represents 13.4 per cent of the total average world export market between MY 1999-2002. Given the relatively inelastic demand for upland cotton, it would be remarkable if world prices did not increase with a 13.4 per cent decrease in the supply of upland cotton to the world export market.
7. Brazil has examined some of the non-subsidy market factors that the United States apparently now claims account for all of the fall in prices in MY 1998-2002. Even though some of these factors may have contributed to lower and suppressed prices during MY 1999-2002, the US arguments and evidence do not refute Brazil’s evidence that the impact of $12.9 billion in US subsidies on US acreage, production, exports and prices was significant. Moreover, Brazil does not dispute that there were other factors causing world prices to fluctuate throughout MY 1999-2002. And these same types of factors are causing prices to fluctuate today – and they will do so tomorrow. Changes in weather, exchange rates, economic growth, and financial conditions, among other factors, will always play a role in price discovery in world commodity markets. But it is simply not credible for the United States to argue now that $12.9 billion in subsidies to US producers faced with an average 24.3 cents per pound cost-revenue gap, who nevertheless increased their world market share to 41.6 per cent at times of record low prices, had no impact on production or world prices.
8. Having established that US production and exports would fall significantly if US upland cotton subsidies were eliminated, Brazil also demonstrated that the effects of lower US exports would result in world upland cotton prices being higher by an amount that is “significant”. Brazil presents additional evidence on the price-suppressing effect of the US subsidies from the Report of the Commission on the Application of Payment Limitations for Agriculture. At the request of the Commission, USDA economists Westcott and Price examined the effects of eliminating marketing loan benefits for MY 2000 and MY 2001 finding significant acreage and price effects representing 33.6 per cent of the average prices received by US farmers in MY 2001. The record contains the results of a number of different simulations of price suppression effects caused by all or some of the US subsidies. All of these results reveal “significant” price suppression within the meaning of Article 6.3(c). They are “significant” because these results of price suppression are far from de minimis.
9. Finally, Brazil has demonstrated the close link between world A-Index prices, Brazilian internal prices and prices received by Brazilian producers in the export markets.
10. Andrew Macdonald has provided his expert testimony and described the importance of US market factors in influencing the perception of traders in the New York futures market and in shaping the perceptions of price movements by traders in international transactions as reflected in the A-Index price development. Mr. Macdonald has also provided evidence of the close relationship between these two sets of prices and the determination of prices in the Brazilian market. This evidence fully supports the pricing data reflecting the close connection between US domestic prices, US export prices, A-Index prices, Brazilian prices, and the prices received by Brazilian and third country exporters.
11. The United States has asserted that the term world market share in Article 6.3(d) “would appear to encompass all consumption of upland cotton, including consumption by a country of its own production”. This is incorrect. The ordinary meaning of the term “world market share” in Article 6.3(d) of the SCM Agreement is not “world production share” or “world consumption share”. Rather, it is the share of the world market for exports. This interpretation is consistent with USDA’s and the EC’s use of the term “world market share”. In addition, footnote 17 to Article 6.3(d) states: “Unless other multilaterally agreed specific rules apply to the trade in the product or commodity in question.” This provision refers explicitly to “trade” referring to international commercial sales and purchases in export markets, not global consumption or production.
3. Threat of Serious Prejudice 12. By guaranteeing a level of support of approximately 75 cents per pound, the US Subsidies create a continuing threat of excess US acreage, production, and exports, and continued suppressed world prices. This threat is a seamless continuation of the present serious prejudice that Brazil has already demonstrated. The threat exists today and will exist throughout the lifetime of the 2002 US Farm Act – until the end of MY 2007. A key initial issue for the Panel to decide is the time period for assessing data regarding the existence of a threat of serious prejudice. The Appellate Body has noted that a threat analysis requires examination of “facts” not “conjecture” and requires the “use of facts from the present and the past to justify the conclusion about the future”. The Appellate Body also has held it is important to examine data for the entire period of investigation “to allow the investigating authority to make a . . . determination that is less likely to be subject to market fluctuations or other vagaries that may distort a proper evaluation”.
13. A threat of serious prejudice exists for the following reasons: The mandatory US subsidies in the 2002 US Farm Act create a guaranteed revenue stream for US producers of 75 cents per pound. This revenue cannot be stopped between MY 2003-2007 regardless of how low US and world prices may fall, regardless of how much US production of upland cotton increases¸ and regardless of the amount of US exports. As found by the EC – Sugar Exports panels, and the Appellate Body in US – FSC, the absence of any legal mechanism to limit the quantity of subsidies is a critical factor to assess in determining the existence of threat.
14. Brazil has demonstrated the existence of present price suppression, increases in world market share and an inequitable share of world export trade based on actual data and market conditions for MY 1999-2002. This four-year period of serious prejudice is the best guide for the Panel to assess whether during the remaining five years of the 2002 US Farm Act there is a significant threat that serious prejudice will occur again. In making this assessment, the Panel should also consider the fact that the US National Cotton Council estimated that the 2002 US Farm Act increased the revenue stream to US producers by 10 cents a pound over that provided in MY 1999-2001.
15. US planted acreage during MY 2003-2007 will remain at significant levels – around 14 million acres (slightly less than the average for MY 1999-2002). USDA and FAPRI both estimate that there will be no significant reduction in US acreage or production between MY 2003-2007. The guaranteed high US acreage between MY 2003-2007 means high levels of production and exports. It also means suppressed world prices.
16. USDA estimates that US producers’ cost of production will increase during MY 2003-2007 and remain high relative to market revenue. The most recent data shows that US producers’ cost of production in MY 2002 was 83.59 cents per pound. At these cost levels, many US upland cotton producers will not be able to meet total costs of production without receiving all of the US subsidies. This fact demonstrates the clear causal connection between US subsidies and continuously high acreage, production, and exports along with significantly suppressed prices throughout MY 2003-2007.
17. With respect to Brazils threat claim under Article 6.3(d), Brazil notes that the threat of an increased US world market share in MY 2002 has already materialized, as the US world market share continued to increase in MY 2002 to 41.6 per cent, well above the MY 1999-2001 three-year average of 29.1 per cent. Brazil also notes that there is a real and clear threat of an Article 6.3(d) violation for MY 2003 as recent USDA projections for MY 2003 US exports indicate that the likely US share will be 38.8 per cent in MY 2003 – an increase over the three-year (MY 2000-2002) average of 34.9 per cent. This evidence further supports the finding of a threat that the US share of world export trade will continue to be inequitable for MY 2003-2007.
18. Finally, Brazil has established that GATT Articles XVI:1 and 3 allow for threat claims to be based on this provision. Brazil has also demonstrated that a threat of the United States to have a more than equitable share of world export trade exists.
5. Export Credit Guarantees 19. Contrary to the US allegation, Brazil has demonstrated that the CCC export credit guarantee programmes are “mandatory” programmes. Moreover, the CCC export credit guarantee programmes are expressly exempt from the requirement that a programme receive new Congressional budget authority before it undertakes new loan guarantee commitments. The Appellate Body considered that the unlimited nature of the FSC regime posed a significant threat, under Article 10.1 of the Agriculture Agreement, that the United States would surpass its agricultural export subsidy reduction commitments. In addition, Brazil again notes that for guarantees, the United States, through the Federal Credit Reform Act, has concluded that costs and losses are best measured and recorded on a net present value basis, rather than on a cash basis, at the time the guarantees are issued.
6. New US Requests for Preliminary Rulings 20. The United States’ “new” request for a preliminary ruling addresses Brazil’s failure to provide a statement of available evidence with respect to export credit guarantees for commodities other than upland cotton. This request is in fact not “new”.
21. The US request for a preliminary ruling that Brazil should have included more information in its statement of available evidence has no merit. Brazil has already addressed this issue. Brazil was required to file a statement of the evidence available to it at the time.
22. Second, the United States claims that cottonseed payments for 1999 and 2000, and 2002 are not within the terms of reference of the Panel because the measures allegedly were not identified within Brazil’s consultation or panel request, and because Brazil and the United States allegedly did not consult regarding these measures. Both of these claims are false. Brazil and the United States did consult about “any programme providing support to the US upland cotton industry for the production, processing, use, sale, promotion or export of cottonseed or products derived from cottonseed.” Similarly, Brazil’s Panel request specifically identified in four different places “measures” that would encompass all forms of cottonseed payments from MY 1999-2007.
23. Finally, the United States argues that the “other payments” such as “storage payments” and “interest subsidies” allegedly were not included in Brazil’s consultation or panel request, that Brazil and the United States did not consult about such payments, and that these payments are not properly within the Panel’s terms of reference. These assertions are also false. Both the consultation and panel requests identify in four different paragraphs as “measures” payments which encompass “other payments” and “storage” and “interest subsidy” payments. Further, Brazil understands that “storage payment” and “interest subsidy” are part of the operation of the marketing loan programme, which Brazil specifically identified in both the consultation and panel requests, as well as in its questions to the United States during the consultations. The record demonstrates that Brazil and the United States consulted about all marketing loan and loan deficiency payments, as well as “any other support to or government funding for the US upland cotton industry”. Therefore, it is properly before the Panel.
CLOSING STATEMENT OF BRAZIL AT THE
RESUMED FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES
1. Introduction 1. In its Closing Statement, Brazil reiterates that at the core of this case are $12.9 billion of US subsidies for upland cotton for MY 1999-2002. These subsidies increase and maintain the production of high-cost US upland cotton, increase US upland cotton exports, suppress US, world and Brazilian prices and lead to the United States having a more than equitable share of world export trade. In short, these US subsidies cause and will continue to cause serious prejudice to the interests of Brazil.
2. Direct, CCP, PFC, and Market Loss Assistance payments were received by producers of upland cotton
2. In its Oral Statement of 7 October, the United States alleged that Brazil has not substantiated the amount of PFC, market loss assistance, direct and counter-cyclical payments to US upland cotton producers. Brazil requested this information from the United States more than a year ago in the consultation phase of this dispute but never received any information. Yesterday, the United States indicated to the Panel that it did not collect or have this information. In similar circumstances, WTO panels have held that “[i]n situations where direct evidence is not available, relying on inferences drawn from relevant facts . . . to determine whether applicable and unrebutted inferences are sufficient for satisfying the burden of proof”. In lieu of this non-existent direct proof, Brazil presented extensive circumstantial evidence that all or nearly all of these producers of upland cotton in MY 1999-2002 received PFC, market loss assistance, direct and counter-cyclical payments.
3. Brazil previously set forth this circumstantial evidence in a number of different Submissions between 24 June and 9 September 2003. To assist the Panel, Brazil has collected this evidence in Annex I to its Closing Statement.
4. A summary of the evidence set out in the Annex is the following: It demonstrates very high production levels of cotton relative to total upland cotton base acreage throughout MY 1999-2002. It shows near universal participation of eligible upland cotton producers in the 1996 PFC programme and 95.7 per cent participation of upland cotton base acreage planted to programme crops in MY 2001. By June 2003, nearly all eligible farms producing, upland cotton in MY 1993-95 or MY 1998-2001 signed up for the direct and counter-cyclical payments. USDA recognized that cotton farmers benefited from PFC and market loss assistance payments and even treated such payments as part of “Government Payments by Crop Year” to upland cotton. Additional evidence shows relatively small fluctuation of cotton planted acreage between MY 1999-2002 and the strong cotton equipment and geographic forces maintaining historic cotton producers in current cotton production. Numerous statements by the National Cotton Council establish that their members received PFC and market loss assistance payments, and would (and do) receive direct and counter-cyclical payments.
5. In addition, the 2002 FSRI Act provides much higher per acre payments for upland cotton than other programme crops (except rice and peanuts). The 1996 FAIR Act similarly provided higher per acre payments for upland cotton (except rice). The only possible rationale for the much higher upland cotton per acre payments for PFC, market loss assistance, direct and counter-cyclical payment base acreage than other programme crops was the expectation that historical producers of upland cotton needed the higher per-acre income to continue to produce high-cost upland cotton on base acreage. This conclusion is further supported by the fact that given their high costs of production, US upland cotton producers would have lost 10 cents per pound in MY 2002 if they had planted on corn (or six other programme crops) direct and counter-cyclical payment base acreage in MY 2002. Similar losses would also have been experienced in MY 1999-2001 if upland cotton were grown on most other programme crop base acreage.
6. The evidence in Annex I supports Brazil’s methodology to calculate the amount of PFC, market loss assistance, direct and counter-cyclical payments by using the ratio of actual US upland cotton production and the amount of upland cotton base acres for programme payments. For example, total planted upland cotton acreage in MY 2002 was 14.1 million acres. The total amount of upland cotton base acreage in MY 2002 was 16.2 million acres. The ratio of these two amounts is 0.87. Brazil used this ratio to adjust the amount of total upland cotton direct and counter-cyclical payments for the marketing year to obtain the amount of subsidies received by upland cotton producers. Out of the 16.2 million upland cotton base acres, 2.1 million acres were not planted to upland cotton in MY 2002. Thus, holders of these 2.1 million cotton base acres either did not plant any crops or planted other crops. Consequently, Brazil has not included direct and counter-cyclical payments on these 2.1 million acres in its calculation of payments to upland cotton producers.
7. The total amount of upland cotton base acreage for direct payments in MY 2002 (which include the portion of PFC payments that were deemed to be direct payments) was $558 million. USDA paid out the maximum amount of upland cotton CCP payments in MY 2002 – $1.148 billion. Multiplying those figures by 0.87 results in $485 million in direct payments and $998 million in counter-cyclical payments to US upland cotton producers.
8. The United States refuses to offer a methodology for calculating the amount of direct and counter-cyclical (or PFC and market loss assistance) payments made to upland cotton farmers. Brazil’s suggested methodology is based on the conclusion that all upland cotton producers received these payments. In particular, the evidence suggests that the amount of payments can be best calculated by finding that US upland cotton producers received those payments using upland cotton base acreage. This follows from the evidence listed in Annex I to Brazil’s Closing Statement.
9. The United States asserts that “Brazil has presented no evidence that the recipients of these decoupled payments on upland cotton base acres are, in fact, upland cotton producers”. Apparently what the United States had in mind in making this statement is that Brazil must produce data detailing the amount of each direct payment received by every single upland cotton farmer between MY 1999-2002. This is data the United States admits does not exist. But such a burden would require the Panel to disregard all the circumstantial evidence provided by Brazil. DSU Article 11 requires the Panel to “make an objective assessment of the facts of the case”. In the absence of any alternative methodology proposed by the United States, the “facts of the case” are those presented by Brazil.
10. Therefore, what the United States suggests is that the Panel ignores $1.7 billion in PFC and direct payments simply because the United States does not collect data that could ascertain the precise figure – which will be very small – of upland cotton farmers that did not receive those payments. Such an approach would permit WTO Members to write off large amounts of subsidies by simply refusing to collect data. The Panel must not allow this position to prevail.