Initial briefs of parties and third parties

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Annex F-7


8 October 2003

Mr. Chairman, members of the Panel,

I am Abderahim Yacoub N’Diaye, the Ambassador of Chad to the WTO. The other members of my delegation are Mr. Mouata Nanrabaye, as well as our legal advisers, Mr. Brendan McGivern and Mr. Stefan Ramel, both from White & Case.
Chad stands by its written Third Party submission of 3 October 2003. In addition, I wanted to supplement this by reading to the Panel a recent statement by Mr. Ibrahim Malloum, who is both the President of the Société Cotonnière du Tchad, as well as the President of the African Cotton Association. Given his unique qualifications, I asked him to prepare a statement for this third party session. Unfortunately, however, he could not attend the hearing, since he had to be in Chad this week. However, his statement is of direct relevance to the issues facing the Panel, and so with your permission, Mr. Chairman, I would like to read it to you.
“Statement by Mr Ibrahim Malloum

1. My name is Ibrahim Malloum. I am the President of the Société Cotonnière du Tchad, commonly known as Cotontchad. Cotontchad is a public/private organization that controls the production and marketing of cotton in Chad. Cotontchad is responsible for supplying farmers with inputs on credit, purchasing and collecting the harvested seed-cotton, ginning the crop into upland cotton lint, as traded internationally, and finally selling the finished product. Cotontchad is required to purchase all cotton produced by Chad cotton farmers. In addition, Cotontchad is responsible for selling and marketing the cotton produced by more than 2.5 million people in Chad involved in the production of cotton.

2. I am also currently President of the African Cotton Association (ACA). The ACA was formally created during a summit meeting of African cotton producers in Cotonou, Benin, in September 2002. It includes all the West, Central and East African producers, ginners and merchants. Many international merchants, shipping companies, and banks are also members of this Association. The ACA’s goals are to defend and promote African cotton in the world market and to encourage knowledge sharing among African cotton producers.
3. I have been involved with selling and marketing cotton for more than 18 years for Cotontchad, during which time I have been involved in all the cotton activities:

  • I was in Memphis Cotton School in 1985.

  • From the end of 1997 to 1999 I was the General Manager of Cotontchad.

  • When I was General Manager I was in charge of supplying the farmers with fertilizers, and pesticides; we buy all the production from farmers, we gin the cotton, we classify and export the cotton.

  • Today I am in charge of marketing all Chad cotton production around the world. I am thus selling in more than 30 countries (Europe, Far East, Africa and South America.).

  • Our selling prices are based on the international prices driven by the New York Cotton Futures Market and the Liverpool “A” Index.

Cotton in Chad

4. Cotton is essential to the livelihood of more than 2.5 million people in Chad. It has been the major cash crop and driver of Chad’s economy dating back to the 1920s and continues to be today. Cotton represents 25 per cent of Chad’s export earnings and 5.1 per cent of its GDP.

5. Chad has about 8.1 million inhabitants of which over 2.5 million are in one way or the other involved in the production of cotton. Cotton is typically produced on small family farms that lack mechanization and modern equipment, and electricity. Irrigation is completely reliant on rain and all harvesting is done by hand. Many farms are not even accessible by road. Despite these handicaps, production costs are approximately between 54 and 58 cents per pound. This is approximately one-half of the costs of producing cotton in the United States.
6. In order to streamline the production of cotton, farmers are organized into roughly 5,000 Village Associations (Associations Villageoises), each comprising about 100 households of both cotton and non-cotton producers. These Associations Villageoises also provide some basic social structure for about 80 per cent of Chad’s eight million people who live in rural areas and that depend on subsistence farming. Normally cotton production in each Association Villageoise is a group effort with everyone in the community contributing to the production process. The cotton harvest and the amount produced is a source of both pride and prestige in each Association Villageoise.
The Role of Prices for Chadian Cotton

7. As already mentioned, Cotontchad plays a central role in the production of cotton in Chad. The production cycle of cotton in Chad starts when each Association Villageoise requests input supplies from Cotontchad’s field agents or “interface”, based on their planned land cultivation. Cotontchad then allocates inputs to each Association Villageoise on credit using future cotton harvests as collateral. The amount of inputs acquired and distributed is influenced directly by the prices that are able to be obtained by Cotontchad in its international sales. When prices are low, as they were during 2001-2002, Cotontchad cannot afford to provide all of the imports demanded by the Associations Villageoises. This in turn reduces the amount of cotton produced by each Association Villageoise and in Chad in general. When prices increase, more inputs are purchased which are then provided to each of the Association Villageoise and causes cotton production – and incomes generated by those Associations – to increase. Thus, higher prices obtained in international markets directly impacts the amount of present and future income received by cotton producers in Chad.

8. Cotontchad purchases upland cotton from each Association Villageoise at its 2,500 nation-wide weigh stations. The price received by the producers is a countrywide uniform price that is set each year by a committee representing both farmers and Cotontchad. The price determined by the committee is a function of the price received by Cotontchad in its physical sales of cotton. Cotontchad can only offer a price to the farmers that is consistent with the international market price.
9. Cotontchad then transports the upland cotton to its nine ginning stations to be sorted, ginned and commercialized. Finally Cotontchad sells the finished cotton in physical markets on the spot and forward market. Cotontchad markets its cotton on both an immediate (spot) and on a forward contract basis. I am the principal negotiator for sales of Chad cotton. In marketing cotton, I provide information to a number of purchasers concerning the availability of Chad cotton. In some countries (Europe, Japan, and partially India) Cotontchad uses the agent channels to sell directly to the spinning mills. In other countries, we sell directly to the international merchants. We fix prices in relation with New York Future prices, Liverpool “A” index and also in relation to the competition prices offered in the market. Everyday we inform our agents and merchants of the available quantities and the prices of the different qualities we are offering.
10. In negotiations for the spot market or immediate shipment of cotton, the price negotiation involves reference to the current N.Y. futures contract price as well as the A and B-index prices. I will always make reference to the N.Y. futures price if prices are increasing and the N.Y. futures price is higher than the A-index price.

11. The New York Cotton futures market is the main cotton market place in the world. It goes without saying that the cotton price is dictated by New York. All the business men can forecast the index “A” by looking to what New York did the night before.

12. The vast majority of cotton produced in Chad is exported (about 95 per cent). Cotton produced in Chad is in direct competition with other regional and foreign exporters of cotton. The extremely small world market share of Chadian cotton exports (about 1 per cent) invariably makes Chad a price taker.
The United States and Its Influence on World Cotton Prices
13. The United States’ production of upland cotton has a large influence on the world market price for cotton. All traders of upland cotton keep a close watch on developments in the United States. As the largest exporter of cotton, the United States supplies more than 40 per cent of cotton sold in international sales. The United States is by far the largest exporter of upland cotton. Because of the large size of the US production and exports, when stocks of US cotton for sale decrease because of weather problems in the United States, then the world price of upland cotton invariably increases. This is normally first reflected in increased N.Y. futures prices and then later by increases in prices in the A-Index. On the other hand, when US production of upland cotton increases because of increased land planted to cotton or because of favourable weather conditions, then the increased stocks of US upland cotton in the world markets press world prices lower. I have seen this process repeatedly over the years that I have been trading upland cotton on world markets. In my view, it is obvious that if the US producers did not have access to very large subsidies, they would plant less cotton and world upland cotton prices would increase. There is no doubt in my mind that the large US subsidies keep world prices lower. This includes prices received by Chad cotton.

14. To give the Panel some idea of the impact of the large US exports, I frequently encounter during negotiations purchasers who indicate that they can purchase US cotton at a price lower than what I am seeking to obtain in negotiations. These purchasers frequently tell me that US upland cotton is available to them at a lower price because of the US Step 2 payments. These payments are well known in the industry and are reported in trade publications. The Step 2 payments for US cotton allows exporters selling US cotton to underbid my bids when I am in direct competition for sales. This has happened to me on a number of occasions. Again, the result is lower prices for cotton that I am able to negotiate for Cotontchad.

Suppressed Cotton Prices and Their Effect on Chad
15. I would tell you that the low prices received by Chad producers contributes to poverty in Chad. The description of what happened in Benin is the same as what has been happening in Chad. Cotton for most Associations Villageoises in Chad is the only source of outside income. Therefore Chadian schools, hospitals and local governments rely directly on money received from cotton sales. The cotton industry in Chad is still trying to recover from record low prices from 2001-2002. While prices are now increasing, prices will have to increase considerably more to make up for the unprecedented crisis caused by extremely low prices last year. In my view, the continuing high levels of US production are still depressing world prices. I look forward to the day when I do not have to compete with US upland cotton for every sale. Increased prices will allow Chad producers and Chad communities to obtain additional income and improve the life of our very poor people”.
Thank you for your attention. I would be happy to answer any questions you may have.

Annex F-8


8 October 2003

1. Introduction
1. The European Communities (the “EC”) welcomes this opportunity to submit orally its views to the Panel.

2. The EC has already submitted in writing its views with respect to Brazil’s further submission of 9 September 2003. Today, the EC will provide its comments on the further submission of the United States of 30 September 2003. Many of the issues raised in the US submission concern factual matters. The EC will limit itself to address three of questions of legal interpretation. Specifically, the EC will argue in this Statement that:

  1. the crop insurance payments made by the United States would be “specific” in so far as it can be established that different insurance policies result in different benefits being conferred with respect to different products;

  1. the issue of whether green box payments can cause “serious prejudice” within the meaning of Article 5(c) of the Agreement on Subsidies and Countervailing Measures (the “SCM Agreement”) does not arise in this dispute;

  1. the term same market in Article 6.3 (c) may refer to any geographical market, including also the world market, provided that there is such a world market for the product under consideration.

3. Before addressing these issues, the EC would like to put on record its agreement with the United States with respect to a number of questions on which it does not consider it necessary to submit additional arguments:

  1. the EC agrees with the US interpretation of the term “world market share” in Article 6.3(d) of the SCM Agreement;

  1. the EC endorses the U.S. interpretation of the term “more than equitable share” in Article XVI:3 of the GATT;

  1. the EC also agrees with the US position that Brazil’s first standard to establish the existence of “threat of serious prejudice” for the purposes of Article 5(c) of the SCM Agreement is incorrect;

  1. finally, the EC agrees with the United States that the Agreement on Agriculture (the “AA”) excludes the application of Article III:4 of the GATT and of Article 3.1 (b) of the SCM Agreement to subsidies “in favour of agricultural producers” which are paid to the processors.

4. On the other hand, the EC would like to restate its disagreement with the US position that Article 10.1 of the AA does not apply to export credits and guarantees.

2. Specificity of crop insurance payments
5. The United States contests Brazil’s claim that the subsidies allegedly provided in the form of crop insurance payments are specific. The United States argues that crop insurance is not “specific” because it is available, in one way or another, with respect to all agricultural products.145
6. The EC understands, however, that different crop insurance policies apply to different agricultural products.146 If such differences had the consequence that some agricultural products will receive a benefit in circumstances where other products will receive no benefit, or only a smaller benefit, the difference would be clearly “specific”.
3. Green Box subsidies
7. The United States argues that Brazil has failed to make a prima facie case that the payments for which it claims green box status cause serious prejudice. The United States recalls that paragraph 1 of Annex 2 of the AA makes clear that green box payments have no, or at most minimal, trade-distorting effects and that, under Article 21.1 of the AA, the SCM Agreement applies “subject to” the AA.147

8. This is correct. But this argument does not appear to be relevant in the context of this dispute. If the payments at issue meet all the criteria of Annex 2, they would be exempted from action under the SCM Agreement in accordance with Article 13 (a)(i) AA. If not, the United States could not invoke their conformity with Annex 2 and Article 21.1 in order to argue that they have no or minimal trade-distorting effects. Logically, the issue raised by the United States could arise only in the absence of the peace clause, or if the peace clause had expired at the initiation of this dispute.

4. The meaning of “same market” in Article 6.3 (c)
9. The United States contends that the term “same market” in Article 6.3 (c) cannot be interpreted to include the world market, because that would render redundant the word “same”.148 The EC disagrees. In accordance with its ordinary meaning, the term “market” may refer to any geographical market, including not only national or regional markets but also the world market, provided that there is such a world market for the product under consideration.
10. The US argument is based on the assumption that there will always be a world market for any given product. That assumption is incorrect. In order to characterise a certain geographical area, whether it is the territory of one or more Members or the entire world, as a “market” it must be shown that the conditions of competition prevailing within that geographical area are sufficiently homogenous. If there are significant trade barriers between Members, or between groups of Members, with the consequence that conditions of competition are significantly different within each Member or group of Members, it will not be possible to consider that there is a world market for the purposes of Article 6.3(c), but only national or regional markets.

Annex F-9


8 October 2003

1. We thank you for giving us the opportunity to present India’s views in this third party session. India is the third largest producer of cotton in the world and has the highest area under cotton cultivation in the world. India has a substantial trade interest as well as systemic interest in this dispute. In the first part of this session on 24 July 2003, we had presented some views on the three US subsidy programmes that we consider as violative of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). Today we wish to present our views on the term ‘serious prejudice’ used in Article 6.3 of the Agreement.

2. The measures challenged by Brazil in its claims of present serious prejudice include the payment of subsidies through various programmes which include marketing loan payments, counter-cyclical payments, direct payments, production flexibility contract payments, market loss assistance payments, crop insurance subsidies, Step 2 payments, and GSM 102 export credit guarantees. The legal instruments providing these subsidies include the 1996 FAIR Act, the 2002 FSRI Act and the 2000 ARP Act as well as various appropriations bills for Marketing Years (MY) 1999-2002.
3. The subsidies given by US at issue are explicitly limited to certain enterprises or industries. None of the subsidies at issue are widely available throughout the US economy across industries. Eligibility for the domestic support and export subsidies at issue in this dispute is either “explicitly” limited to the subset of the US industry producing agricultural crops, to subgroups of industries producing certain agricultural crops, or to only upland cotton. None of the subsidies are available for any non-agricultural product. Thus the subsidies given by US to cotton are “specific” as understood under the SCM Agreement.
Mr. Chairman, Members of the Panel,
4. For establishing serious prejudice caused by the subsidies given by the US to cotton, Brazil has provided numerous facts that independently as well as collectively demonstrate the causal link between these subsidies and significant price suppression in upland cotton markets in MY 1999-2002.

5. It has been demonstrated, inter-alia through the analysis of Professor Daniel Sumner, details of which are available in Section of Brazil’s Further Submission to the Panel, that in terms of significant price suppression, removal of the subsidies given by the US would increase the A-index prices by an average of 12.6 per cetn or 6.5 cents per pound between MY 1999 and 2002. Brazil has demonstrated that the subsidies given by the US during MY 1999-2002 cause present significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement in the Brazilian and world markets, including in markets where both Brazilian and United States producers export, and thus cause serious prejudice.

6. The average rate of subsidisation of cotton in the US during MY 1999-2002 as revealed in the Table at page 4 of Brazil’s Further Submission was as high as 95 per cent. These subsidies, therefore, almost entirely constitute the 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, even when prices for upland cotton were falling, and the value of the United States dollar and costs of production were rising, production and exports of upland cotton by the United States increased significantly. Similarly, the acreage under upland cotton in the US increased by 13.5 per cent between MY 1998 and MY 2001. Thus, in our view, Brazil has made a prima facie case of having suffered “serious prejudice” on account of the subsidies given by the US to cotton.
7. In its Further Submission, the United States has argued that after Brazil demonstrates that one or more of the effects of the subsidy mentioned in Article 6.3 is applicable, Brazil must then further demonstrate that the “prejudice” caused by the effects of the subsidy were “serious” enough to constitute “serious prejudice” within the meaning of the term in that Article. The argument of the United States appears to be based on the use of the words “may arise” in Article 6.3 as against the use of the words “shall be deemed to exist” in Article 6.1. The US seems to conclude that serious prejudice need not arise even if one or more of the effects of the subsidy listed in Article 6.3 is found. 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.

8. In India’s view nothing more than the demonstration that one of the effects enumerated in Article 6.3 exists is necessary to arrive at a finding of “serious prejudice”. Subsidies listed under Article 6.1 are deemed to cause serious prejudice, hence such a presumption is rebuttable under Article 6.2 if the subsidy does not result in any of the effects enumerated in Article 6.3. No such rebuttal is envisaged under Article 6.3. There is, thus, no obligation under the SCM Agreement to demonstrate serious prejudice separately after establishing that one of the effects of a subsidy listed under Article 6.3 applies, as the effects listed in Article 6.3 themselves equate to serious prejudice. This interpretation is also confirmed by a reading of Article 6.2, which equates serious prejudice to effects listed under Article 6.3. India disagrees with the US interpretation of Article 6.3.

9. In conclusion, Mr. Chairman and Members of the Panel, India holds the view that the subsidies given by the US on upland cotton are specific, causal link exists between these subsidies and the significant price depression, and these subsidies given by the US have caused serious prejudice within the meaning of the term in Article 6.3 of the SCM Agreement.

Annex F-10


8 October 2003

1. Mr Chairman, Members of the Panel, New Zealand’s Further Submission to the Panel of 3 October outlines New Zealand’s support for the claims made by Brazil and its views on the issues raised in the Further Submission of the United States. The evidence brought by Brazil in support of its claims is overwhelming and conclusive.

2. New Zealand’s submission, and our statement today, focuses in particular on Brazil’s demonstration that the United States subsidies cause significant price suppression within the meaning of Article 6.3(c) of the Agreement on Subsidies and Countervailing Measures (or the SCM Agreement). Evidence brought by Brazil shows that the United States subsidies suppressed A-index prices by an average of 12.6 per cent over MY 1999-2002. That means a total amount of lost revenue for Brazilian producers of $478 million and suppressed revenue worldwide of $3.587 billion.

3. The United States has produced no evidence or argument to rebut this claim. Instead the United States points to a number of factors that it says caused prices for upland cotton to fall. However, those factors are entirely irrelevant to the issue of whether the United States subsidies cause significant price suppression. Nothing in the SCM Agreement requires a complainant to show that the subsidies at issue are the sole or major cause of prices falling in order to demonstrate serious prejudice.

4. In fact, the SCM Agreement does not even require prices to fall for there to be price suppression. As demonstrated by Brazil, price suppression can occur even when prices are rising. All a complainant is required to show to satisfy Article 6.3(c) is that significant price suppression is caused by the subsidies at issue. Brazil has done that, and the econometric models Brazil has used have not been challenged by the United States. Furthermore, those models isolate the effects of the subsidy from other factors, and thereby ensure that the effects of other factors affecting cotton prices are not attributed to cotton subsidies.
5. By contrast, the United States advocates an interpretation of Articles 5 and 6 that would completely undermine their objective, which is of course to allow WTO Members to act when adversely affected by other Members’ use of subsidies.
6. In particular the United States draws the wrong conclusion from a comparison of Article 6.1 and Article 6.3, namely that it is not sufficient for a complainant to show that one of the effects set out in Article 6.3 exists for there to be serious prejudice. A closer look at the substance and nature of those provisions in the broader context of Articles 5 and 6 makes it clear that once a Member has demonstrated the existence of significant price suppression within the meaning of Article 6.3, there is serious prejudice. We note that the EC agrees with this interpretation in its Further Third Party Submission. New Zealand has described in detail in its Further Submission why the United States interpretation of Article 6 should be rejected.

7. The United States takes a similar approach to interpretation of the phrase “significant” in Article 6.3(c). The United States approach would require “significant price suppression” to be demonstrable solely by reference to some arbitrary level of numeric significance. Yet the United States does not suggest what level of significance would be appropriate in the present case, nor does the United States go so far as to suggest that 12.6 per cent is not “significant”. The United States offers no explanation at all of how “significance” is to be determined under its proposed approach. This is perhaps because such an approach is unworkable in practice.

8. Whether or not price suppression is significant within the meaning of Article 6.3(c) will depend on the circumstances of the case. And such a determination must be anchored in the overall context of consideration of the adverse effects of the subsidy if the Agreement is to operate as Members intended it to. Thus Brazil’s approach of considering whether the level of price suppression is “meaningful” in its effect is entirely appropriate and workable, and offers the best means of ensuring that Article 6.3(c) is effectively and consistently applied.

9. These are but two examples of attempts by the United States to read into the SCM Agreement additional requirements that are simply not there and distort the requirements that are there. If accepted, such interpretations would make it virtually impossible for Members to show the existence of serious prejudice. Such an erosion of the rights negotiated by Members under the SCM Agreement cannot be permitted.

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