Threat of Serious Prejudice 10. New Zealand’s Further Third Party Submission also outlines why the Panel should find that the United States subsidies create a threat of serious prejudice to the interests of Brazil in the future. The fact that Brazil’s interests are already suffering serious prejudice as a result of the United States subsidies leads to a strong presumption that they will continue to do so. United States legislation requires the continued provision of the subsidies irrespective of whether or not they have adverse effects on other Members. 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 threat of future serious prejudice is therefore a real one.
11. In addition to the points addressed in New Zealand’s Further Submission, New Zealand takes this opportunity to record its views on two further issues raised by the United States.
Crop Insurance 12. The first is the United States argument that crop insurance payments fail to meet the requirement for specificity in Article 2 of the SCM Agreement. As demonstrated by Brazil, the crop insurance subsidies to upland cotton producers enhanced United States upland cotton production. The payments act as a direct production stimulant by keeping marginal upland cotton land in production. Professor Sumner’s analysis concludes that in the period MY 1999-2002 United States crop insurance subsidies resulted in suppression of world prices by 1.2 per cent.
13. Brazil has demonstrated that the crop insurance programme is limited to certain enterprises and thus is not generally available but is effectively available only in respect of crops. The crop insurance programme is therefore specific within the meaning of Article 2 of the SCM Agreement.
Step 2 domestic payments 14. Second, New Zealand wishes to elaborate its view in support of Brazil’s claim that the Step 2 domestic payments are prohibited subsidies under Article 3.1(b) of the SCM Agreement and GATT Article III.4. There is no basis upon which to claim that the Agreement on Agriculture gives Members a right to use whatever domestic support they wish with complete impunity from action under other WTO Agreements. The Agreement on Agriculture is silent on the issue of local content subsidies. Such silence cannot be taken as creating an “entitlement”.
15. Nor does New Zealand accept that Members could have so encroached on the fundamental GATT principle of national treatment any way other than explicitly and expressly. The United States has been unable to demonstrate that Members intended, through the Agreement on Agriculture, to effectively waive their rights under GATT Article III in respect of agricultural products. Nor is there any evidence that Members traded those rights in return for reduction commitments on domestic support. Where there was a trade-off was between the application of Articles 5 and 6 of the SCM Agreement (for a limited period of time) and reduction commitments, as set out explicitly in the peace clause. There is no such trade-off in the peace clause for Article 3.1(b) of the SCM Agreement.
16. Paragraph 7 of Annex 3 of the Agreement on Agriculture, relied upon by the United States and EC as evidence that the Agreement authorises the use of local content subsidies, provides no basis for such a conclusion. All paragraph 7 does is recognise that it is possible for measures directed at agricultural processors to benefit the producers of basic agricultural products. For example, a government may pay a subsidy to a processor which it is required to pass on to the domestic producers. This can occur without affecting the competitive relationship between imports and domestic production. The measure would be consistent with Article 3.1(b) of the SCM Agreement and GATT Article III, and the support rightly counted against the Member’s AMS. Nothing in paragraph 7 suggests that it should be interpreted as referring to domestic content subsidies, let alone that it authorises them in contravention of Article 3.1(b) of the SCM Agreement or GATT Article III.
Conclusion 17. In conclusion, New Zealand considers that Brazil has presented the factual evidence necessary to substantiate its claims under the SCM Agreement. Brazil has also demonstrated that the United States cannot avail itself of protection under the peace clause. The interpretation advanced by the United States of the provisions of the SCM Agreement would render actionable subsidies inactionable, thereby undermining the carefully negotiated balance of rights and obligations in the SCM Agreement and the Agreement on Agriculture. New Zealand therefore requests the Panel to make the findings and recommendations requested by Brazil.
FURTHER REBUTTAL SUBMISSIONS OF PARTIES
Annex G-1 Executive Summary of Brazil's Further Rebuttal Submission
Annex G-2 Executive Summary of the United States' Further Rebuttal Submission
ANNEX G-1 EXECUTIVE SUMMARY OF BRAZIL'S
FURTHER REBUTTAL SUBMISSION
Brazil responds in its Further Rebuttal Submission to various arguments raised and evidence presented by the United States in earlier stages of this proceeding.
Brazil presents new evidence in rebuttal of US assertions that it has failed to demonstrate that contact payments were paid to current producers of upland cotton in MY 1999-2002. This evidence is in the form of USDA payment data obtained and analyzed by the Environmental Working Group (EWG) concerning, inter alia, upland cotton and other crop base contract payments between MY 2000-2002, as well as upland cotton marketing loan payments. The EWG database matches the upland cotton recipients and farms receiving each type of payment. It shows that the great majority of upland cotton producers grew upland cotton on upland cotton base acreage. It also shows that upland cotton producers received approximately three-quarters of all upland cotton contract payments between MY 2000-2002. Additional contract payments supporting upland cotton are found by attributing contract payments on non-cotton base acreage. While the EWG data underestimates the amount of contract payments in support of upland cotton, it nevertheless corroborates and supports Brazil’s “14/16” methodology. Moreover, this data is also consistent with the large body of evidence demonstrating that upland cotton producers receive, rely on, and need upland cotton contract payments to make “ends meet.”
Better evidence of the amount of contract payments in support of upland cotton would come from an examination of the amount of upland cotton currently planted on upland cotton (or other) contract acreage. This evidence is collected and exclusively in the control of the United States. Brazil rebuts the US assertions that it does not collect or maintain information permitting it to respond to the Panel’s Question 67bis or to Brazil’s repeated requests for information regarding the amount of contract payments received by current producers of upland cotton. In fact, the United States has access to all of the farm-specific and commodity specific commodity acreage and payment data from both current upland cotton producers as well as holders of crop base under contract payment programmes that would permit it to (1) provide a close approximation of the PFC and market loss assistance payments to current upland cotton producers in MY 1999-2001, and (2) provide the precise amount of direct and counter-cyclical payments to current upland cotton producers in MY 2002. Brazil requests the Panel to ask the United States, for the third time, to produce this information.
In the absence of information within the exclusive control of the United States, the information on marketing loan and contract payments in the EWG database, together with the considerable other evidence presented by Brazil, is the best information available to assist the Panel in making the determination concerning the amount of “support to upland cotton” for the purposes of the peace clause.
Regarding Brazil’s price suppression and increase in world market share claims under Articles 6.3(c) and 6.3(d) of the SCM Agreement, Brazil first responds to US arguments that only variable costs are relevant to any cost of production analysis. This is the wrong legal as well as economic benchmark. Brazil notes the Appellate Body’s decisions in the Canada – Dairy (21.5) disputes held that a cost of production analysis should focus on total, not variable,costs. That is, only an analysis of the total cost of production takes account of the economic resources the producer invests in the product. The Appellate Body’s jurisprudence on this issue reflects the economic reality that, over the long term, producers have to recover all their costs and make profits to stay in business. To the extent that the producer charges prices that do not recoup the total cost of production, over time, it sustains a loss which must be financed from some other source.
USDA cost data shows that US producers would have lost $871 per acre if they had grown upland cotton without subsidies between MY 1997-2002. With subsidies, these upland cotton producers made a per-acre “profit” of $120 over the six-year period. Further, most of the fixed costs of US producers must be covered over a long-term six-year period, or upland cotton producers would be forced to halt production. This evidence supports the close causal link between US subsidies and continued high levels of US upland cotton production and exports, as well as suppressed prices. These facts demonstrate the veracity of the National Cotton Council’s Chairman’s statement that US upland cotton producers “can’t exist without subsidies”.
The United States’ argument that a cost of production analysis may be limited to variable costs defies all economic logic. This is particularly true in light of the items that the United States counts towards fixed costs, including hired labour, opportunity cost of unpaid labour, capital recovery of machinery and equipment, opportunity cost of land, taxes and insurance, and general farm overhead. These facts confirm the common sense notion that without the US subsidies, a significant portion of the US upland cotton production would not be economically viable and would not be produced.
Brazil rebuts US arguments that US subsidies had no price-suppressing effects by demonstrating the close relationship between increases or decreases in world cotton stocks and A-Index prices. USDA’s own economists estimate that US subsidies increased US upland cotton world supply by 1.9 million bales in MY 2000 and 4.3 million bales in MY 2001. Because the United States has admitted that the injection of 11.6 million bales of Chinese government stocks into world supply between MY 1999-2001 depressed prices, it is not surprising that USDA economists, as well as Professor Sumner, found that the addition of similar quantities of US subsidy-generated upland cotton had similar price-suppressing effects. Moreover, if Chinese Government sales of stocks significantly depressed prices, as the US claims, then withdrawing a similar amount of US upland cotton during the same period certainly would significantly increase prices.
In addition, market experts predict that a 14 million bale US crop in MY 2004 (resulting from a potential crop failure) would have a significant impact in MY 2004 on increasing the New York futures price – and the world (and Brazilian) price of cotton. Brazil demonstrated the interconnected nature of world upland cotton market and the direct relationship between large US subsidies in sustaining US production and in lowering world and Brazilian prices.
Brazil rebuts US arguments that the appreciation of the US dollar does not demonstrate any causal link between US subsidies and increased US world market share and suppressed prices. Using data from Exhibit US-69, Brazil demonstrates that there has been a dramatic increase in the appreciation of the US dollar against a cotton-trade weighted basket of currencies of other world cotton producers by 154 per cent between the period 1996-2003. US exports – instead of falling as predicted by USDA economists – almost doubled.
The impact of the subsidies on international cotton trade is best assessed by analyzing the cotton trade-weighted exchange rate for cotton-exporting countries in general. This where the competition exists and where the impact of exchange rate movements on the competitiveness of countries should be found. With their currencies depreciating dramatically against the US dollar, US competitors should have been able to increase their market share and their exports compared to high-priced and high-cost US exports of the same commodity product. But since these competitors do not have access to subsidies averaging 95 per cent of the value of their production, as a result, these competitors saw their exports and world market share reduced.
Brazil responds to US arguments that US producers are responsive to changes in futures prices at the time of planting. Brazil demonstrates that average January-March futures prices declined between MY 1998-2002, while US planted acreage increased. This is exactly opposite of what would be expected without the effect of US subsidies (that increased significantly during the same period). All of the analysis presented by Brazil is consistent with Congressional testimony by USDA’s Chief Economist Keith Collins that there is little supply (i.e., planted acreage) response from US upland cotton farmers because of the subsidies they receive.
Further, the 72.4 cents target price support level available to US upland cotton producers in MY 2002 meant that US producers could not expect to receive higher revenue even if prices increased throughout MY 2002. In fact, US planted acreage declined in MY 2002 because some US upland cotton producers had suffered significant losses even with US subsidies, as they could not recover their cost of production.
Brazil responds to US legal arguments seeking to impose countervailing duty concepts in adverse effects claims by demonstrating that there is no textual basis in either Article 1 or Part III (adverse effects) of the SCM Agreement for the imposition of “pass-through,” “value of subsidy”, “subsidized product” or “tied-untied” methodologies. Unlike a countervailing duty investigation, it is the cumulative effects of the US subsidies that are the focus of price suppression and increase in world market share claims under Articles 6.3(c ) and (d) of the SCM Agreement. The current US position is directly contrary to its arguments in Indonesia – Automobiles, where the United States rejected Indonesian efforts to have the Panel examine each subsidy of the National Car Programme” individually.
The focus of Articles 5 and 6 of the SCM Agreement is on the effect of the subsidies in suppressing prices or increasing world market share. These cumulative effects of a variety of US subsidies caused price suppression and an increase in the US world market share between MY 1999-2002, and will continue to do so through the end of MY 2007.
Contrary to the US argument to sustain its serious prejudice claims, Brazil does not have to prove “that the ‘prejudice’ caused by the effects of the subsidies were ‘serious’”. Brazil’s interpretation of the chapeau of Article 6.3 of the SCM Agreement does not read “may” to mean “shall”. Rather, the term “may” refers to various situations in which the four enumerated types of serious prejudice exist but are not actionable.
Brazil highlights the collective effects of the US subsidies by noting that numerous econometric studies that Brazil has presented to the Panel, all conclude that US subsidies significantly increase US production and suppress US and world prices. Moreover, no study has ever found that the US subsidies to upland cotton would not have a significant production and export-enhancing as well as a price-suppressing effect.
Furthermore, Brazil rebuts US arguments that Professor Sumner’s results, using the November 2002 FAPRI baseline misrepresent the real effects. Brazil demonstrates that using the most recent January 2003 FAPRI baseline, Professor Sumner’s results also show significant production and export-enhancing and price-suppressing effects. Brazil further argues that a USDA study and an IMF study that the United States claims show that Professor Sumner’s analysis was inflated are, in fact, consistent with Professor Sumner’s findings.
Therefore, the US assertion that Professor Sumner’s results are grossly overstated due to the use of a baseline projecting artificially low upland cotton prices is false. Whether the results of the modified or the original model and whether the November 2002 or the January 2003 baseline are used, continue to fully support that the US subsidies cause significant price suppression and an increase in the US world market share, as well as that those subsidies caused the United States to have more than an equitable share of world export trade.
Brazil further demonstrates the causal link between US subsidies and price suppression and increased exports by showing that the individual effects of the various US subsidies increase US production and exports, and result in suppressed prices. USDA and other economists are unanimous in finding that marketing loan payments to upland cotton created significant production- and export-enhancing and price-suppressing effects during the period of investigation. The effect of this subsidy alone caused serious prejudice to the interests of Brazil in MY 1999-2002.
Furthermore, USDA economists also found that crop insurance subsidies for upland cotton have far more production-enhancing effects than for other crops.
The National Cotton Council and cotton market experts have repeatedly emphasized the importance of the Step 2 subsidy in stimulating US production and exports. Brazil has provided compelling evidence that the Step 2 subsidies are trade- distorting and have caused increased US upland cotton exports and suppressed world prices.
Lastly, Brazil rebuts the United States so-called “literature review” for contract payment subsidies by pointing out that none of the studies addresses the specific situation of upland cotton during the period of investigation, none focuses on the impact of the restrictions on planting fruits and vegetables, none examine the impact of the updating of the base acreage and yield in 2002, and none focuses on the production effects caused when CCP payments are triggered by lower prices, or the production effects of more than $1 billion paid to producers of upland cotton in MY 2002. Finally, the studies do not explain the much higher per acre cotton payments than other base acres or the fact that US average upland cotton producers could not have covered their total costs without contract payments during MY 2000-2002.
Therefore, the evidence submitted to the Panel demonstrates that the decoupled payments have production-enhancing effects. While these effects are smaller than the effects of the marketing loan payments, they are an important part of the collective effects of the US subsidies in creating price suppression and increased and inequitable world market share.
Brazil demonstrates that crop insurance subsidies are specific within the meaning of Article 2 of the SCM Agreement. There are different crop insurance policies that are available for only limited products, as well as groups of policies available for certain crops. Therefore, the US crop insurance system is simply not the “one size fits all” programme as argued by the United States. Furthermore, Brazil rebuts US arguments concerning the specificity of crop insurance subsidies by showing that there are no crop insurance policies available for livestock, with the exception of four pilot programmes. Even these pilot programmes are very limited in terms of recipients, and have only a total budget of $20 million, a tiny fraction of the crop insurance subsidies paid for crops.
Additionally, the US – Softwood Lumber CVD panel report endorsed a finding by USDOC that subsidies paid to only a handful of industries in an economically diverse economy are “limited” (and therefore “specific”) within the meaning of Article 2.1 of the SCM Agreement. The record continues to demonstrate that agricultural products representing approximately 50 per cent of the value of US agricultural commodities are not covered by crop insurance subsidies. This, together with the evidence submitted of specific policies and groups of coverage that are provided to only selected crops such as upland cotton, highlight the fact that only certain enterprises receive the benefits of these subsidies.
Regarding Brazil’s Article 6.3(d) claim, the United States is incorrect in claiming that Brazil’s claims relate only to MY 2001. As discussed in Section 3.9, those claims also include claims for MY 2002, 2003 and the period from 2004-2007.
Furthermore, the United States argues that the term “world market share” in Article 6.3(d) of the SCM Agreement means “world consumption share”. Contrary to the US arguments, the “world market share” does not refer to “all the markets in the entire ‘world’, including the market of the subsidizing Member. Brazil has demonstrated that the ordinary meaning of “world market share” refers to the share of a Member in the world export trade.
This interpretation is further supported by the context of Article 6.3(d), which includes the reference to the word “trade” in footnote 17. Additional context can also be found in the close similarity between the concepts used in Article 6.3(d) and Article XVI:3, second sentence (both involve primary products, increase in exports, representative periods, effects of any subsidy). Given the similarities between these provisions, the use of the terms “world market share” and “share of world export trade” does not state that both provisions deal with separate situations, as the United States argues. Instead, both terms refer to a share of export transactions in the world market. Therefore, the phrase “world market share” means the world market share of exports, not consumption.
In sum, Brazil has demonstrated that the US subsidies caused serious prejudice and threat thereof to the interests of Brazil, because for each marketing year between 2001-2003 the US world market share in upland cotton increased over its previous three-year average. These increases followed a consistent trend, within the meaning of Article 6.3(d) of the SCM Agreement.
Brazil rebuts US arguments that GATT Article XVI:3 only applies to export subsidies and, thus, has been superseded by Article 3.1(a) of the SCM Agreement. GATT Article XVI:3 is an actionable subsidy provision that applies to all subsidies having the effect of increasing exports. The phrase “which operates to increase the export” is quite different from the phrase “subsidy on the export”. Furthermore, the phrase “operates to increase the export” does not contain any export contingency requirement. Therefore, read in the context of the SCM Agreement and GATT 1994, Article XVI:3, second sentence refers to export-related subsidies, which is a far broader notion than subsidies that are “contingent upon export performance”.
In sum, GATT Article XVI:3 is not superseded by the export subsidy provisions of the Agreement of Agriculture and the SCM Agreement. Instead, it provides obligations concerning any form of subsidy, independent of the obligations set forth in Article 3 of the SCM Agreement.
Brazil also conclusively demonstrates that US upland cotton subsidies violate GATT Article XVI:3 by causing the United States to have a more than equitable share of world export trade in upland cotton.
With respect to Brazil’s threat serious prejudice claims, Brazil argues that the appropriate standard for serious prejudice claims is not the “imminent threat” standard argued by the United States, but rather whether the unlimited and mandatory US subsidies create a structural and permanent source of uncertainty in suppressing prices, increasing world market share, and securing an inequitable share of world trade.
Brazil has demonstrated that it is appropriate for the Panel to rely on the standard proposed by the GATT EC-Sugar Exports panels to determine whether the mandatory and unlimited US subsidies on upland cotton create a permanent source of uncertainty in the world upland cotton market. The facts of this dispute meet that standard. The United States has admitted that the US subsidies are both mandatory and unlimited. Given the large US world market share and share of total world production, the US subsidies will have the effect of locking in large amounts of US production, of creating an ongoing significant threat of suppressed prices, and of securing an increasing and inequitable US world market share throughout MY 2003-2007.
The “imminent threat” standard is not found in the text of Part III of the SCM Agreement, and is only applicable to investigations by investigating authorities in countervailing duty, anti-dumping, or safeguard contexts. It is inconsistent with the remedies provided for in Article 7.8 of the SCM Agreement, which are imposed well after the period of investigation examined by a Panel.
Therefore, the collective effects of the mandated and unlimited US subsidies in MY 2003-2007 threaten to maintain a large US upland cotton production, to increase and maintain US exports, and to significantly suppress world upland cotton prices during MY 2003-2007, in violation of Articles 5(c), 6.3(c), and (d), and GATT Articles XVI:1 and 3.
In sum, the mandatory and unlimited US upland cotton subsidies cause threat of serious prejudice to the interests of Brazil. They constitute a structural and permanent source of uncertainty in the world upland cotton market, in which the United States enjoys a dominant position. This conclusion is further supported by the trade-distorting nature of the US subsidies, their effects in causing present serious prejudice in MY 1999-2002.
Finally, with respect to export credit guarantees, Brazil offers the Panel a recounting of its evidence and argument in support of its claims against the CCC export credit guarantee programmes, along with footnote citations to all of the places in its various submissions in which it makes those arguments and offers that evidence. Brazil also responds to particular points raised by the United States that Brazil has not yet addressed. The GSM 102, GSM 103 and SCGP export credit guarantee programmes constitute export subsidies that circumvent, or threaten to circumvent, the US export subsidy reduction commitment, within the meaning of Articles 10.1 and 8 of the Agreement on Agriculture. They also constitute prohibited export subsidies within the meaning of Articles 3.1(a) and 3.2 of the SCM Agreement and item (j) of the Illustrative List of Export Subsidies.