3. Claims under Article 6.3(d) of the SCM Agreement 15. The facts strongly support Brazil’s claims that US subsidies contributed to an increased US world market share of exports. USDA’s data show that US exports increased in MY 2001, MY 2002, and are projected to increase in MY 2003 to levels well above the previous 3-year averages as required by Article 6.3(d).
16. The US domestic subsidies played a major role in the increased US exports by maintaining high-cost US production. Similarly, the Step 2 subsidy was paid in 188 out of 208 weeks and more than $1.6 billion worth of US upland cotton exports received GSM 102 export credit guarantee financing. The NCC confirmed that both subsidies played a major role in the significant expansion of US exports, in particular against the background of a rapidly appreciating US dollar. Professor Sumner’s analysis estimates that on average, US exports would be 41.2 per cent lower without any of the US subsidies between MY 1999-2002. US world export market share expanded rapidly from MY 1999 even as prices plunged to record lows. After reaching 41.6 per cent in MY 2002, the US market share is projected to remain very high at 39 per cent in MY 2003.
17. The United States response to this evidence is to argue that the term “world market share” means “world market share of consumption”. But USDA, Canada, and the EC agricultural experts, among others, use and interpret the phrase as “world market share of exports”. This is the correct meaning as confirmed by the use of the word “trade” in the footnote qualifying Article 6.3(d), and by the close similarity between the scope and text of Article 6.3(d) and Article XVI:3, second sentence, which also deals with world market share of exports. Further, as we demonstrated yesterday, the US “consumption” interpretation is unworkable and illogical because US consumption is total domestic “shipments” (i.e. net use from production or stocks) plus imports minus exports. To count US exports as consumption means double counting other countries’ imports as consumption.
4. Claims under GATT Article XVI:1 and 3 18. The facts strongly support a finding that the US share of world export trade is inequitable. While world market prices plunged and the US dollar appreciated rapidly, the huge US subsidies allowed US exporters to purchase a record high share of 41.6 per cent. At the same time, the share of much lower cost and non-subsidized producers declined between MY 1999-2002. The text of Article XVI:3, second sentence, covers any type of subsidy that “operates to increase the export” of a primary product such as upland cotton. Contrary to the US arguments, nothing in the text of the WTO or GATT 1994 suggests that Article XVI:3, second sentence, has been superseded by Article 6.3.
5. Claims of Threat of Serious Prejudice 19. Brazil has also established that there is a present threat of serious prejudice during the lifespan of the 2002 FSRI Act. This threat covers the threat of significant price suppression, threat of a further increased US world market share and the threat that the United States continues to have a more than equitable share of world export trade. The mandatory and unlimited nature of the production and trade-distorting US upland cotton subsidies and the absence of a legal mechanism that stems, or otherwise controls, the flow of these subsidies constitutes the actionable threat of serious prejudice to the interests of Brazil. The timing and nature of actionable subsidy cases, as well as the remedies available under the SCM Agreement compel that such a threat need not be “imminent”, but instead “present” to be actionable.
20. Brazil has demonstrated that there is a present threat of serious prejudice from the existence of the US subsidies. There is no dispute between the United States and Brazil that the US marketing loan, Step 2, crop insurance and contract payments are mandatory subsidies. There is no limit on the amount of upland cotton that can be produced, used and exported from farmers receiving these payments. Brazil has also demonstrated that all of these subsidies are production and trade-distorting and have caused present serious prejudice between MY 1999-2002.
21. The most recent USDA and FAPRI baselines project continued high levels of US planting and continued high costs that will not be covered by market revenue. Therefore, the US subsidies will continue to have large production and export-enhancing and price-suppressing effects. In particular, until MY 2007, the US subsidies threaten to cause significant price suppression in the US, world, Brazilian and in third-country markets to which Brazil exports its upland cotton.
22. Finally, the US subsidies mandated until the end of MY 2007 will cause serious prejudice under any market conditions. Thus, the provisions mandating marketing loan, Step 2, crop insurance and direct and counter-cyclical payments constitute per se violations of Articles 5 and 6.3(c) and (d) of the SCM Agreement.
6. Brazil’s Claims regarding Step 2 Export and Domestic Payments under Article 3.1(a) and (b) of the SCM Agreement 23. The Step 2 export and Step 2 domestic subsidies are prohibited subsidies under Article 3.1(a) and (b) of the SCM Agreement. The Step 2 export subsidies violate Article 3.1(b) because they are subsidies expressly contingent upon proof of export of US upland cotton and are paid only to eligible exporters. The NCC describes the Step 2 programme as “export assistance” and the USDA acknowledges it makes U.S. exports of upland cotton more “competitive”.
24. The United States acknowledges that Step 2 domestic subsidies are local content subsidies within the meaning of Article 3.1(b) of the SCM Agreement. Local content subsidies to processors of agricultural commodities are not expressly exempted from the disciplines in the SCM Agreement by either Agreement on Agriculture or by the chapeau of Article 3.1. In particular, Annex 3, paragraph 7 and Article 6.3 of the Agreement on Agriculture do not create rights and obligations that by necessity conflict with Article 3.1(b). Brazil has demonstrated the absence of any inherent conflict because it is possible to provide domestic support to processors of agricultural products without violating Article 3.1(b). Further, Article 13(b)(ii) is properly read as meaning that even if a local content domestic support measure may conform to Article 6.3 of the Agreement on Agriculture, it is not exempted from claims under Article 3 of the SCM Agreement. If the drafters had intended to exempt agricultural local content subsidies from Article 3 claims, they would have included Article 3 in Article 13(b)(ii), the same way that they included Article 3 of the SCM Agreement in Article 13(c)(ii) for purposes of exempted export subsidies for scheduled products.
7. Brazil’s Claims regarding the CCC Export Credit Guarantees 25. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP export credit guarantee programmes administered by the CCC constitute export subsidies within the meaning of Articles 10.1, 1(e) and 8 of the Agreement on Agriculture, Articles 1.1 and 3.1(a) of the SCM Agreement, and item (j) of the Illustrative List of Export Subsidies. Brazil has also demonstrated that those export subsidies circumvent, or threaten to circumvent, the United States’ export subsidy reduction commitments, in violation of Articles 10.1 and 8 of the Agreement on Agriculture. Additionally, because they violate the Agreement on Agriculture, these programmes are not exempt from actions by Article 13(c)(ii) of the Agreement on Agriculture, and constitute prohibited export subsidies within the meaning of item (j) and Articles 1.1, 3.1(a) and 3.2 of the SCM Agreement.
8. Brazil’s Claims regarding the ETI Act Subsidies 26. With respect to the ETI Act, Brazil and the United States agree that the Panel should follow the precedent of the panel in India – Patents (EC). Indeed, the United States has effectively admitted the inconsistency of the ETI Act by repeatedly stressing to the Panel that it intends to implement the rulings and recommendations of the Dispute Settlement Body to bring the ETI Act into conformity with the Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement.
I. THE EFFECT OF US SUBSIDIES IS NOT SIGNIFICANT PRICE SUPPRESSION
1. Brazil’s theory of its case is that subsidies result in greater production, increased exports, and suppressed world prices for upland cotton. Brazil does not, because it cannot, refute the fact that US producers have increased and decreased acreage commensurately with producers in the rest of the world. Thus, there is no evidence that US producers are insulated from market forces in making production decisions.
2. In every year but one in which Brazil has alleged price suppression, and in marketing year 2003 in which it alleges a threat of price suppression, expected harvest season prices at the time of planting have been above the US marketing loan rate. In marketing year 2002, the only year in which expected harvest season price was below that rate, US harvested acres fell by a slightly larger percentage than the rest of the world. In fact, US planted acres fell by the amount expected from the decline in expected harvest season prices from marketing year 2001 to 2002 and by far more than would have been expected had producers been planting for the marketing loan rate. Therefore, rather than supporting Brazil’s argument – that the effect of US payments is to make US producers unresponsive to market price changes – the evidence contradicts it.159
3. Brazil’s allegation that the effect of US subsidies is price suppression is dispelled by the fact that Brazilian cotton undercuts the US price in various third country markets.160 Aggregated data on average US and Brazilian upland cotton prices to various markets identified by Brazil unambiguously show that Brazilian cotton undercuts the US price in these third country markets. Thus, these data demonstrate that it is not US upland cotton that has suppressed Brazilian upland cotton prices, but Brazilian cotton prices that have undercut US prices.
II. THE EFFECT OF US SUBSIDIES IS NOT AN INCREASE IN WORLD MARKET SHARE 4. The facts do not demonstrate any increase in US world market share. While US world market share in marketing year 2002 was projected to be higher than the average of the preceding three year period, the 2002 subsidies are different from the subsidies for prior marketing years, and 2002 payments were only introduced with the 2002 Act. It is the effect of the 2002 subsidies that Brazil must demonstrate under Article 6.3(d) of the SCM Agreement establishes an increase that follows a "consistent trend." One year does not make a "consistent trend". Thus, there can be no "consistent trend over a period when subsidies have been granted".161 III. THE EFFECT OF US SUBSIDIES IS NOT A THREAT OF SERIOUS PREJUDICE 5. The facts do not support a finding of threat of serious prejudice. We submit that Brazil seeks to have the Panel reject the "imminent threat" standard, even though it was Brazil itself that previously suggested this standard to the Panel, because market prices have recovered to the point that no marketing loan payments have been made since 18 September 2003, and counter cyclical payments are expected to be well below their statutory maximum for marketing year 2003.162
6. Brazil concedes that "market prices [may] increase to the point where the present effects of the subsidies are minimal". Given current and expected prices for marketing year 2003, even Brazil might have to concede that the present effects of US subsidies could be "minimal". However, Brazil seeks to prevent the Panel from basing its threat of serious prejudice analysis on that same marketing year 2003 data. If Brazil cannot demonstrate an imminent threat of serious prejudice in marketing year 2003, logically, neither can it demonstrate a threat of serious prejudice in farther off years, given that (in Brazil’s words) "market prices move up and down," and "[n]o Member . . . can predict the course of future prices".
IV. BRAZIL HAS FAILED TO SHOW THE ELEMENTS NECESSARY TO ESTABLISH ITS SUBSIDIES CLAIMS 7. Brazil has argued that no concepts or analysis drawn from other parts of the SCM Agreement or provisions from other agreements may be applied to claims under Part III of the Subsidies Agreement. This position is untenable. The United States is not suggesting some radical methodology dreamt up for purposes of this dispute but instead is proposing methods based on principles set forth in the SCM Agreement and accepted and applied by other WTO Members, including Brazil, for purposes of their countervailing duty practice.
8. Brazil says there is no need for it to quantify the subsidy benefit attributable to the product at issue nor the rate of subsidization but does not explain how to evaluate the effect of the subsidy without identifying the amount or rate of support. Further, Brazil has repeatedly alleged a subsidy amount and subsidization rate for the marketing year 1999 2002 period. Presumably, then, the value of the subsidy and the subsidization rate of exported US upland cotton would be highly relevant to the Panel’s analysis of the effect of the challenged subsidies; Brazil’s position would deprive the Panel of that crucial element.
9. Brazil errs in asserting that it need not identify the "subsidized product", ignoring or selectively quoting various provisions – Subsidies Agreement Articles 6.1(a), 6.3(c), 6.3(d), 6.4, and 6.5 – that expressly mention the "subsidized product". Subsidies to products other than upland cotton would not be within the Panel’s terms of reference nor relevant to the Panel’s analysis of the effect of the challenged subsidies. Again, Brazil’s position would deprive the Panel of a crucial element in determining, for example, whether and to what extent the US product in the same market as the Brazilian product was a subsidized product.
10. Brazil also errs in arguing that it need not attribute payments not tied to production across the recipient’s total value of production. The methodology of attributing subsidies not tied to production across the value of a recipient ’s production is spelled out in Annex IV to Part III of the Subsidies Agreement. Attributing such non tied payments across the total value of the recipient’s production is necessary to avoid double counting of the subsidy.
11. The United States does not see how decoupled payments made with respect to non upland cotton base acres would be within the scope of this dispute. Given Brazil’s own explanation of the measures it has challenged163, it cannot be possible that one set of measures was within the scope of the dispute at one point but that Brazil has the sole discretion to change the scope of that dispute by changing its legal position as to what it is challenging as support to upland cotton.
12. Finally, Brazil says effects of subsidies can linger, even if allocated to a particular year for countervailing duty purposes. It is clear in Annex IV, paragraph 7, that Members took it for granted that some subsidies are allocated to future production and others are not. Brazil, however, does violence to this principle by essentially asserting that all subsidies – including so-called "recurring" subsidies that most experts and national authorities (including its own) would expense to current production – should be allocated to future production. Brazil has now conceded that the subsidies at issue in this dispute are "recurring".164 Brazil cannot have it both ways: it cannot expense the entire value of a payment to a particular crop year but also claim that the subsidy continues to exist in a later year in which new recurring subsidies are made.
13. Decoupled Payments. Brazil has fundamentally erred in its explanation and modelling of decoupled payments by ascribing a production effect to them that is based on little more than conjecture. This assertion contradicts basic economic theory, the economic literature on such payments, and the available data showing large shifts in cotton acreage as recipients of decoupled payments plant alternative crops or no crops at all and other farmers who do not hold upland cotton base acres choose to produce upland cotton.165 Thus, there is no basis to ascribe production distorting effects to decoupled payments. In fact, most empirical studies have concluded that the effects of decoupled payments are minimal.166 14. Third Party Papers. Brazil cannot cite to results from papers that employ an approach fundamentally at odds with its own. These third party economic studies do not provide insight into the question this Panel has been asked to examine because they generally suffer from two crucial conceptual flaws. First, most of the cited studies do not distinguish between payments linked to production of upland cotton and payments decoupled from any requirement to produce, instead treating them as having equal production impacts. Second, most of the third party studies do not model the marketing loan programme appropriately, simply removing revenue from the producer without focusing on the producer’s expected harvest season price at the time of planting. Thus, Brazil would have to agree that these third party papers do not properly model farmers’ production decisions.
IV. BRAZIL HAS ADVANCED ERRONEOUS LEGAL STANDARDS UNDER ITS CLAIM IN THIS DISPUTE
15. Threat of Serious Prejudice/Article XVI:3. Brazil may not advance a claim of threat of serious prejudice using the "more than equitable share of world export trade" standard from GATT 1994 Article XVI:3. Nothing in the text of GATT 1994 Article XVI indicates that a threat claim under paragraph 1 may utilize the more than equitable share standard under paragraph 3. Neither is there any analysis in the EC – Sugar Exports GATT panel report that provides a textual basis to import that standard. Further, Brazil’s interpretation would also introduce a contradiction between GATT 1994 Article XVI:1 and SCM Agreement Articles 5 and 6 even though the term "serious prejudice" is used "in the same sense" in these provisions.167
16. Threat of Serious Prejudice and Per Se Serious Prejudice Standard. Brazil’s argument is that "[c]onsistent with prior precedent [the GATT EC – Sugar Export Subsidies panel report], the threat of serious prejudice is caused by the absence of any legal mechanism that stems or otherwise controls the flow of mandatory and unlimited US subsidies". The GATT Sugar Export Subsidies panel report, however, provided no basis for selecting that standard, and neither we nor Brazil find any basis for that standard in the text of the Subsidies Agreement or GATT 1994 Article XVI:1.
17. Brazil is simply wrong that US payments are "mandatory" and "unlimited".168 More fundamentally, however, Brazil’s argument that "the availability of a mandatory subsidy for an unlimited amount of production and exports will inevitably create a threat and support a finding of a per se violation" proves too much. Brazil’s standard means that only way a Member could act consistently with its WTO obligations would be to have a cap on expenditures with respect to a particular product. It is not at all clear at what level such a cap would have to be set. But Members rejected product specific expenditure caps in the Uruguay Round, instead agreeing on a commitment across all commodities (the Total and Final Aggregate Measurement of Support).
V. BRAZIL'S SUBSIDIES AND PEACE CLAUSE ARGUMENTS MUST BE CONSISTENT
18. Brazil’s arguments in this dispute must be consistent. First, it is evident that Brazil has conceded that various payments it previously claimed were product specific – namely, decoupled income support and crop insurance – are, in fact, non product specific support. That is, these subsidies are provided to "agricultural producers in general", either because they do not specify any production that must occur for receipt of payment or because they are provided to producers of a wide range of products.169 As non product specific support, they should not be included in the comparison under Article 13(b)(ii) of the Agreement on Agriculture. This contradicts the Brazilian approach, and is consistent with the US approach, to the Peace Clause.
19. Second, Brazil not only recognizes that support to upland cotton may be measured in terms of a rate but also that this is the only way to gauge the support decided by the United States for future years; therefore, Brazil relies on the rate of support concept for its threat and per se claims.170 By advancing such arguments, Brazil has effectively conceded the basis for the US Peace Clause analysis – that is, that the only way for Members to know whether US measures for any given year will comply with Peace Clause requirements is to examine the way in which they "decide" support: that is, the rate of support. If Brazil makes arguments under its subsidy claims based on the rate of support, it cannot credibly assert that the rate of support is inapt in the context of the Peace Clause. As demonstrated during the Peace Clause phase, the United States disciplined itself to remain within those limits by deliberately moving away from production linked deficiency payments with a high target price to decoupled income support.
CLOSING STATEMENT OF THE UNITED STATES AT THE
SECOND MEETING OF THE PANEL WITH THE PARTIES
I. CCC EXPORT CREDIT GUARANTEE PROGRAMMES ISSUES A. BRAZIL WRONGLY MINIMIZES THE SIGNIFICANCE OF ARTICLE 10.2 OF THE AGREEMENT ON AGRICULTURE
1. Brazil’s assertions in its opening oral statement regarding the CCC export credit guarantee programmes invite a brief response.
2. First, as discussed with the Panel during this meeting, Brazil asserts that Article 10.2 of the Agreement on Agriculture reflects merely a banal compromise to accommodate potential "additional obligations regarding notification, consultation, and information exchange". Brazil implausibly asserts that the obvious transition between the language of the Draft Final Act that would have imposed significant substantive disciplines on export credit guarantees and the absence of such language in the Article 10.2 ultimately adopted can be fully explained as reflecting merely an agreement to work on such pedestrian disciplines as information exchange.
3. Brazil asserts that the Members had agreed on the applicability of export subsidy disciplines to export credit guarantees and that Article 10.2 was an apparently insignificant "good faith agreement". However, Article 10.2 did not arise only because "other participants were not willing to offer more than general disciplines included in Article 10.1". It arose because part of the grand compromise of the Agreement on Agriculture was that export credit guarantees were excluded from the export subsidy disciplines.
4. Ironically, however, Brazil’s statement further serves to illustrate that export credit guarantees were not considered export subsidies under the Agreement on Agriculture. In December 1994, the Preparatory Committee for the World Trade Organization issued Notification Requirements and Formats Under the WTO Agreement on Agriculture.171 These notification requirements remain in effect. Elaborate reporting requirements are set forth for Members with respect to numerous aspects of the disciplines of the agreement, including with respect to export subsidies.172 However, no reporting requirement is indicated for export credit guarantees. This is consistent with treatment of such programmes as outside export subsidy disciplines. Had the parties agreed that all were "willing to offer" at least "the general disciplines included in Article 10.1", as Brazil asserts, then it would have been logical to include reporting requirements for such purposes. It is hard to imagine parties willing to make such an offer in the absence of the United States, among the largest providers of export credit guarantees. In fact, the United States never offered to include export credit guarantees in Article 10.1, and the Members never so agreed. Indeed, the agreement reflected in Article 10.2 is expressly to the contrary.
5. Article 10.2, furthermore, would be unnecessary for mere "notification, consultation, and information exchange". Had export credit guarantees been subject to export subsidy disciplines, Article 18 of the Agreement on Agriculture, to review the progress in the implementation of commitments negotiated under the Uruguay Round reform programme, and the Notification Requirements, which are still in effect, could amply accommodate any "notification, consultation, and information exchange".173 B. BRAZIL INVENTS A STANDARD NOT REQUIRED UNDER ARTICLE 10.3 OF THE AGREEMENT ON AGRICULTURE
6. Second, with respect to Article 10.3 of the Agreement on Agriculture, Brazil asserts that the only way for the United States to satisfy any burden applicable under that provision is "to demonstrate the absence of subsidization on a transaction by transaction basis". Such a standard would obviously be impossible to satisfy. Perhaps more importantly, Article 10.3 requires no such demonstration. Brazil simply invents this. The only authority it offers for this novel proposition is a Third Party Submission of Canada, which itself offers no authority for the assertion.
7. Article 10.3 applies only to export subsidy reduction commitments. We believe that Brazil agrees at least with that. Brazil has alleged that the United States has exceeded only its quantitative export subsidy reduction commitments and only during the period July 2001 June 2002. The United States has demonstrated that with respect to 12 of the 13 commodities for which the United States has reduction commitments the respective exports during that period under the export credit guarantee programme did not exceed applicable quantitative reduction commitments. Other than the Dairy Export Incentive Programme applicable to cheese and skim milk powder, with respect to which the United States previously noted in a prior submission the issuance of export subsidies, the United States provided no export subsidies for the other scheduled commodities. To avoid any further ambiguity the United States submits a copy of its notification concerning export subsidy commitments for fiscal year 2001, which reflects no export subsidies provided by the United States other than for cheese and skim milk powder.174
C. BRAZIL’S RECENT STATEMENTS CONCERNING THE CORRECT ANALYSIS UNDER ITEM(J) ARE INCONSISTENT AND INCORRECT
8. Third, with respect to item (j) Brazil directly acknowledges its view that the relevant period of time for examination is 10 years.175 Yet Brazil disingenuously urges the Panel to examine allegedly "uncollectible amounts" on pre 1992 guarantees, and defaults of Iraq and Poland, which commenced in 1990 and the 1980’s, respectively.176
9. Brazil also mysteriously alleges that "according to CCC’s 2002 financial statements, CCC has been relieved of what the United States argues are onerous government wide accounting rules that ‘compel’ projection of enormous losses". CCC, however, has never been so "relieved". It remains compelled to adhere to the requirements of the federal Credit Reform Act of 1990, and relevant provisions of the Office of Management and Budget Circular A 11, implementing that legislation. CCC remains subject to government wide requirements for subsidy estimates and the risk categories mandated by OMB with respect to exposure to debt from different countries. The government wide rules continue to dictate the methodology for calculation of estimates, and reestimates, and as the United States has previously noted, a principal reason for overly high initial estimates is continuously overly optimistic projections of programme use. Also, as the United States has previously noted, the result of the estimate (and reestimate) process is simply carried forward to the CCC financial statements; Brazil continues to misrepresent the $411 million figure in the 2002 financial statement as well as to mistakenly assert the inclusion of "enormous uncollectible amounts . . . on post 1991 guarantees".
D. BRAZIL CONTINUES TO WRONGLY ASSERT THAT THE ISSUANCE OF CCC EXPORT CREDIT GUARANTEES IS UNBOUNDED
10. Fourth, with respect to Brazil’s circumvention arguments, Brazil continues to insist that notwithstanding the myriad programmatic impediments to issuance of guarantees the export credit guarantee programmes are a runaway train, beyond the ability of CCC to "stem or otherwise control the flow of" CCC export credit guarantees. With respect, this is simply not so.
11. Similarly, in its oral statement, Brazil has increased the supposed annual mandatory minimum dollar amount of guarantees to $6.5 billion from $5.5 billion.177 As the United States has previously observed, CCC has never remotely approached issuing any such fancifully large amount of export credit guarantees.178