III. BRAZIL’S INITIAL BRIEF RAISES A NUMBER OF MISGUIDED CONCERNS WHICH CANNOT UPSET THE BALANCE OF RIGHTS AND OBLIGATIONS OF MEMBERS UNDER THE PEACE CLAUSE AND DO NOT SUPPORT CONSIDERING BOTH THE APPLICABILITY OF THE PEACE CLAUSE AND BRAZIL’S SUBSTANTIVE CLAIMS TOGETHER 19. Brazil has advanced a number of other arguments, which relate neither to the ordinary meaning and context of the phrase “exempt from actions” nor to the object and purpose of the Peace Clause and the Agreement on Agriculture. These arguments are thus not relevant to the Panel’s task of clarifying the meaning of the Peace Clause in accordance with customary rules of interpretation of public international law. Nonetheless, an examination of each of Brazil’s arguments reveals that none of these concerns is well founded.
A. THE PANEL MAY EXAMINE THE APPLICABILITY OF THE PEACE CLAUSE UNDER NORMAL DSU RULES
20. Brazil argues that because Article 13 is not a special or additional rule set out in Appendix 2 of the DSU, Peace Clause issues must be resolved using normal DSU rules and procedures, which Brazil believes would prohibit reaching the Peace Clause issue first. Brazil errs on two counts. There was no need to designate Article 13 of the Agriculture Agreement as a special or additional rule precisely because the Panel may properly deal with the Peace Clause issue using the flexibility inherent in the normal DSU rules. The DSU, in Articles 12.1 and 12.2, provides the Panel with all the authority it needs to organize its working procedures as it considers best to resolve the matter in dispute.106 Under DSU Article 12.1, the Panel is given the authority to determine its own working procedures "after consulting the parties to the dispute".107 Under DSU Article 12.2, moreover, the Panel is charged with establishing panel procedures with "sufficient flexibility so as to ensure high quality panel reports".108
21. Brazil itself has conceded the Panel’s broad authority to establish its procedures in its letter of 23 May 2003, when it wrote of objections relating to the scope of a panel request under DSU Article 6.2: "The decision on how to handle such preliminary objections procedurally is a matter of panel discretion".109 Thus, Brazil implicitly recognizes that the Panel already has the flexibility and the authority under normal DSU rules to organize its procedures to consider and dispose of the Peace Clause issue first. There is no need for the Peace Clause to be listed as a “special or additional rule and procedure” in DSU Appendix 2 because under normal DSU rules the Panel may bifurcate the proceedings in order to respect the balance of rights and obligations of Members under the Peace Clause and the Agriculture Agreement – that is, to ensure that conforming US measures are “exempt from actions based on” provisions specified in the Peace Clause.
22. The United States notes that the Appellate Body has urged panels to adopt working procedures providing for preliminary rulings to deal with threshold jurisdictional issues110, even though there are no “special and additional rules” in the DSU providing for these. In addition, we note that Article 10.3 of the Agriculture Agreement (the same agreement at issue here) is not listed as a “special and additional rule,” but panels and the Appellate Body have made clear that this provision nonetheless governs dispute settlement proceedings by shifting the burden of proof to the responding party.111
23. Finally, Brazil relies on Article 11 of the DSU – pursuant to which a panel “should make an objective assessment of the matter before it, including an objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements” – to support its position. Brazil’s reliance on Article 11 is misplaced as shown by a simple examination of the text of Article 11. Article 11 provides the standard of review for panels; it does not guide the procedure used by panels. According to Brazil, DSU Article 11 somehow mandates that a panel review “all the facts including rebuttal facts,” hold two panel meetings, and allow for the exchange of rebuttal submissions.112 Brazil’s argument is untenable; it would read Article 11 to mandate a particular series of meetings and submissions when Article 11 does not set out any particular procedural steps through which a panel “should make an objective assessment of the matter before it.” At the same time, Brazil argues that the Panel may not, consistent with Article 11, consider the applicability of the Peace Clause first because "Article 11 contains no requirement for a special briefing, meeting or determination by a panel to resolve such applicability or exemption."113 Of course, there is nothing in the text of Article 11 that supports reading this provision to preclude the Panel’s bifurcating the proceeding to respect the balance of rights and obligations in the Peace Clause. However, to be consistent with its own argument, Brazil should also read Article 11 not to mandate any particular number or sequence of procedural steps (such as those set out in DSU Appendix 3) that are not required under its terms.
B. NO PREVIOUS PANEL REPORT HAS EXAMINED THE PEACE CLAUSE, AND OTHER PROCEDURAL PROVISIONS CITED BY BRAZIL DO NOT CONTAIN THE PHRASE “SHALL BE . . . EXEMPT FROM ACTIONS”
24. Brazil suggests that deciding the issue of the applicability of the Peace Clause in advance of Brazil’s substantive Subsidies Agreement and GATT 1994 claims is "contrary to the practice of earlier panels".114 Of course, there is no such practice since this is the first dispute to face this issue.
25. Brazil also argues that there are “a number of other threshold issues in WTO Agreements” but that "none of these provisions have special and additional rules to provide for extraordinary preliminary briefings, meetings, and determinations prior to a panel hearing on all of the claims presented".115 Brazil’s invocation of previous panel proceedings is inapt. Brazil has not asserted that any of the “threshold” provisions in other WTO agreements that it cites or that have been interpreted by previous panels contain the same language as the Peace Clause (that is, “shall be . . . exempt from actions”).116 Indeed, it is striking that Brazil studiously avoids comparing the text of any of these provisions with the text of the Peace Clause.117
26. Given the fact that none of the other provisions cited by Brazil contains Peace Clause like language, these provisions have little relevance for the Panel’s interpretation of the Peace Clause. At most, the relevance of these provisions lies in the fact that such “ threshold” provisions do not use language that certain measures “shall be . . . exempt from actions.” This suggests that the distinct language of the Peace Clause was intended to provide a distinct right, and one that differs from rights provided by these other WTO provisions.
27. We also note Brazil’s argument that in the “closest case to the peace clause issue presented here” – that is, Brazil – Export Financing Programme for Aircraft, WT/DS46/AB/R – there was “never a suggestion or finding that the panel erred by not conducting a special briefing and special determination” on the “threshold issue whether Brazil was in compliance with Article 27.4” of the Subsidies Agreement. From the Appellate Body report, it would appear that the Appellate Body did not address it because no party suggested that this threshold issue had to be taken up as a first stage of the proceeding. Nonetheless, the Appellate Body found that the panel erred in not considering the threshold Article 27.4 issue first. The Peace Clause language (“measures . . . shall be . . . exempt from actions”) is different and even stronger in requiring that the Peace Clause be taken up first and separately, with findings, prior to any consideration of the relevant GATT 1994 and Subsidies Agreement provisions.
C. BRAZIL WILL NOT BE PREJUDICED BY SEPARATE HEARINGS AND BRIEFINGS ON THE PEACE CLAUSE ISSUE
28. Brazil, referring to its 23 May letter, argues that it will be prejudiced if the Panel considers separately the issue of the applicability of the Peace Clause from Brazil’s substantive claims as this will disrupt "Brazil’s efforts to make a coherent and unified presentation of its case"118 and result in greater expense to Brazil "in having to bring its legal and economic experts to Geneva for an extra meeting."119 Of course, any concerns that Brazil’s presentation of its case may be affected cannot supersede the rights and obligations of Members as set out in the covered agreements – including the Peace Clause. In fact, the Peace Clause resolves any issue of how to account for burdens on parties since it provides that the responding party’s measures are exempt from any action based on the relevant GATT 1994 and Subsidies Agreement provisions – it exempts the responding party from the burden of having to respond to the complaining party’s claims. Brazil ignores this aspect of the Peace Clause. In any event, we note that bifurcating this proceeding to ensure that these conforming US measures are exempt from action based on Peace Clause specified provisions will reduce, rather than increase, the amount of work involved for both parties. Here, dealing with the Peace Clause issue first will resolve that part of the dispute, saving both parties further work, since the US measures conform to the Peace Clause. And in general, such an approach simply means that a panel would deal in sequence with the issues it would otherwise have to confront in a dispute. Because no additional issues would be covered (and needless work on certain claims might be avoided), it would not appear that additional effort on the part of a panel or the parties would be required.
29. We also note in any event that Brazil’s concerns about duplication of its factual presentation and increased expense seem overstated. Even if this were a dispute where the relevant measures did not conform to the Peace Clause, Brazil misunderstands the process. The fact that some of the same evidence might be relevant to Peace Clause as well as Subsidies Agreement claims does not mean that the evidence would have to be introduced twice. Once Brazil’s factual evidence were introduced, if it were relevant to later stages of the proceeding, it could of course be used for that purpose.120 Thus, there should be no duplication of its factual presentation and no additional burden to Brazil on that count. Similarly, with respect to concerns about the additional expenditure of resources should the Panel bifurcate this proceeding, the full time presence of Brazil’s private sector counsel in Geneva should alleviate some of the expense that extra meetings (which there is no reason to assume would be needed since the US measures conform to the Peace Clause) might entail. In any event, however, the United States finds it difficult to believe that Brazil would bring an action with claims under 17 different provisions of the WTO agreements with respect to programs under at least 12 US statutes and not expect that the resulting dispute would involve additional complications and all the accompanying demands for time and resources.
30. Finally, the United States notes that Brazil has raised the issue that separate hearings and briefing on the Peace Clause issue "would cause it prejudice because there would be significant delays in the resolution of its claims – many of which do not implicate the peace clause".121. While, on its face, Brazil’s list of “non peace clause claims” appears to include claims based on provisions specified in the Peace Clause122, Brazil’s point is not raised by the Panel’s question. If the Panel requests the parties to give their views on the question of what should happen with any claims in this action based on provisions not specified by the Peace Clause, the United States would be pleased to do so.
IV. WERE THE PANEL TO CONSIDER THAT THE PEACE CLAUSE DOES NOT REQUIRE THAT THE PANEL DETERMINE WHETHER US MEASURES ARE EXEMPT FROM ACTIONS BEFORE CONSIDERING BRAZIL’S SUBSIDIES AGREEMENT AND GATT 1994 ARTICLE XVI ACTION, THE PANEL SHOULD EXERCISE ITS DISCRETION TO BIFURCATE THE PROCEEDING 31. Putting aside the arguments related to prejudice and expense which have been discussed above, the United States notes that, in the course of allegedly discussing the “context” for the Peace Clause, Brazil makes an argument that speaks not to any relevant context but to the Panel’s exercise of its discretion to organize its procedures. Brazil argues that the “close overlap of proof for both peace clause and actionable and prohibited subsidy claims highlights the need for the Panel to examine all the ‘facts of the case’ together".123 First, in this context, the United States has noted, and Brazil and the European Communities apparently agree, that the Panel enjoys significant discretion under DSU Articles 12.1 and 12.2 to organize its working procedures as it considers best to resolve the matter in dispute.
32. However, even were the Panel to conclude that Article 13 does not require the Panel to determine whether US measures are in breach of the Peace Clause and no longer “exempt from actions based on” specified provisions, the significance and wording of the Peace Clause in this dispute would mean that the Panel should exercise its discretion to bifurcate this proceeding. The Peace Clause would remain a significant, decisive issue. As noted above, bifurcating the proceedings would save both parties as well as the Panel significant time and work since it will render it unnecessary to address the relevant GATT 1994 and Subsidies Agreement claims.
33. Furthermore, given that Brazil has signalled that its Peace Clause arguments alone will involve "the presentation of considerable factual evidence and expert econometric testimony"124, it would appear that to hear Brazil’s substantive claims at the same time would significantly complicate the Panel’s work. The apparent complexity of Brazil’s Peace Clause evidence also calls into significant question the likelihood that the timetable requested by Brazil is realistic with respect to the legitimate interests of the United States to defend its position. Finally, we note that, by seeking to have the Panel consider both the Peace Clause issue and Brazil’s substantive claims at the same time, Brazil may be attempting to prejudice the US rights of defence – particularly since, even on Brazil’s mis reading of the Peace Clause, the US measures are “exempt from actions”, Brazil is not entitled to obtain any remedy from the DSB.125
34. The United States also disagrees in any event that the “close overlap of proof for both peace clause and actionable and prohibited subsidy claims highlights the need for the Panel to examine all the ‘facts of the case’ together”. For example, to establish its “serious prejudice” claims, Brazil must present evidence showing that the United States has caused “adverse effects” through “the use of any subsidy” (Subsidies Agreement, Article 5(c)) and evidence on “the effect of the subsidy” (Subsidies Agreement, Article 6.3(b), (c), (d)). Neither of these showings is relevant to the issue of whether US measures have breached the Peace Clause.
35. Frankly, if Brazil’s Peace Clause arguments will involve extensive factual and econometric evidence, it is difficult to understand why the Panel would be better served by considering this “considerable” evidence and testimony at the same time that it receives even more evidence and testimony on other, unrelated issues. Thus, even if one hypothesized that the Peace Clause does not require the Panel to consider the issue of its applicability prior to examining Brazil’s substantive claims and that the Panel solely needed to consider how to take the Peace Clause issue into account in exercising its discretion to organize its procedures, the United States submits that the Panel’s work would be facilitated by focusing on the legally and logically distinct Peace Clause issue first.126 V. OTHER ARGUMENTS BY THIRD PARTIES A. GIVEN DSU RULES, THE PANEL’S ORGANIZATION OF ITS PROCEDURES REPRESENTS THE FIRST OPPORTUNITY TO ARREST BRAZIL’ S ACTION
36. India and the European Communities have suggested that, taken to its logical extreme, reading “actions” as the “taking of legal steps to establish a claim” would require a complaining party to bring two actions: first, an action to establish that the Peace Clause does not apply to certain measures, and second, if a panel were to find the Peace Clause inapplicable, an action challenging the measures based on the provisions specified in the Peace Clause. While this issue is not pertinent to the Panel’s question concerning Article 13, the United States notes that it has not advanced such an interpretation by, for example, asking the Panel to find that it could not be established.127 Thus, this issue is not before the Panel, and India’s and the EC’s arguments are irrelevant. Rather, we have requested more modestly that the Panel, consistent with the Peace Clause, structure its procedures so that US measures will in fact be exempted from Brazil’s action based on provisions specified in the Peace Clause at the earliest possible juncture under the DSU.
37. As these third parties apparently fail to appreciate, prior to this moment, DSU rules provided for the dispute to proceed through consultations and panel establishment automatically, regardless of the US insistence that its measures conform to the Peace Clause. Although the United States has maintained at each and every stage that the challenged measures conform to the Peace Clause, the United States could not have stopped Brazil from asking for consultations128, nor could it reasonably have been expected to refuse an entire request for consultations because it contains a request contrary to the Peace Clause, nor could the United States have prevented the establishment of this Panel. As a responding party cannot prevent panel establishment from occurring, it will inevitably be forced to argue to a panel that the panel’s procedures should be structured so that the party’ s challenged measures are not subject, from that point on, to actions based on provisions specified in the Peace Clause. Thus, given the automaticity in DSU rules relating to consultations and panel establishment, the Panel’s organization of its procedures provides the first opportunity to arrest Brazil’s “taking of legal steps to establish a claim”, and this is all the United States has asked the Panel to do.
B. CONTRARY TO THE SUGGESTION BY SEVERAL THIRD PARTIES, THE PEACE CLAUSE IS NOT AN AFFIRMATIVE DEFENCE
38. Australia and the European Communities have each asserted that the Peace Clause is an affirmative defence.129 The United States believes that they are in error. However, this issue is not raised by the Panel’s question concerning Article 13, and there is no need to discuss it further at this time.
VI. CONCLUSION: BRAZIL MAY NOT BRING, AND THE PANEL MAY NOT ADJUDICATE, A SUBSIDIES AGREEMENT OR GATT 1994 ARTICLE XVI ACTION AGAINST US MEASURES CONFORMING TO THE PEACE CLAUSE
39. For the reasons set out above and in its initial brief on the Panel’s question concerning the Peace Clause, the United States respectfully requests the Panel to find that measures that conform to the Peace Clause are exempt from any action, including action under the DSU, based on the corresponding provisions of the Subsidies Agreement and the GATT 1994. As a result, the United States is not required to defend those measures in any action based on Brazilian claims exempted by the Peace Clause.
SUBMISSION OF PARTIES AND THIRD PARTIES FOR THE
FIRST SESSION OF THE FIRST SUBSTANTIVE MEETING
Annex B-1 Executive Summary of the Submission of Brazil
Annex B-2 Executive Summary of the Submission of the United States
Annex B-8 Third Party Submission of the European Communities
Annex B-9 Third Party Submission of New Zealand
Annex B-10 Third Party Submission of Paraguay
Annex B-11 Third Party Submission of Chinese Taipei
EXECUTIVE SUMMARY OF BRAZIL’S FIRST SUBMISSION
TO THE PANEL REGARDING THE “PEACE CLAUSE”
AND NON-PEACE CLAUSE RELATED CLAIMS
1. Brazil’s first submission initially addresses issues relating to the substantive interpretation of Article 13 of the Agreement on Agriculture (AoA), known as the “peace clause,” and details the evidence demonstrating that the United States has no basis to assert a peace clause defence regarding Brazil’s actionable and prohibited subsidy claims. The second part of Brazil’s first submission sets forth the evidence and arguments concerning claims involving the following US measures: Step 2 export payments, the US export credit guarantee programmes (GSM 102, GSM 103 and SCGP) and the ETI Act subsidies. These three subsidies do not fully conform to the provisions of Part V of the Agreement on Agriculture and, thus, the United States has no peace clause protection from claims under the SCM Agreement. Step 2 export payments, the three export credit guarantee programmes and the ETI Act subsidies also violate ASCM Article 3.1(a) and 3.2. Finally, Brazil demonstrates that Step 2 domestic payments violate ASCM Article 3.1(b) and GATT Article III:4.
Issues Regarding the Peace Clause in AoA Article 13 2. The peace clause of AoA Article 13 is in the nature of an affirmative defence. The United States has indicated that it will invoke a peace clause defence. To do so, the United States bears the burden of proof that US domestic support and export subsidies to upland cotton are provided in conformity with the requirements of the peace clause. Based on public international law and Appellate Body jurisprudence on the allocation of the burden of proof, AoA Article 13 is an affirmative defence because it provides an exception to a legal regime otherwise applying to agricultural support measures. It does not alter the scope of other provisions providing positive obligations on Members, and is not itself a positive obligation. It simply allows Members to maintain measures otherwise inconsistent with their WTO obligations exempt from actions, provided that the measures meet the conditions specified in AoA Article 13.
3. In accordance with Article 31 of the Vienna Convention, the appropriate interpretation of AoA Article 13(b)(ii) is the following: Members may assert a peace clause defence under AoA Article 13(b)(ii) only if the total quantity of support granted through all non-“green box” domestic support measures (i.e., measures that do not fully comply with the provisions of AoA Annex 2) to a specific commodity in any marketing year from 1995-2003 does not exceed the quantity of non-“green box” domestic support decided to be granted in MY 1992. The only “decision” made by the United States “during” MY 1992 was to grant (i.e., make actual expenditures) of $1.994 billion in non-“green box” support to upland cotton pursuant to the terms of the 1990 FACT Act.
4. The evidence regarding the amount of non-“green box” US support to upland cotton granted in MY 1999-2002 is based largely on USDA documents, which show that US non-“green box” domestic support decided to be authorized and paid to upland cotton increased to $3,445 million in MY 1999, was $2,311 million in MY 2000, and increased to a new record high of $4,093 million in MY 2001 (for a crop valued at $3,312 million). Brazil estimates that US non-“green box” domestic support for MY 2002 (which will end on 31 July 2003) is $3,113 million. This estimate is based on the last available data and the requirements set out in the 2002 FSRI Act.
5. Thus, the evidence reveals that the amount of non-“green box” support granted in MY 1999-2002 exceeds the level of support “decided” by the United States in MY 1992. Therefore, the United States does not enjoy peace clause exemption from actions based on ASCM Article 5 and 6 and Article XVI:1 of GATT 1994 involving non-“green box” domestic support to upland cotton.
6. Brazil’s calculation of the MY 1999-2002 reflects the appropriate set of non-“green box” domestic support measures granted to upland cotton. The United States notified to the WTO Committee on Agriculture that the following programmes are “amber box” support for MY 1999: Step 2 payments, loan deficiency payments, marketing loan gains, crop insurance payments, cottonseed payments, and market loss assistance payments. The structure of the first five of these domestic support programmes is substantially the same in MY 2000-2001 and under the 2002 FSRI Act as it was in MY 1999. There is also no indication that these five programmes should not continue to be treated as non-“green box” domestic support to upland cotton for the purposes of MY 2002. Therefore, the support under these five programmes, as well as market loss assistance payments, are non-“green box” support to upland cotton and are properly included in the set of domestic support measures for purposes of assessing possible US peace clause exemption from action.
7. With respect to production flexibility contract payments (PFC), direct payments (DP) and counter-cyclical payments (CCP), the evidence demonstrates that these payments are also non-“green box” support granted to upland cotton. The basis of this conclusion is summarized below.
8. Production Flexibility Contract Payments (PFC): There are two reasons why PFC payments are not properly “green box” support. First, PFC payments are inconsistent with AoA Annex 2 paragraph 6(b), because Section 118(b) of the 1996 FAIR Act and the regulations implementing the PFC programme eliminates or reduces payments if producers grow certain products – fruits, vegetables and wild rice – on contract acreage.
9. AoA Annex 2 paragraph 6(b) requires that the “amount” of payments “shall not be related to or based on, the type of production…” The object and purpose of paragraph 6(b), based on its text and context, is to ensure that decoupled “green box” payments are not focused or channelled for a single product or a particular sub-set of products. It covers only completely decoupled domestic support measures. Paragraph 6(b) seeks to guarantee that a producer who receives such payments can produce any product covered by the Agreement on Agriculture.
10. Section 118(b) of the 1996 FAIR Act and its regulations make it clear that the amount of PFC payments in any given marketing year between 1996 and 2001 was related to or was based on the type of production undertaken by a producer who entered into a PFC contract. The general rule is that “planting fruits and vegetables (except lentils, mung beans, and dry peas) shall be prohibited on contract acreage”. If fruits and vegetables are grown on contract acreage, then the regulations provide that “the Deputy Administrator shall terminate the contract with respect to the producer on each farm in which the producer has an interest”. The regulations also provide that in less serious cases of violation, the penalty may be a reduction of contract payments equal to the market value of the fruits and vegetables or the contract payment for each acre used for fruits and vegetables. Thus, the PFC payments are not “decoupled income support” as set out in AoA Annex 2 paragraph 6(b) and therefore, are not “green box” support.
11. The second reason that PFC payments provided to upland cotton producers are not properly “green box” support is that they are inconsistent with the “fundamental” requirement in AoA Annex 2 paragraph 1 that they have “no, or at most minimal, trade distorting effects or effects on production”. The quantity or level of production or trade distorting effects need only be very minimal to trigger denial of “green box” status under AoA Annex 2. This follows from the text of AoA Annex 2 paragraph 1, which contains the phrases “no,” “at most,” and “fundamental”.
12. The record in this case demonstrates that PFC payments have had more than “at most” a “minimal” effect on production of US upland cotton during MY 1999-2002. Almost all upland cotton producers participated in the PFC programme. Furthermore, domestic US upland cotton producers view PFC payments as an important component of payments provided to upland cotton farmers. The percentage of subsidization by PFC payments relative to the market value measured by the price received by US upland cotton producers represents between 14 and 17 per cent for period MY 1999-2001. This provides US producers with a significant advantage in export competition with producers in the rest of the world who do not receive such a level of (or any) subsidies.
13. The PFC payments also have production effects because of the very high cost of production for upland cotton in the United States. Given the high US costs, without 14-17 per cent subsidies some higher-cost US producers would likely stop producing upland cotton. This would have resulted in lower levels of US upland cotton production. USDA economists have acknowledged the production-enhancing effects of PFC payments. They have also identified likely patterns of production effects.
14. Because the quantity or level or trade distorting effects need only be very minimal to trigger denial of “green box” status under AoA Annex 2, the evidence of the production enhancing effects of PFC payments necessitates the conclusion that PFC payments are not properly included within the AoA Annex 2 “green box”. They are, thus, properly included within the domestic support measures to be used for the calculation of the amount of domestic support to upland cotton for MY 1999, 2000 and 2001.
15. Direct payments (DP): with the passage of the new FSRI Act in May 2002, PFC payments were discontinued and replaced with DP. These began to be paid in MY 2002 and will be paid until the end of MY 2007. USDA has identified the DP programme as the direct successor to the PFC programme under the 1996 FAIR Act.
16. There are three reasons why DP are not properly within AoA Annex 2. First, as with PFC payments, the amount of DP are related to or based on the type of production undertaken in any year after the base period in violation of AoA Annex 2 paragraph 6(b). The 2002 FSRI Act and its implementing regulations eliminate or limit the amount of DP if base acreage is used for the production of certain crops, i.e., fruits, vegetables and wild rice.
17. Second, the DP provisions of the 2002 FSRI Act violate AoA Annex 2, paragraph 6(a) and (b) because producers were permitted to “update” their base acreage using MY 1998-2001 production totals. This is inconsistent with Annex 2, paragraph 6(a), which requires a single, fixed base period for a programme of support. The object and purpose of AoA Annex 2 paragraph 6(a) and (b) is to ensure that Members do not permit payments to increase over time in a manner linked to increases in production over time. This also follows from the AoA Annex 2 paragraph 1 requirement that “green box” support measures have no or at most minimal production effects. That can only occur if the base (i.e., the base for increased payments) does not adapt to recent changes in the production of a farmer.
18. The major structural elements of the PFC programme and the DP programme are the same for both programmes in terms of the basic types of crops covered, the producer’s obligations to receive payments, prohibited plantings of certain crops, and freedom to receive payments for one crop and farm another crop. The change from the PFC programme to the DP programme is not “de-coupling” but rather “re-coupling” of MY 2002 and future DP with MY 1998-2001 production.
19. One third of farms receiving PFC payments between MY 1996-2001 updated their acreage for the DP programme using MY 1998-2001 production data. Thus, interpreting AoA Annex 2 paragraph 6(a) and (b) to permit an updating of the “fixed” base period by essentially changing the name of the “PFC payment” programme to DP programme would render these provisions a nullity.
20. Third, DP also have more than “at most minimal” production and trade-distorting effects contrary to the chapeau of AoA Annex 2 paragraph 1. DP, like PFC payments, can increase production of upland cotton through (1) a direct wealth effect through risk aversion reduction, (2) a wealth facilitated increased investment reflecting reduced credit constraints, and (3) a secondary wealth effect resulting from the increase in investment. In addition, the updating of base acres in the 2002 FSRI Act created an ongoing production-enhancing effect because farmers will expect future updates and continue to maintain high levels and even increase production between MY 2002 - 2007. Continued low cotton prices will increase the need of producers to protect their base as a hedge against low prices. In addition, US upland cotton producers are among the world’s highest cost producers. That means that the amount of DP (and CCP) is critical to the economic survival of many US upland cotton producers. Thus, there will be a very strong incentive to maintain and increase upland cotton base in anticipation of future base updates in future farm legislation to offset potentially lower world prices.
21. In sum, DP are properly included within the set of domestic support measures to be used for calculating the amount of domestic support to upland cotton for MY 2002.
22. Counter-Cyclical Payments (CCP): are non-“green box” domestic support because they are inconsistent with AoA Annex 2 paragraphs 6(a), 6(b) and 6(c). First, like PFC and DP, CCP are inconsistent with Annex 2 paragraph 6(b) because the CCP programme eliminates or limits the amount of payments for those producers who grow fruits, vegetables and wild rice on base acres.
23. Second, CCP also violate AoA Annex 2 paragraph 6(c) because the amount of payments is based on current market prices. The ordinary meaning of AoA Annex 2 paragraph 6(c) is that any direct income support to a producer of agricultural products must not be linked to an international or domestic price established after the base period, i.e., to a current price. CCP are not based on the prices of upland cotton production that took place in a prior base period but rather on prices of present production. As the current upland cotton prices received by US farmers fluctuate between $0.52 and $0.6573 per pound, the amount of payments for each year between MY 2002-2007 changes. This is inconsistent with AoA Annex 2 paragraph 6(c), which requires that payments cannot be based on “the prices…applying to any production undertaken in any period after the base period”. But the CCP programme has no fixed “base period” for the purposes of setting “prices”. It uses current prices, i.e., prices that apply to current production and, thus, to a “production undertaken in a period after the base period”.
24. Third, like PFC and DP, CCP have production and trade distorting effects in violation of AoA Annex 2 paragraph 1. The new CCP programme for upland cotton is one of the main sources of increased payments for US cotton producers between the 1996 FAIR Act and the 2002 FSRI Act. The payments to US upland cotton farmers in MY 2002 will exceed $1 billion and represent over 32 per cent of the market value of US upland cotton. USDA economists have acknowledged that CCP have identifiable and measurable production effects.
25. In sum, CCP are non-“green box” domestic support properly included within the set of domestic support measures to be used for calculating the amount of domestic support to upland cotton for MY 2002.
26. DP and CCP are support to upland cotton: DP and CCP made in MY 2002 are support to upland cotton within the meaning of AoA Article 13(b)(ii). The great majority of upland cotton producers are enrolled in the programmes and will receive the full amount of these payments in MY 2002. Most of the producers of upland cotton in MY 2002 used upland cotton base acres to produce upland cotton. US farms growing the bulk of upland cotton tend to grow upland cotton year after year because of considerable investments in cotton-specific equipment and the lack of alternative crops. Thus, most farmers with cotton “base acreage” generally do not use that base acreage to grow other crops. In addition, CCP create incentives to maintain upland cotton production at the level of the base period in order to minimize the risk of low revenues.
27. In sum, the United States cannot successfully invoke peace clause protection against Brazil’s actionable subsidy claims under ASCM Articles 5 and 6 or Brazil’s claims under GATT Article XVI:1.
28. Export Subsidy Peace Clause Issues Under AoA Article 13 (c): The United States also has no peace clause protection under AoA Article 13(c) for claims against export subsidies under the SCM Agreement regarding Step 2 export payments, the export credit guarantees and subsidies provided under the ETI Act. AoA Article 13(c) can only be invoked by a WTO Member as an affirmative defence if that WTO Member can demonstrate that its export subsidies “conform fully to the provisions of Part V” of the AoA. Part V of the AoA consists of Articles 8 to 11. A Member violates Part V of the AoA if it provides export subsidies for products for which it has not undertaken any export subsidy reduction commitments; or second, if it has export subsidy reduction commitments for the product under consideration, but exceeds the maximum amount of export subsidies to or the maximum value of the product that it has scheduled to be exported with the assistance of export subsidies. The United States does not enjoy peace clause protection for the agricultural export subsidies challenged by Brazil under the SCM Agreement because – as Brazil demonstrates – each of the subsidies at issue does not fully conform to Part V of the AoA.
Brazil’s Claims Regarding Prohibited US Export and Local Content Subsidies
29. The United States maintains three types of export subsidies related to US upland cotton and other commodities. These subsidies violate AoA Articles 3.3, 8 and 10.1 and are prohibited under ASCM Articles 3.1(a) and 3.2. Brazil challenges all three measures to the extent they provide subsidies to upland cotton. In addition, it challenges the export credit guarantee programmes for all products covered.
30. The first measure, the Step 2 export programme, relates solely to exports of US upland cotton and provides grants to exporters. The second group of measures are three export credit guarantee programmes – the General Sales Manager 102 (“GSM 102”), the General Sales Manager 103 (“GSM 103”) and the Supplier Credit Guarantee Programme (“SCGP”) – provided by the United States in connection with the export of agricultural goods in general. The third measure providing export subsidies is the FSC Repeal and Extraterritorial Income (ETI) Act of 2000, by which the United States provides tax breaks for exporters of US products, including agricultural products such as upland cotton.
31. Step 2 Export Payments: Section 1207(a) of the 2002 FSRI Act mandates Step 2 export payments contingent on the export of US upland cotton lint. Section 1207(a) of the 2002 FSRI Act requires USDA to pay US exporters the difference between higher priced US upland cotton and the average of the five lowest price quotes for exports of upland cotton worldwide (Cotlook’s A-Index). The size of this subsidy averaged 8 per cent of the price received by US producers between MY 1999-2001 and an estimated 9.9 per cent in MY 2002.
32. Step 2 export payments constitute export subsidies within the meaning of the AoA. The Appellate Body has indicated that context for interpretation of an “export subsidy” under the AoA is found in the ASCM. Step 2 export payments involve grants within the meaning of ASCM Article 1.1(a)(1)(i), as the US Government pays money to US exporters. Such grants are direct transfers of economic resources for which the US Government receives no consideration. Step 2 export payments constitute “free money” for which exporters incur no corresponding obligations and, thus are made for “less than full consideration”. They, therefore, confer a benefit within the meaning of ASCM Article 1.1(b). Finally, Step 2 payments are also export contingent within the meaning of ASCM Article 3.1(a) because exporters are only eligible to receive Step 2 export payments if they produce evidence that they have exported an amount of US upland cotton.
33. Section 1207(a) of the 2002 FSRI Act requires the US Secretary of Agriculture to make Step 2 export payments to eligible exporters upon proof of the export of US cotton. Therefore, Section 1207(a) of the 2002 FSRI Act is inconsistent with AoA Articles 3.3 and 8, because it requires payments of export subsidies to upland cotton without the United States having undertaken any export subsidy reduction commitments under the AoA. Thus, the United States has no peace clause protection against claims made under the ASCM for Step 2 export payments. In addition, for the same reasons the Step 2 export payments violate AoA Articles 3.3 and 8, Section 1207(a) of the 2002 FSRI Act also mandates payment of export subsidies in violation of ASCM Articles 3.1(a) and 3.2.
34. Export Credit Guarantee Programmes: The United States, through the US Commodity Credit Corporation (CCC), operates three export credit guarantee programmes – General Sales Manager 102 (GSM 102), General Sales Manager 103 (GSM 103) and the Supplier Credit Guarantee Programme (SCGP). The programmes guarantee the repayment of loans granted to foreign importers of all US agricultural commodities and are not limited to upland cotton. Brazil’s also challenges the whole programmes, not just as they relate to upland cotton.
35. USDA export data demonstrates that US exports of most scheduled commodities exceed the respective US quantitative export subsidy reduction commitment. For unscheduled commitments, there is no such commitment, which means that every export of these commodities is in excess of the United States’ commitments. In Canada – Dairy Article 21.5 (II), the Appellate Body characterized export subsidy claims under the AoA as involving both a “quantitative aspect” and an “export subsidization aspect”. It held that AoA Article 10.3 allocates the burden of proof for the export subsidization part to the defending Member – in this case the United States – if the complaining Member – in this case Brazil – establishes that the level of exports in exceeds of the export subsidy reduction commitments. Therefore, the United States bears the burden to prove that its excess exports did not benefit from export subsidies, including export credit guarantees
36. Nevertheless, Brazil also provides evidence that the three export credit guarantee programmes are export subsidies within the meaning of the AoA. The Appellate Body in US – FSC held that export subsidies within the meaning of the SCM Agreement are also export subsidies for the purposes of the AoA. Brazil demonstrates in two distinct ways that GSM 102, GSM 103 and SCGP are “export subsidies”. First, context for determining whether the US programmes are export subsidies under the AoA is provided by reference to ASCM Annex I, Item (j) of the Illustrative List of Export Subsidies. Item (j) provides that export credit guarantee programmes are export subsidies if they are operated “at premium rates which are inadequate to cover the long-term operating costs and losses of the programme”. Second, export credit guarantees also constitute export subsidies under the AoA and in light of the Appelllate Body decisions in US- FSC and Canada – Dairy, if they involve “financial contributions” that confer “benefits” and are contingent upon export performance within the meaning of ASCM Articles 1.1 and 3.1(a).
37. US documents demonstrate that GSM 102, GSM 103 and SCGP are export subsidies because they are operated at premium rates which are far below the level necessary to cover the programmes operating costs and losses. The programmes are, thus, export subsidies as defined in item (j) of the Illustrative List of Export Subsidies. Under Appellate Body and panel jurisprudence, export subsidies defined in the ASCM Agreement are relevant context for a finding of export subsidies under the AoA. Therefore these three programmes constitute export subsidies within the meaning of the AoA.
38. In addition, GSM 102, GSM 103 and SCGP are export subsidies within the meaning of the AoA because they are financial contributions consistent with ASCM Article 1.1(a)(1)(i), and confer benefits within the meaning of ASCM Article 1.1(b). The United States itself, in its budget, treats them as subsidies. In addition, no such guarantees are commercially available in the marketplace. GSM 102, GSM 103 and SCGP are, furthermore, contingent upon export performance within the meaning of ASCM Article 3.1(a). Thus, the programme constitutes export subsidies within the meaning of both the SCM Agreement and the AoA.
39. The export subsidies GSM 102, GSM 103 and SCGP result in, or threaten to lead to, circumvention of the United States’ export subsidy commitments within the meaning of AoA Article 10.1. GSM 102, GSM 103 and SCGP, in so far as they are available for unscheduled products, violate AoA Articles 10.1 and 8 because they make export subsidies available for unscheduled products. The Appellate Body has held that for unscheduled products, it is inconsistent with AoA Article 3.3 to provide export subsidies listed in AoA Article 9.1, and that it is inconsistent with AoA Articles 10.1 and 8 to provide any other export subsidy. GSM 102, GSM 103 and SCGP provide export subsidies to unscheduled products, and thus violate AoA Article 10.1 and 8.
40. With respect to scheduled products, GSM 102, GSM 103 and SCGP as such also threaten to lead to circumvention of the US export subsidy reduction commitments. The United States provides monetary allocations for export credit guarantees to individual third countries either on a commodity specific basis or on a non-commodity specific basis. This common feature of the three export credit guarantee programmes creates a threat that the United States will exceed its quantitative export subsidy reduction commitment for scheduled products in violation of AoA Articles 10.1 and 8.
41. In sum, the export credit guarantee programmes GSM 102, GSM 103 and SCGP are inconsistent with AoA Articles 10.1 and 8. As they do not fully conform to AoA Part V, they do not enjoy peace clause protection under AoA Article 13(c)(ii).
42. Brazil has already established that GSM 102, GSM 103 and SCGP are export subsidies within the meaning of item (j) of the Illustrative List of Export Subsidies attached as Annex I to the SCM Agreement, and within the meaning of ASCM Article 3.1(a). It follows that GSM 102, GSM 103 and SCGP are prohibited export subsidies within the meaning of ASCM Articles 3.1(a) and 3.2.
43. ETI Act Export Subsidies: The third export subsidy provided by the United States to upland cotton consists of tax cuts under the FSC Repeal and Extraterritorial Income Act of 2000. This Act eliminates tax liabilities for exporters, inter alia, of upland cotton. A WTO panel and the Appellate Body have previously found that the ETI Act violates AoA Articles 10.1 and 8 and ASCM Articles 3.1(a) and 3.2. The tax breaks provided for under the ETI Act constitute export subsidies within the meaning of AoA Article 10.1. The ETI Act threatens to circumvent the US export subsidy commitments by providing an export subsidy to upland cotton while the United States does not have any export subsidy reduction commitments for upland cotton in violation of AoA Articles 10.1 and 8. As the ETI Act subsidies do not fully conform to AoA Part V, there is no peace clause exemption from actions under the SCM Agreement. Consequently, the ETI Act also constitutes a prohibited export subsidy within the meaning of ASCM Article 3.1(a) and 3.2.
44. Step 2 Domestic Payments: Section 1207(a) of the 2002 FSRI Act mandates the payment of the Step 2 domestic payments. Step 2 domestic payments are subsidies within the meaning of the ASCM Article 1.1. They involve grants because the US Government pays domestic users of US upland cotton the difference between higher priced US upland cotton and the average of the five lowest upland cotton price quotes for exports (A-Index) without receiving any consideration in return. These grants are direct transfers of funds and constitute a financial contribution by a Government within the meaning of ASCM Article 1.1(a)(1)(i). They confer a “benefit” within the meaning of ASCM Article 1.1(b) because the domestic user of US upland cotton receives the financial contribution on terms more favorable than those available in the market. Step 2 domestic payments constitute “free money” for which domestic users of US upland cotton incur no corresponding obligations. Finally, Step 2 domestic payments are contingent on the use of domestic over imported goods. Domestic users of US cotton can only receive payments upon proof of opening a bale of domestic US upland cotton. In sum, Section 1207(a) of the 2002 FSRI Act mandating Step 2 domestic payments violates ASCM Articles 3.1(b) and 3.2 by requiring the provision of subsidies contingent upon the use of domestic over imported goods.
45. The Step 2 domestic payment programme also constitutes a violation of GATT Article III:4. Section 1207(a) requires the US Secretary of Agriculture to treat upland cotton of non-US source less favorable than like US upland cotton. Only upland cotton that “is domestically produced baled upland cotton” is eligible for the Step 2 domestic payment programme. Paying a subsidy to like domestic upland cotton while denying such payments to imported like cotton negatively affects the competitiveness of imported cotton by making it less attractive to US purchasers. The Step 2 domestic payment programme therefore extends “less favorable treatment” to imported goods within the meaning of GATT Article III:4.
Conclusion 46. In Brazil’s further submission (scheduled for 4 September 2003 following the Panels expression of its views on AoA Article 13 on 1 September 2003) Brazil will present its arguments concerning its claims under ASCM Articles 5(c), 6.3(b), 6.3(c) and 6.3(d), as well as under GATT Article XVI.