38. The following chart clearly illustrates the direct relationship (except for the year 2000) between Argentine exports and international cotton prices.
III. LOSS OF PROTECTION UNDER THE PEACE CLAUSE: ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE (AoA) 39. As stated in paragraph 6 above, Argentina will address the inconsistency of the United States subsidies with Articles 5 and 6 of the SCM Agreement in the 22 September submission. On that occasion, Argentina will explain why the United States cannot seek the protection of Article 13 of the AoA because of non-compliance with the legal requirements for protection under that provision.
PEACE CLAUSE DEFENCE SUBJECT TO CONDITIONS
40. The "Peace Clause" – Article 13 of the AoA – precludes actions against a Member's agricultural subsidies up to 1 January 2004 if such measures comply with certain legal requirements.
41. As stated by Argentina in its Third Party Initial Brief:
"… a textual analysis of Article 13 of the AoA reveals that "actions"… can only be precluded if all conditions established in paragraphs (b) (ii) or (c) (ii) of the referred Article 13 are met".142 (Emphasis added).
" … 'Exempt from actions' means that a finding of inconsistency with Article XV1 of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement will not be possible if the legal requirements for the exemption are fulfilled. The immediate context of the term 'exempt from actions' – i.e., paragraphs (b) and (c) – confirms this interpretation since that exemption requires a particular threshold, i.e. that domestic support measures and export subsidies 'conform fully' (to different provisions of the AoA)".143
" … A different interpretation would imply giving the measures allegedly covered by the Peace Clause a character of absolute immunity, independent of whether the legal requirements established in Article 13 are fulfilled or not. This would contradict the principle of in dubio mitius, constituting a more onerous interpretation of the treaty provisions".144 …
" … Indeed, the key words in Article 13 (b) (ii) and (c) (ii) of the AoA are "that conform fully" and "provided that" and "that conform fully", respectively. These words imply that the exception is not absolute, but rather subject to the fulfilment of certain conditions … ".145 BURDEN OF PROOF WITH RESPECT TO THE CONDITIONS FOR THE PEACE CLAUSE DEFENCE
42. As Argentina stated in its Third Party Initial Brief, the defence under Article 13 of the AoA is in the nature of an exception (affirmative defence).
43. It follows that in accordance with the WTO rules on the burden of proof (laid down by the Appellate Body in (United States – Shirts and Blouses from India), the burden is on the party invoking the exception to show that its use is justified. In the present case, it is clearly for the party invoking the protection of Article 13 of the AoA to show that the conditions stipulated in that Article are satisfied.
44. Accordingly, for the United States domestic support measures to be exempt from actions based on Article XVI.1 of GATT 1994 or Articles 5 and 6 of the SCM Agreement, the United States must show that:
- The domestic support measures for cotton conform fully to the provisions of Annex 2 to the AoA (or belong in the "green box", at the risk of being included in the Current Total AMS in accordance with Article 7.2 (a) of the AoA), or that
- the domestic support measures that do not belong in the "green box" and grant support to cotton do not exceed the support decided during the 1992 marketing year.
45. Likewise in order for the export subsidies granted by the United States to be exempt from actions based on Article XVI of GATT 1994 and Articles 3, 5 and 6 of the SCM Agreement the United States must show that these export subsidies conform fully to Articles 8 to 11 of the AoA (Part V).
III.1 LOSS OF PEACE CLAUSE PROTECTION IN RELATION TO DOMESTIC SUPPORT MEASURES: ARTICLE 13 (B) (II) OF THE AoA
46. In particular, in relation to domestic support measures, Article 13 (b) (ii) of the AoA states that:
"During the implementation period, notwithstanding the provisions of GATT 1994 and the Agreement on Subsidies … : … domestic support measures that conform fully to the provisions of Article 6 of this Agreement including direct payments that conform to the requirements of paragraph 5 thereof, as reflected in each Member's Schedule, as well as domestic support within de minimis levels and in conformity with paragraph 2 of Article 6, shall be: … exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 and 6 of the Subsidies Agreement, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year; …" (emphasis added).
47. In Argentina's opinion, in the present case, for lack of a specific WTO notification or known US laws or regulations, the support "decided during the 1992 marketing year" by the United States should be considered to be the non-"green box" domestic support granted by that country to cotton during the 1992 marketing year.
48. Argentina agrees with Brazil that the level of subsidies granted by the United States to its cotton sector during marketing years 1999 to 2002 exceeded that of 1992, thereby depriving the United States of Peace Clause protection, for non-compliance with the legal requirements of Article 13 (b) (ii) of the AoA.
49. In this respect, the Oxfam Briefing Paper ("Cultivating Poverty: The impact of USCotton Subsidies on Africa")146 states that:
"The US has lost this protection (the Peace Clause protection) by virtue of the fact that the level of subsidies it provided in 2001 was double that provided in 1992". …
"Every acre of cotton farmland in the US attracts a subsidy of $230, or around five times the transfer for cereals. In 2001/02 farmers reaped a bumper harvest of subsidies amounting to $3.9bn – double the level in 1992. This increase in subsidies is a breach of the "Peace Clause" in the WTO Agreement on Agriculture …" …
"The United States accounts for approximately one-half of the world's production subsidies for cotton. In 2001/02 the value of US cotton production amounted to $3bn at world market prices. In the same year, the value of outlays in the form of subsidies to cotton farmers by the USDA's Commodity Credit Corporation (CCC) was $3.9bn.In other words, cotton was being produced at a net cost to the American economy".
50. The domestic support measures which, in Argentina's view, do not enjoy Peace Clause protection under Article 13 (b) (ii) are the following programmes established in the United States legislation as described by Brazil in its First Submission: Deficiency Payments147, Loan Deficiency Payments148, Production Flexibility Contract Payments149, Direct Payments150, Market Loss Assistance151, Counter-Cyclical Payments152, Marketing Loan Gains153, Crop Insurance Subsidies154, Step 2 Domestic Payments155, and Cottonseed Payments156.
51. It should be pointed out that in the consultations held on 3, 4 and 19 December 2002 – in which Argentina was joined – in relation to the above-mentioned programmes Argentina requested the United States for information on the amount of support granted to cotton producers in the years 1999, 2000 and 2001, considering that the last domestic support notification had been for the year 1998157.
52. In this connection, the United States confined itself to pointing out that various answers to the Argentine questions could be found in US domestic support notifications in the process of being submitted to the Committee on Agriculture, without specifying what these answers were or when these notifications would be made.
The programmes Production Flexibility Contract (PFC), Direct Payment (DP) and Counter-Cyclical Payment (CCP) are non-"green box" 53. As Brazil shows in its Submission, the PFC, DP and CCP programmes are not subsidies that can be classified as "domestic support measures that conform fully to the provisions of Annex 2" of the AoA.
54. Accordingly, the amounts granted to cotton producers under these programmes must be treated as domestic support in calculating total support under Article 13(b)(ii).
55. These three programmes are inconsistent with Annex 2 of the AoA, inter alia, because they are not in accordance with the provisions of paragraph 6 (b) of that Annex in as much as the amount of payments is related with the type of production undertaken by the producer in years after the base period.
56. In this respect, Argentina agrees with Brazil that the term "type … of production …" means the type of crop planted and not the production method employed.
Failure of the United States to comply with its notification obligations
57. Considering (i) that the last domestic support notification available is that for the year 1999158 and (ii) the delay of more than three years, since the end of that year, in submitting a notification, Argentina wishes to make the following points:
58. Argentina considers that the United States has failed to fulfil its notification obligations under Article 18.2 of the AoA, the Decision on Notification Procedures adopted on 15 December 1993 and the Notification Requirements and Formats (G/AG/2) adopted by the Committee on Agriculture on 8 June 1995.
59. This failure to comply with notification obligations makes it very difficult to verify the domestic support provided from 2000 onwards as regards compliance with the commitments under Article 3.2 of the AoA, that is to say, whether or not the United States' non-"green box" subsidy programmes remain within the limits to which it is committed in its Schedule. The lack of notification also makes it difficult to verify whether the domestic support measures "conform fully to Article 6" of the AoA.
60. It is also difficult to review the implementation of the AoA by the United States under Article 18.2 in relation to the categorization of its subsidies, in particular whether some of them are "green box" or not.
61. The seriousness of failure to comply with the obligation to inform Members is such that paragraph 7 of Annex V to the SCM Agreement actually sanctions instances of non-cooperation by requiring the Panel to draw adverse inferences.
62. Argentina considers that this failure should be taken into account in deciding whether the United States' domestic support is consistent with Article 3.2 of the AoA and whether that domestic support should be included among the subsidies of Annex II to the Agreement.
THE US LEVELS OF DOMESTIC SUPPORT FOR COTTON EXCEED THE 1992 LEVEL
63. Argentina agrees with Brazil's figures in paragraphs 144, 148 and 149 of its First Submission showing that the United States budgetary outlays for domestic support for the cotton sector have been as follows (in millions of dollars), on the basis of information supplied by the USDA itself159:
* The information relating to United States support for cotton during marketing year 2002 is not yet complete as the marketing year does not end until 31 July 2003. Nevertheless, Argentina has used the best available evidence provided by Brazil in paragraph 149 of its Submission using partial USDA data and estimates based on criteria and provisions of support under the 1996 FAIR Act.
64. Thus, the subsidy levels for cotton in 1999, 2000, 2001 and 2002 are considerably in excess of the level for 1992 and, as already pointed out, the United States therefore lacks a basis for its claim, under Article 13(b)(ii) of the AoA, that its domestic support measures for cotton are exempt from actions based on Article XVI.1 of GATT 1994 or Articles 5 and 6 of the SCM Agreement.
III.2 LOSS OF PEACE CLAUSE PROTECTION IN RELATION TO EXPORT SUBSIDIES: ARTICLE 13(c)(ii) OF THE AoA
65. With respect to export subsidies, Article 13(c)(ii) of the AoA states that:
"During the implementation period, notwithstanding the provisions of GATT 1994 and the Agreement on Subsidies … : … export subsidies that conform fully to the provisions of Part V of this Agreement, as reflected in each Member's Schedule, shall be: … exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the Subsidies Agreement". (Emphasis added).
66. In relation to export subsidies, the Peace Clause could only be invoked by the United States if its export subsidies conformed fully to the provisions of Part V of the AoA, that is, Articles 8-11 of the AoA.
67. According to Article 8 of the AoA, "Each Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in that Member's Schedule".
68. Thus, as Brazil asserts in paragraph 222 of its Submission, the United States can provide export subsidies for agricultural products if it satisfies two conditions: (i) has a reduction commitment for the product in question and (ii) the amount of export subsidies provided does not exceed this reduction commitment.
69. In this case, the measures that Argentina considers to be inconsistent with WTO rules are:
I. the export subsidies for US (upland) cotton established in the United States legislation under the Step 2 Export Program166;
II. the export credit guarantee programmes for cotton and other products, General Sales Manager 102 (GSM 102), General Sales Manager 103 (GSM 103), and Supplied Credit Guarantee Programme (SCGP), as described by Brazil in its First Submission167; and
III. the cotton export subsidies granted under the FSC Repeal and Extraterritorial Income Act of 2000(ETI Act).
Inconsistency with the provisions of Part V (Articles 8 to 11) of the AoA
70. Article 3.3 of the AoA prohibits the granting of export subsidies in respect of agricultural products not specified in Section II of Part IV of a Member's Schedule168. This provision forms part of the reference to "unconformity with this Agreement and with the commitments as specified in that Member's Schedule" in Article 8 of the AoA.169
71. In fact, Schedule XX of the United States, Part IV (Agricultural Products: Commitments Limiting Subsidization), Section II (Export Subsidies: Budgetary Outlay and Quantity Reduction Commitments)170, does not specify cotton among the products subject to commitments.
72. Consequently, because its export subsidies are not in conformity with the provisions of Part V of the AoA, the United States has no basis for invoking, under Article 13 (c) (ii) of the AoA, the exception to the effect that its cotton export subsidies are exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement.
73. Moreover, as described in Section IV of this submission, neither the US (upland) cotton export subsidies established in the United States legislation under the Step 2 Export programme, nor the export credit guarantee programmes for cotton and other products General Sales Manager 102 (GSM 102), General Sales Manager 103 (GSM 103) and Supplied Guarantee Programme (SCG), nor the subsidies granted to cotton exports under the FSC Repeal and Extraterritorial Income Act of 2000 (ETI Act) are in conformity with Part V of the AoA since they are inconsistent with Articles 3.3, 8 and 10.1 of the AoA.
IV. INCONSISTENCY WITH ARTICLES 3.3, 8 AND 10.1 OF THE AoA AND ARTICLE 3 OF THE SCM AGREEMENT 74. In accordance with paragraph 7 above, Argentina maintains that the United States cotton export subsidies are inconsistent with Articles 3.3, 8 and 10.1 of the AoA.
75. As already pointed out, Schedule XX of the United States, Part IV (Agricultural Products: Commitments Limiting Subsidization), Section II (Export Subsidies: Budgetary Outlay and Quantity Reduction Commitments)171, does not specify cotton among the products subject to commitments.
76. Consequently, as noted by Brazil in paragraph 237 of its Submission, any export subsidy provided by the United States to its cotton industry will be inconsistent with Articles 3.3 and 8 of the AoA. In other words, as it has not specified cotton as a product subject to subsidy reduction commitments, the United States has no right to grant this type of support for the product in question, any support granted or proposed constituting a breach of the provisions of Articles 3.3 and 8 of the AoA:
ARTICLE 10.3 OF THE AoA
77. Argentina wishes to point out that, in accordance with Article 10.3 of the AoA and the Appellate Body's interpretation in "Canada - Dairy Products: Article 21.5 DSU (II)172", it is for the United States to show that quantities exported in excess of the export subsidy reduction commitment level have not been subsidized.
78. Figures 18 and 19 in paragraphs 265 and 266 of Brazil's submission clearly indicate that in the case of both cotton and other agricultural commodities exports of which qualify for the export credit guarantee programmes GSM 102, GSM 103 and SCGP United States exports during the year 2001 were well in excess of the reduction commitments in its Schedule.
79. Consequently, the United States bears the burden of proving that both for cotton and for other products that benefit from export credit guarantee programmes the export segment in excess of the scheduled reduction commitment has not received any export subsidy.
THE INDIVIDUAL EXPORT SUBSIDY PROGRAMMES
- Step 2 Export Programme
80. Referring to Brazil's observations in paragraphs 244 and 245 of its Submission, Argentina agrees that Section 1207(a) of the Farm Act of 2002 (2002 FSRI Act)173 – establishing the Step 2 Export Programme – constitutes a per se violation of AoA Articles 3.3 and 8 as it is a mandatory provision, in the same way that the Step 2 Export Programme also constitutes a per se violation of those provisions because of its mandatory nature.
81. Both the corresponding section of the 2002 FSRI Act and the provisions of Section 1427.100 ff. of the Code of Federal Regulations clearly establish that the Commodity Credit Corporation (CCC) must issue marketing certificates or cash payments to exporters and/or users of US (upland) cotton.
82. The purpose of the programme is to provide a direct incentive for US cotton exports and consists of a direct payment to exporters based on the difference between the US domestic cotton price and the world market price. There can be no doubt that whenever the former is higher than the latter an export subsidy is present in as much as the existence of these payments enables the US product to compete artificially with the lower-cost products of more efficient producers. All these aspects are dealt with in extenso by Brazil in its Submission dated 24 June 2003174, and Argentina therefore considers it unnecessary to dwell on a description of the operational details of the programme itself.
83. What Argentina wishes to make clear is the fact – to which attention has already been drawn by Brazil – that the programme known as Step 2 establishes the right of exporters to receive a subsidy for shipments made in connection with foreign sale operations, while establishing an obligation upon the CCC to grant that subsidy once the particular requirements are satisfied.
84. In "US EXPORT CREDITS: Denials and Double Standards"175, published by Oxfam America, it is noted that:
"In the case of cotton, developing countries are clearly losing out because of the unfair competitive advantage given to US cotton exports. For the marketing year 2001/2002, US subsidies to cotton amounted to $4 billion, including, among other programs, export credits. In the 2001/2002 marketing year, the transfer linked with Step 2 cotton subsidies ranged from 0-7 cents per pound, or up to 18 per cent of the world market price. Total export subsidization under this heading was around $197 million in 2001".
85. Insofar as the United States does not specify Upland Cotton in its Schedule of Commitments (see paragraphs 72 and 75 above) and this type of subsidy is granted to cotton under the Step 2 programme, any provision in the legal texts with respect to the granting of such a subsidy makes those texts inconsistent per se with Articles 3.3 and 8 of the AoA, while for the same reason any sum distributed, budgeted or provided for under this programme constitutes a prohibited subsidy within the meaning of Article 3 of the SCM Agreement, which expressly establishes a reservation in respect of the Agreement on Agriculture.
- The programmes GSM 102, GSM 103 and SCGP: 86. In its submission of 24 June, Brazil establishes unequivocally that the US export credit guarantee programmes constitute export subsidies. For this purpose Brazil carries out a combined analysis of the provisions of the AoA and the SCM Agreement, while also basing its arguments on the relevant WTO case-law176.
87. Argentina agrees with the Brazilian analysis and therefore considers it unnecessary to repeat the description of the operational programmes or the analysis of their legal coverage under the Agreement on Agriculture and the SCM Agreement. Suffice it to note that Argentina also considers that these programmes constitute export subsidies under item (j) of the Illustrative List in Annex I to the SCM Agreement – in as much as the export credit guarantees are granted "at premium rates which are inadequate to cover the long term operating costs and losses of the programmes" – thereby resulting in a violation of the provisions of Article 10.1 of the AoA.
88. At the same time, Argentina wishes to emphasize the impact and distorting effect on trade of these export credit guarantees.
89. The export credit guarantee programmes provide incentives for exports for United States agricultural products, in this case cotton and other agricultural products, and the credits are granted on terms more favourable than those available on the market. This situation is clearly reflected in paragraphs 275 to 286 of Brazil's First Written Submission and further illustrated by the Oxfam study "US EXPORT CREDITS: Denials and Double Standards"177 which on page 3 states:
" … those favourable conditions include lower interest rates, a longer loan repayment period, a smaller down payment, less frequent payments per year and/or the virtual waiver of a fee or premium designed to provide the US government with adequate protection against potential defaults".
90. Likewise, a study carried out by the OECD in 2000, in which the effects of export subsidies granted by various countries are evaluated, indicates that the United States credit guarantee programmes are the most trade-distorting of all those analyzed, in as much as the premiums paid by the beneficiaries are too low to cover the high level of the guarantees granted for long term credits.178
91. According to the "Summary of FY 2002 Export Credit Guarantee Programme Activity", published on the Federal Agricultural Service (FAS) Website179, the percent shares of export credit guarantee applications, by commodity, for fiscal year 2002 were as follows: