II. SPECIFIC COMMENTS REGARDING BRAZIL'S ANSWERS A. Scope of this Proceeding
Questions to both parties 44. The European Communities argues in respect of the preliminary objection raised by the United States regarding the claims of Brazil relating to export credit guarantees for pig meat and poultry meat under the GSM 102 programme that "the important issue is the nexus or the degree of interrelatedness or interdependence between different elements of the measure." (Oral Statement of the European Communities, para. 6) The European Communities submits in this regard that: "the Panel should examine the original measure at issue and the 'measures taken to comply,' and, with particular reference to the 'elements of the measure' that the United States argues are outside the Panel's terms of reference, enquire into the extent to which these are interrelated or interdependent with measures or 'elements of measures' that the United States accepts are within the Panel's terms of reference." (Oral Statement of the European Communities, para. 11)
Do the parties agree with the approach suggested by the European Communities and with the considerations in paragraph 13 of the Oral Statement of the European Communities?
43. The United States respectfully refers the Panel to its general comments above regarding Brazil's claims in respect of exports of pig meat and poultry meat as well as to its own response to this question.523
45. Could the parties comment on the observations made by the European Communities in paras. 15-24 of its Oral Statement on the issue of whether the marketing loan and counter-cyclical payment programmes are within the scope of the Panel's proceeding?
44. The United States respectfully refers the Panel to its general comments above regarding Brazil's claims in respect of the marketing loan and counter-cyclical payment programs as well as to its own response to this question.524 The United States also submits one additional brief observation regarding Brazil's answer to this question.
45. The United States disagrees with Brazil's assertion that a claim about a measure "as such" is "typically understood to involve an examination of a general rule or norm in the abstract."525 An "as such" claim relates to whether the application of a measure in all present and future circumstances results in a breach of a covered agreement. This is not an inquiry "in the abstract" but the exact opposite, an inquiry across all of the possible factual circumstances that have and are expected to arise. Indeed, the Appellate Body underscored exactly this aspect of "as such" claims in United States – Sunset Reviews on OCTG from Argentina, where it explained that:
By definition, an "as such" claim challenges laws, regulations, or other instruments of a Member that have general and prospective application, asserting that a Member's conduct – not only in a particular instance that has occurred, but in future situations as well – will necessarily be inconsistent with that Member's WTO obligations.526
The Appellate Body explained that "as such" claims were to be considered to be "serious challenges" because "[i]n essence, complaining parties bringing 'as such' challenges seek to prevent Members ex ante from engaging in certain conduct."527
46. Despite this clarification from the Appellate Body about the caution to be exercised with "as such" challenges – and Brazil's own acknowledgment, in response to this question, that a finding regarding the effects of a subsidy under Articles 5 and 6 of the SCM Agreement requires an examination of market conditions and the operation of the alleged subsidy within those conditions – Brazil would have the Panel believe that the original panel made a serious prejudice finding against the statutory and regulatory provisions authorizing Step 2, marketing loan, and counter-cyclical payment programs without so much as addressing the market conditions likely to prevail in the future. Rather, Brazil urges the Panel to ignore Brazil's own express explanation to the original panel that the MY 1999-2002 period was "both the period of time covering the measures challenged by Brazil as well as the period of investigation to examine present serious prejudice caused by the U.S. subsidies under Articles 5(c) and 6.3 of the SCM Agreement" and its arguments in this proceeding that the MY 1999-2002 period presented an unusually "dynamic" situation for world market prices and U.S. exports.528 Instead, Brazil would now have the Panel believe that the original panel simply used MY 1999-2002 as a reference period for the entire period of effectiveness of the FSRI Act of 2002. The facts simply do not support Brazil's argument.
46. In its Oral Statement, the European Communities characterizes Brazil's and the United States' respective approaches as the "measure model" and the "element of the measure model" (Oral Statement of the European Communities, para. 7). Please discuss whether you agree with this characterization and whether, in your view, the application of a measure alleged to be a subsidy to different agricultural products relates to a "measure" (or elements thereof) or if, rather it relates to a "claim". Would it be permissible for a compliance panel to examine a "claim" that relates to subsidies (granted as part of measures taken to comply) provided to agricultural products to which the "initial measure" did not apply? 47. The United States respectfully refers the Panel to its general comments above regarding Brazil's claims in respect of exports of pig meat and poultry meat, its comments regarding Brazil's answer to Question 44 above, as well as to its own response to this question.529 Questions to the United States 47. The United States has raised a preliminary objection regarding Brazil's claims of (threat of) serious prejudice in respect of the marketing loan and counter-cyclical payment programmes. Is the Panel's understanding correct that, apart from this preliminary objection regarding programmes, the United States also considers that the issue of whether payments made under the marketing loan and counter-cyclical payment programme after 21 September 2005 cause serious prejudice to the interests of Brazil is not properly within the scope of this proceeding?
48. How does the United States address the argument of Brazil that "[i]f the United States were to prevail on its view that subsequent mandatory and price-contingent marketing loan and CCP payments are not properly before this Panel, the grant of annual recurring subsidies becomes 'a moving target that escape from [the WTO subsidy] disciplines'"? (Closing Statement of Brazil, para. 4)
49. Could the United States comment on the argument of the European Communities that the text of Article 21.5 of the DSU does not limit the temporal scope of that provision in the manner suggested by the United States? (para. 29 of the Oral Statement of the European Communities) Question to Brazil 50. Does Brazil maintain its claims with respect to the three unscheduled products (lyocell, lysine, wood products) identified by the United States as falling outside the scope of the Agreement on Agriculture? (see paragraph 83 of the United States' Rebuttal)
48. In its response, Brazil appears to acknowledge that lyocell, lysine, and wood products fall outside the scope of the Agreement on Agriculture. By definition, therefore, the provision of GSM 102 export credit guarantees in respect of lyocell, lysine, and wood products cannot circumvent U.S. agricultural export subsidy commitments under that agreement.530 In its request for establishment of a panel, Brazil presented claims under Articles 3.1 and 3.2 of the SCM Agreement "as a result and to the extent of [the alleged] violation of Article 10.1 (and, as a consequence, Article 8) of the Agreement on Agriculture."531 As there can be no "violation of Article 10.1 (and, as a consequence, Article 8) of the Agreement on Agriculture,"532 there can be no claim under the SCM Agreement with respect to the GSM 102 export credit guarantees in respect of lyocell, lysine, and wood products under the express terms of Brazil's request for panel establishment. Where a claim is not set out in the request for panel establishment – as here – it is not part of the matter referred to the panel and falls outside the scope of a panel proceeding.
B. Claims of Brazil regarding present serious prejudice
1. Significant price suppression - Article 6.3(c) of the SCM Agreement Questions to both parties 51. The parties disagree on whether or not the marketing loan and counter-cyclical payments have more than minimal effects on production of upland cotton. Could each party explain how its approach to the analysis of the impact of these payments on production of upland cotton is supported by the provisions of Articles 5 and 6 of the SCM Agreement and by any other relevant WTO provisions? 49. The United States notes that, although the Panel's question asks each party to "explain how its approach to the analysis of the impact of [marketing loan and counter-cyclical] payments on production of upland cotton is supported by the provisions of Articles 5 and 6 of the SCM Agreement and by any other relevant WTO provisions," Brazil does not appear to actually answer this question. Rather, Brazil devotes almost all of its response to explaining why even green box measures can be subject to challenge under the SCM Agreement. This is inexplicable because Brazil then asserts that (a) the marketing loan and counter-cyclical payment programs are properly viewed as so-called "amber box" measures and (b) in the very next question, concedes that the fact that measures are classified in the "amber box" does not mean that they cause adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement. It is difficult to understand, therefore, what – if anything – Brazil's answer has to do with explaining whether Brazil's approach is consistent with Articles 5 and 6 of the SCM Agreement.
50. Instead, Brazil's discussion seems to be aimed at suggesting that U.S. marketing loan and counter-cyclical payments should be found in breach of Articles 5 and 6 of the SCM Agreement no matter how minimal the effects thereof. Any such suggestion would be flatly wrong under the terms of those provisions. Only "subsidies" the effect of which is "significant" price suppression are subject to discipline by virtue of Articles 5(c) and 6.3(c) of the SCM Agreement. Whether any measures – whether green, blue, amber, or something else – may be challenged does not change the fact that the complaining party bears the burden of proving through evidence and argument that the challenged measures are causing adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement (in the present case, "significant" price suppression under Article 6.3(c)). Where – as here – a complaining party fails to do so, its claim cannot succeed.
52. In its Third Party Submission New Zealand observes: "Marketing loan payments are amber box measures, the category in which are included the non-prohibited measures with the most trade distorting effect on production and trade." (para. 5.19)
Do the parties consider that the fact that under the Agreement on Agriculture a subsidy is included in the 'amber box' is relevant to the analysis of the subsidy's consistency with Articles 5 and 6 of the SCM Agreement? 51. The United States respectfully refers the Panel to the U.S. comments regarding Brazil's response to Question 51 above.
Questions to the United States 53. The United States argues that Brazil has not provided evidence of 'actual production inducing' effects of marketing loan and counter-cyclical payments and that Brazil 'purports to demonstrate indirect production effects through its claim that the US planting, production, and exports are not responsive to prices.' (Opening Statement of the United States at the meeting of the Panel with the parties, paras. 62 and 69, emphasis in original) (a) Could the United States explain further the distinction between what it terms "actual production inducing effects "and "indirect production effects"? Could the United States also elaborate on how this distinction is legally relevant in the context of Articles 5 and 6 of the SCM Agreement?
(b) What is the response of the United States to the argument that the fact that "U.S. upland cotton producers know that their overall revenue will always be protected by marketing loans and counter-cyclical payments ... plays a major role in their planting decisions"? (Rebuttal of Brazil, para. 185; see also Third Party Submission of New Zealand, paras 5.20-5.21)
(c) In its Opening Statement at the meeting of the Panel with the Parties, Brazil observed: "...we have demonstrated that these subsidies stabilized cotton producers' revenue despite wildly fluctuating market prices, thereby insulating and numbing acreage response to market price signals. These subsidies also cover the huge long-term gaps between market returns and total costs of production. Both effects are closely interrelated." (para.55)
Is the United States only arguing that Brazil has not empirically substantiated that these two "effects" have actually occurred or is it also the position of the United States that these effects are in any event legally irrelevant to an analysis of whether a subsidy causes significant price suppression within the meaning of Article 6.3 (c) of the SCM Agreement? 54. Could the United States explain whether, and, if so, why, it is of the view that this Panel should not rely on the findings and analysis by the original Panel regarding the effects of marketing loan and counter-cyclical payments on production and exports? Please comment in particular on paras. 7.1291, 7.1295, 7.1302, 7.1349, 7.1353 of the Panel Report. 55. Can the United States confirm that the figures "$868 million" and "$838 million" Brazil cited in para. 40 of its Opening Statement are correct figures if one uses the "Brazil's methodology" and the "Cotton-to-Cotton methodology"? (Please note that the Panel is not asking whether the US agrees with these methodologies.)
56. The United States has cited new empirical research on the production effects of counter-cyclical payments. How does the United States address Brazil's criticism that none of this research has dealt specifically with the effects of countercyclical payments under the FSRI Act of 2002 on upland cotton? (Rebuttal Submission of Brazil, para. 120)
57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott (US-35) studies as examples of new empirical research on the production effects of counter-cyclical payments. (a) Is it not more accurate to characterize the Lin and Dismukes study as a simulation of the possible effect of countercyclical payments on production rather than a study on the actual impact of the payments since it does not statistically estimate the effect of the actual payments (which began only in 2002) on crop production? (Please refer to pages 9-12 of the paper which describe the data, covering the period 1991-2001, used for the study). (b) How does the United States deal with Brazil's characterization of the Westcott study as offering no new empirical evidence, and instead, being a qualitative discussion, much like that presented to the original panel (see para 128 of Brazil's rebuttal)?
58. The Unites States stated that the key consideration in assessing a farmer's decision to grow upland cotton is whether the farmer has been covering his variable costs of production. In this connection, it presented upland cotton costs and returns estimates for marketing years 1999-2005 (Exhibit US-47). Brazil has disputed the absence of certain items – land, labour and capital recovery costs - in the US calculations of variable costs. In response, the United States has referred to the Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by a Task Force of the American Agricultural Economics Association as the basis for leaving out these items in its calculations. However, the Task Force which authored the Handbook does not use the categories "fixed" or "variable" costs and in fact recommends that the microeconomic concepts of fixed and variable costs not be used in preparing and reporting cost and return estimates. Page 2-67 of the Handbook states:
The Task Force therefore recommends that costs should be categorized only as to whether they are associated with expendable factors or the services of capital assets. The division of costs into categories such as fixed and variable should generally be avoided in preparing CAR estimates. For the purpose of preparing CAR estimates for specific enterprises, the Task Force recommends that all the costs of all expendables be allocated to the generic group OPERATING COSTS and that all other costs be allocated to the group ALLOCATED OVERHEAD.
Would the United States clarify whether the categories "operating costs" and "allocated overhead" correspond to the economic concepts of fixed and variable costs? In particular, are "operating costs" variable costs or not? Would the United States please indicate whether, and if so, where, the Handbook makes these clarifications or distinctions. 59. In discussing the impact of long-term costs of production (and hence long-term profitability) of upland cotton production on farmers' decisions to exit cotton farming, the United States argues that income from other crops and off-farm income must be into account. Why does the United States consider these issues relevant given the original Panel's decision that "off farm income" is not a legally relevant consideration. (Panel Report, para. 7.1354, footnote 1470) Please respond to Brazil's arguments on this matter in paragraphs 249-253 of its Rebuttal Submission.
60. In its Rebuttal Submission, the United States argues that Prof. Sumner's description of the model that appeared in a recent CATO publication is not "appropriate" for use in a WTO dispute involving claims of serious prejudice. Professor Sumner has since introduced "more empirical and institutional detail" to the model used in this dispute. These changes are described in paragraphs 111-117 of Brazil's Opening Statement. Does the United States view these changes as being sufficient to make the model appropriate for use in a WTO dispute involving claims of serious prejudice? If not, what modifications does the United States think should have been made to the model?
61. With respect to marketing year 2006, the United States has provided some data on upland cotton exports (Exhibit US-113), planted and harvested area and cotton production (Exhibit US-114), as well as a copy of the National Cotton Council's survey of planting intensions (Exhibit US-115). The data, all of which have been collected through the first half of marketing year 2006, are variously qualified as "estimates" or "projections" or "projected." (a) Please clarify, as completely as possible, what these various terms mean as they apply to US upland cotton exports, acreage and production. (b) Would the United States be able to provide the Panel with some information, based on the average of the past six marketing years or so, of how final marketing year data on these variables, would differ from preliminary estimates, projections and the like, taken at the end of February of the relevant marketing year? (c) Finally, would the United States be able to update that part of Exhibit US-83 dealing with futures prices so as to provide the panel with as complete as possible average January to March 2007 New York futures prices for upland cotton? Questions to Brazil
62. How does Brazil rebut the argument of the United States that the fact that marketing loan and counter-cyclical payment programmes provide income support when prices are low is not the key question before this Panel and that while, like any other payments to producers, marketing loan and counter-cyclical payments could affect production, Brazil has not provided any evidence of actual production-inducing effects? (Rebuttal Submission of the United States, paras. 222, 287-291; Opening Statement of the United States at the meeting of the Panel with the parties, paras. 62 75; Comments of the United States on Brazil's 'Oral' Presentation in the meeting with the Panel, paras. 42-57)
52. Brazil's response to the first part of this question highlights that fact that Brazil is attempting to have the Panel find income support to agricultural producers to effectively be a prohibited measure under the SCM Agreement.
53. Indeed, Brazil asserts as "one of the fundamental facts supporting Brazil's adverse effects claims"533the mere fact that marketing loan and counter-cyclical payment programs provide income support to U.S. producers at times of low prices. Similarly, Brazil argues that it is evidence of price suppression under Articles 5(c) and 6.3(c) of the SCM Agreement that U.S. farmers "know" that if prices fall below certain levels, they may receive payments under the marketing loan and counter-cyclical payment programs. As the United States explained in its response to Question 53(b), however, any eligible recipient of income support "knows" that he or she will receive some income protection due to those payments. That is the very nature and intent of income support programs – to ensure that producers receive some income that they would not otherwise get on the market.
54. In fact, U.S. farmers are even more secure in their "knowledge" that they will receive such payments where payments are fixed, as in the case of direct payments (i.e., as compared to payments under the marketing loan and counter-cyclical payment program, which depend on U.S. and world market prices that are not within the control of individual farmers and cannot even be known until many months after the decision is made whether or not to plant cotton). Yet, as the original panel recognized in the case of direct payments534, the fact that farmers have such "knowledge" does not necessarily result in any "adverse effects" within the meaning of Articles 5 and 6 of the SCM Agreement.
55. As the United States has noted before, most economists agree that direct payments, like marketing loan payments, counter-cyclical payments, payments supporting elderly or low-income recipients or, for that matter, any type of payment to a producer of agricultural products will have some effect on risk and wealth and that this may, in turn, have some effect on production. The question under Articles 5(c) and 6.3(c) is whether Brazil has shown that – taking into account the particular structure and design of the programs and the way they operate under the market conditions prevailing at present – payments under the programs are having actual effects on production that are so substantial that they are resulting in "present" significant price suppression. It is significant price suppression that is precluded under the SCM Agreement, not any possible effect on production or any actual effect on production that does not ultimately result in significant price suppression in the market identified by the complaining party.
56. Brazil's response to the second part of the Panel's question – asking Brazil to respond the U.S. observation about the lack of an empirical basis for Brazil's claims of "present" serious prejudice – confirms that Brazil has not established such actual "present" effects. Thus, for example, Brazil cites as "evidence" findings made by the original panel and the Appellate body about the collective effects of a different set of measures (Step 2, marketing loan and market loss assistance or counter-cyclical payments) in a different period of time (MY 1999-2002) and under different market conditions.535 These findings are not directly relevant here. Moreover, as the United States explained in its response to Question 54536, the factual observations that the original panel made regarding marketing loan and counter-cyclical payments in reaching its conclusion about the collective effects of the Step 2, marketing loan and counter-cyclical payments made in MY 1999-2002 do not support a finding that marketing loan and counter-cyclical payments are causing "significant" price suppression at present under the existing market conditions.
57. Brazil then asserts that a "strong link" "has been recognized" by various entities between the programs and payments challenged by Brazil in this proceeding and upland cotton acreage, production, exports, and prices.537 However, not a single one of the sources Brazil cites actually looks to the collective effects of the marketing loan and counter-cyclical payments on world market prices, let alone looks at whether these effects amount to significant price suppression under the market conditions existing in the "present" (i.e., MY 2006). Indeed, Brazil even goes as far as to cite as "evidence" a U.N. Food and Agricultural Organization ("FAO") report that observes that "all of the recent studies unambiguously demonstrate that the removal of domestic subsidies in industrialized countries reduces cotton production in and exports from these countries."538 There is no basis whatsoever to find that U.S. marketing loan and counter-cyclical payments are causing "present" significant price suppression within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement simply on the basis that they are "domestic subsidies in [an] industrialized countr[y]."
58. Moreover, contrary to Brazil's assertions, the FAO report does not suggest that there is a "strong link" between the marketing loan and counter-cyclical payments and upland cotton acreage, production, exports or prices.539 The FAO report simply reviews a number of different studies examining the removal of various domestic support measures and/or tariffs from the cotton sector in a number of countries (some even looking at removal of such measures world-wide). As Brazil has acknowledged, the original panel reviewed similar studies during the course of its analysis and "recognized that many of the parameters including magnitude, and time period of the subsidies, elasticities, measures, and selection of baselines did not address exactly the time period or legal issues before the original panel."540 Accordingly, the only conclusion that the original panel considered appropriate to draw from these widely divergent, inapposite studies – according to Brazil – was that "subsidies bestowed by Member governments have the potential to distort production and trade."541 This does not equate to the recognition of any "strong link."
59. Brazil also points to statements by a U.S. trade association made before enactment of the 2002 farm bill purporting to show that U.S. farmers would be "bankrupt" without marketing loan and counter-cyclical payments. Again, not one of these statements pertain to marketing loan or counter-cyclical payments. Rather, they were made about emergency relief provided under the FAIR Act of 1996 in the period MY 1999-2001. These statements – quoted out of context – about an entirely different set of measures (including disaster payments), offers no insight regarding the role of marketing loan and counter-cyclical payments in production decisions or about U.S. farmers' costs and revenues today. Certainly it does nothing to detract from the actual data regarding "present" costs and revenue, which, as discussed in the prior U.S. submissions, flatly contradict Brazil's claims that U.S. upland cotton farmers would be bankrupt without the marketing loan and counter-cyclical payment programs.
60. What is conspicuous in its almost complete absence from Brazil's listing of the evidentiary basis for its claims is evidence of any present production-inducing effects of the marketing loan and counter-cyclical payments under the market conditions prevailing at present and without the Step 2 program in place. Indeed, the only argument that Brazil makes about the effects of marketing loan and counter-cyclical payments under the current market conditions is that, according to a U.S. "market expert," current U.S. stocks will allegedly "keep a heavy lid on the market" and, in term of prospective plantings, that "any total acreage number below 12.5 million acres will be bullish. The lower the intended plantings, the higher the price rally."542 61. Brazil's assertion that this is "evidence" of significant price suppression is misleading. The question under Articles 5(c) and 6.3(c) is whether U.S. marketing loan and counter-cyclical payments significantly suppress world market prices for upland cotton. Whether or not increased U.S. stocks may have some effects on prices does not answer that question. Any effects on prices could only be attributed to U.S. marketing loan and counter-cyclical payments to the extent that Brazil proves that it was marketing loan and counter-cyclical payments that caused all of the production that is placed in inventory. Brazil clearly has not done so.543 62. Absent specific evidence regarding the effects that marketing loan and counter-cyclical payments are having at present under the prevailing market conditions, Brazil has no basis for its claims of "present" serious prejudice under Articles 5(c) and 6.3(c).