1. Outstanding export credit guarantees Questions to the United States 90. The United States states, in para. 50 of its Opening Statement, that: ... nothing in the SCM Agreement provides that "withdrawing" a "subsidy" allegedly "taking the form of a program" "includes an obligation to abstain from performing on commitments outstanding under that program as of the deadline for implementation." That argument improperly equates "performing on commitments under the program" with the "subsidy" itself. Such an equation was appropriate in Brazil – Aircraft (21.5), where Brazil continued to issue new WTO-inconsistent bonds even after the period of implementation on the basis that it had pre-existing contractual obligations to do so. However, it is not accurate here, where the guarantees are not themselves prohibited subsidies.
Would the United States please clarify what it meant in the underlined sentence? 91. In paragraph 342 of its First Written Submission, Brazil indicates that the total amount of guarantees under the GSM 102, GSM 103 and SCGP programs outstanding on 1 July 2005 amounted to $8.5 billion. (a) Does the United States agree with the figure provided by Brazil? (b) Please indicate what proportion of that amount concerns exports of unscheduled products? (please distinguish between principal and interests)
(c) Please indicate what proportion of that amount concerns exports of scheduled products, and in particular rice (please distinguish, in each case, between principal and interest).
Questions to Brazil 92. Is it of any relevance to the Panel's assessment of Brazil's claims concerning "outstanding" export credit guarantees that what was at issue in Brazil – Aircraft (21.5) was the issuance, after the implementation date, of new bonds, and that bonds which had been issued prior to the implementation date could be redeemed for a number of years thereafter (see para. 46 of the US' Opening Statement at the panel meeting). 142. Contrary to Brazil's assertions, the situation in the present proceeding with respect to export credit guarantees issued prior to July 1, 2005 is not analogous to Brazil's continued provision of WTO-inconsistent bonds in Brazil – Aircraft (21.5). Brazil's bonds continued to be prohibited export subsidies both before and after the date of implementation. By contrast, since July 1, 2005 (and, indeed, even before that time), U.S. export credit guarantees ceased being part of any program that is being operated at a "net cost to the government."629 Thus, unlike Brazil, the United States has not attempted to continue providing prohibited export subsidies past the date of implementation.
93. The Panel notes that Exhibit Bra-516 indicates outstanding amounts for GSM 5 as of 30 June 2006 rather than as of 30 June 2005 as indicated in footnote 523 of Brazil's First Written Submission. Please explain. 2. Legal Bases for Brazil's export subsidies claims Question to the United States
94. The United States has noted that the original Panel's findings (that the export credit guarantees at issue constituted prohibited export subsidies) were based on item (j). The United States has also asserted that it has based itself on item (j) in implementing the DSB recommendations with respect to export credit guarantees. Please clarify whether the Panel should understand the United States' argument in this respect as an argument concerning the scope of the present proceeding.
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement Questions to both parties 95. Brazil has taken the position that "different parties to a transaction involving a GSM 102 ECG derive different benefits from the GSM 102 ECG, each of which is potentially subject to assessment under Article 1.1(b) of the SCM Agreement" and has indicated that it is, in this proceeding, "primarily concerned" with the benefit received by the US exporter in the form of below-market fees (para. 404, Brazil's Rebuttal). The United States has challenged Brazil's approach of focusing on fees to the exclusion of other elements of the total cost of the loan. Please explain, referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your position as to whether: (1) export credit guarantees and other types of subsidies may involve more than one type of benefit and/or recipient; (2) whether it is up to the complaining Member to decide which benefit it chooses to challenge. 143. The United States respectfully refers the Panel to the U.S. response to this question.630 In addition, the United States offers the following observation regarding Brazil's response.
144. Brazil's response assumes that the United States "argues that Brazil must prove that [an export credit] guarantee also resulted in a benefit to a foreign bank by lowering the 'total cost of funds' involved in the transaction."631 This is a mischaracterization of the U.S. position. The United States has made no argument concerning the necessity to prove a benefit to any particular participant in a transaction or group of participants. Instead, consistent with Article 14(c) of the SCM Agreement, the United States has argued that the proper focus is on the guaranteed loan transaction itself, and whether the there is a "difference between the amount that the firm receiving the guarantee pays on a loan guaranteed by the government and the amount that the firm would pay on a comparable commercial loan absent the government guarantee."
145. The express focus under the text is on a comparison of two transactions to determine whether a benefit exists at all, not on whether a particular entity does or does not receive a benefit. Brazil has made no attempt to provide such specific information on individual loan costs and fees or to identify comparable commercial loans and their terms.
96. The parties differ as to whether different types of loans can be compared as long as they have the same "average life." What support (economic literature, etc.) exists for your position on this issue? 146. Brazil's response to this question appears to be irrelevant to the question posed by the Panel. Brazil offers an exhibit (BRA-686) in which the consultant retained by Brazil for purposes of this dispute expounds on "why at any point in time, the principal exposures between the two-year bullet loan and the three-year amortizing loan can be different."632 However, the United States has never argued that a loan with principal payable over 3 years has the same principal exposure as a loan with principal payable over 2 years. To the contrary, the United States has simply demonstrated that the prosaic arithmetic concept of average life provides a common and straightforward basis for comparing the costs and fees derived for loans of differing principal repayment terms.633
147. Brazil has previously argued that such a difference necessarily renders the two types of loans not comparable because "the patterns of credit risk to which the lender is exposed are very different in these two cases."634 Brazil now appears to retreat from this unequivocal argument, when it states that the difference in principal repayment terms "pose potentially differing risks of default."635
148. Brazil's consultant states "the likelihood of default in the two periods may be different."636 Presumably, therefore, they may also not be different. As the United States has previously observed, Brazil's analysis simply assumes, without a factual basis, "that the borrowing bank's credit outlook is sufficiently positive in the short term that there is a very low default likelihood perceived in the first two years . . . and a greater likelihood of default in the third year."637
149. Brazil's consultant expressly acknowledges that if the chance of default in each of the years is the same then there is no difference in spread between the two-year bullet loan and the three-year amortized loan.638 However, he argues that if one assumes the risk of default is higher after the first year then "the amortizing loan commands a higher spread."639 And, conversely, if one assumes higher risk of default in the first year, "the amortizing loan now has a lower spread."640 While this may be true, in the absence of any factual basis in the examples before the Panel for an assumption that the risk is greater in the out years, then Brazil's theoretical disquisition is of no significance. Far from there being any such factual basis, however, the United States has actually submitted evidence that in a study of medium-term U.S. government-guaranteed loans, the authors found that "as the medium-maturity loans season the likelihood of default increases initially, peaks in the second year after origination, and declines thereafter."641 150. In any event, in the absence of any specific basis for assigning, in particular transactions, differing default risks in particular years, Brazil's analysis simply confirms the basic utility of average life for comparing pricing of loans of different principal repayment terms.
Questions to the United States
97. Assuming that the Panel accepts the United States' argument that "benefit" is to be assessed on the basis of the "total costs of funds," what do you consider Brazil must establish in order to meet its burden of proof in that respect? Must Brazil prove that a benefit is conferred in all instances (all transactions and all recipients)? In most instances?
98. Does the United States dispute the accuracy of Brazil's comparison of GSM 102 fees with Exim Bank fees? Does the United States agree that ExIm Bank and GSM 102 guarantees are (at least in certain circumstances) similar or comparable? 99. Please comment on Brazil's argument that the GSM 102 fees are not sufficiently scaled to take into account country risk (i.e. they vary only minimally according with country risk) (see, inter alia, paras. 410-412 Brazil's First Written Submission).
Questions to Brazil 100. Assuming the Panel were to agree with the United States that the proper benchmark to determine "benefit" is the "total cost of funds" of the transactions, what elements of evidence has Brazil provided the Panel in this respect (other than evidence from the Regulations that the programme targets situations where no credit would be available on the market)? In answering, please address the United States' argument at para. 133 of its First Written Submission that "Brazil has made no attempt to provide such specific information on individual loan costs and fees or to identify comparable commercial loans and their terms".
151. Effectively conceding that it has not provided the requisite specific information on loan costs and fees or identified comparable commercial loans and their terms, Brazil protests that it is "not in the position of an investigating authority" and therefore cannot be expected to produce "this type of data."642 This does not excuse Brazil from making a prima facie case of breach. If it does not have evidence that the United States is breaching its WTO obligations – as the United States has argued is in fact the case – Brazil has no basis to make claims to that effect before a WTO panel. Brazil finds itself in no different position than domestic industries, who must submit sufficient evidence of subsidization (including financial contribution, benefit, and specificity within the meaning of Articles 1 and 2 of the SCM Agreement) and injury in order to warrant an investigation under Part V of the SCM Agreement.
152. Brazil next implies that the commercial bank that has provided specific transactional information submitted by the United States may be motivated to falsify such information because of a specific interest in maintaining the GSM 102 program.643 These assertions are completely baseless and do not merit a response.
153. Brazil also mischaracterizes the arguments of the United States. Brazil asserts that "the United States argues, in essence, that the interest that the lender charges on a loan guaranteed by the U.S. government could be higher than the interest it charges on a loan guaranteed by a commercial enterprise."644 Consistent with Article 14(c) of the SCM Agreement, however, the arguments of the United States have not been restricted to comparisons of interest alone, nor to a comparison of two transactions in which a guarantee is necessarily involved. Rather, the United States has noted that private sector commercial products comparable to the GSM-102 program are available in the marketplace and commercial lenders have provided unsecured financing to foreign banks who are CCC-approved obligors on terms the annualized cost of which was less than that available under the GSM-102 program.645 This contradicts Brazil's sweeping assertions that GSM 102 guarantees are only provided where credit would not otherwise not have been available to foreign obligors.
154. Finally, Brazil asserts that "as a factual matter,  Article 14(c) is not directly applicable to GSM 102."646 The United States has never asserted that Article 14(c) is directly applicable. Rather, the United States – like the Appellate Body – has noted that Article 14 provides key contextual guidance in assessing "benefit." In the case of loan guarantees, it is Article 14(c) that is relevant.
155. Article 14(c) recognizes that a loan guarantee is made for the sole purpose of supporting a loan transaction; the guarantee becomes an integral part of that transaction and has no value beyond it. The particular fee assessed for a guarantee is affected by the terms of the underlying loan transaction, who the parties are to the underlying loan transaction, the nature of the goods being purchased and sold, and any number of other factors. In turn, the terms of the underlying loan transaction and the costs and fees associated with that financing may be affected by the fees assessed.
156. Therefore, the drafters expressly provided that "a loan guarantee by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the guarantee pays on a loan guaranteed by the government and the amount that the firm would pay on a comparable commercial loan absent the government guarantee. In this case the benefit shall be the difference between these two amounts adjusted for any differences in fees." In other words, they expressly recognized that an assessment of the total costs of the transaction is necessary to assess whether a "benefit" is actually conferred by the guarantee. Brazil has provided no basis to depart from this logic.
101. Brazil argues that "[w]here guarantees are reserved for circumstances in which credit would not otherwise be available, there is no "comparable commercial loan absent the government guarantee," within the meaning of Article 14(c) of the SCM Agreement." (Brazil First Written Submission, para. 375). The Panel understands this argument of Brazil to focus on the foreign obligor. Brazil elsewhere indicates that it is principally concerned, in this proceeding, with the benefit to the US exporter (fees). Are these two arguments at tension?
4. Item (j) of the Illustrative List Questions to both parties 102. What, in your view, explains the different results achieved by the two methods advocated, on the one side, by the United States in paragraphs 87-89 of its First Written Submission and by Brazil in Exhibit Bra-613 (other than the United States' criticism that Brazil has not taken recoveries corresponding to pre-1992 guarantees into account in its "cash basis" accounting calculations, of which the Panel is already aware)? 157. The United States appreciates the observation by Brazil that under the Federal credit reform accounting methodology, "application of re-estimates effectively converts the process to a retrospective, cash-basis accounting methodology."647 It is precisely because of such re-estimates that the profitability of the export credit guarantee programs is evident.648 As Brazil elsewhere notes in its answers to the Panel's questions, the required accounting methodology under the Credit Reform Act of 1990, "'measure[s] more accurately the costs of Federal credit programs' than does cash-basis accounting."649 158. In addition to this observation, the United States respectfully refers the Panel to its extensive arguments regarding the profitability of the export credit guarantee programs in its prior submissions.650
103. To what extent is evidence pertaining to guarantees issued under the three programmes (GSM 102, GSM 103 and SCGP) under the prior fee schedule relevant to the Panel's analysis of the revised GSM 102 programme under item (j)?
159. The United States has already addressed all of Brazil's arguments in response to this question in its prior submissions. Brazil is simply incorrect to assert that CCC "predicts" that "'cohorts' of GSM 102 ECGs issued in FY 2006 and FY 2007 (and thus under the amended GSM 102 fee schedule) will suffer losses over the long term."651 In this respect, the United States respectfully refers the Panel to the U.S. comments on Brazil's answer to Question 105 below as well as the U.S. Rebuttal Submission at paragraphs 108-126. With respect to the "cash results" that Brazil advances652, the United States respectfully refers the Panel to the U.S. comments herein in response to Brazil's answers to Question 102 and 106.
104. Must a risk-based fee necessarily take into account foreign obligor risk? Please discuss and provide any relevant support for your position. Can foreign obligor risk be treated differently than country risk in this respect, and if so, why?
160. The United States respectfully refers the Panel to its own response to Question 104653 and simply notes again that it establishes internal bank limits to govern exposure to potential defaults by foreign obligor banks in individual transactions.654 Brazil does not dispute the fact of such limits but indicates that the United States has offered "no evidence" of the way in which it establishes such limits. In particular, Brazil suggests that "CCC does not account for differing ratings between individual non-sovereign foreign obligors in a country, [but] rather, it applies a single rating . . . for all non-sovereign foreign obligors within that country."655 Brazil is incorrect.
161. As the United States has explained, CCC conducts an independent analysis of each foreign bank to establish the risk rating for such bank and the resulting bank limit.656 The Office of Management and Budget ("OMB") establishes 11 sovereign and 9 non-sovereign risk categories for use by government agencies and programs subject to the Federal Credit Reform Act of 1990.657 CCC uses the same risk category methodology to classify foreign banks it approves for the GSM-102 program. Generally, if a bank is itself considered to be sovereign, then it will not be rated better than the sovereign country rating. Similarly, if a bank is considered non-sovereign, then it generally will not be rated better than the OMB non-sovereign rating for its country. CCC's independent analysis of each bank applies a standard CAMEL approach, evaluating capital adequacy, asset quality, management, earnings, and liquidity of the foreign bank.658 105. What considerations must guide the Panel's decision to accept or refuse new evidence or arguments on issues that were addressed by the original Panel? Please discuss in light of the following:
(a) The original Panel found that original subsidy estimates, while not reflecting 'actual' figures, nevertheless provide a reliable measure of the United States government's own assessment of the profitability of the export credit guarantee programmes. Is the United States asking the Panel to revisit that conclusion (see paras 108 ff. of the United States' First Written Submission).
(b) The United States presents evidence which, it argues, demonstrates that the three programmes examined by the original panel were operated at no net cost to the US government. Is there any issue as to whether the Panel can or should accept the United States' evidence in this respect? 162. First, Brazil is incorrect to assert that "the CCC predicts that costs and losses for the 'cohorts' of GSM 102 ECGs newly issued in FY 2006, FY 2007 and FY 2008 will, over the long term, exceed fees, penalties and recoveries."659 As the United States has explained, initial subsidy estimates in the U.S. budget are not derived from the specific experience of the CCC programs, nor do they in any way constitute a prediction of loss.660 163. Furthermore, the United States does not "ask the compliance Panel to ignore the original panel and the Appellate Body's findings" nor abandon "the original panel and Appellate Body's adoption of a forward-looking, future-oriented assessment under a methodology 'used and relied upon by the United States government to assess the estimated long-term net cost to the United States government of export credit guarantees,' in favor of a purely retrospective assessment of program performance."661 To the contrary, the United States has expounded at length on the prospective viability of the program662 and – unlike Brazil – on its profitability under the credit reform methodology "used and relied upon by the United States government."663
164. One additional factual assertion in Brazil's answer to Question 105 merits response. Brazil ascribes erroneous significance to "the USDA model" to which it refers in paragraph 302 of its answers and in Exhibit Bra-588. This is not a reference to a model specific to USDA of "expected loss rates or estimated default costs" particular to the CCC export credit guarantee programs, as Brazil asserts. Instead, it refers only to a cash flow model required of all U.S. government agencies providing international credit, which cash flow model is only an initial step in the budgetary process and which must, in any event, use risk ratings and assumed loss rates required by the OMB for all such agencies, irrespective of the particular program experience.664 The OMB then also requires such agencies to use "a credit subsidy calculator . . . that agencies use to convert agency-estimated cash flows into present values."665 These figures can in no way be characterized to reflect that "CCC anticipates losses."666
106. The parties disagree as to whether Brazil should include recoveries for pre 1992 guarantees in its cash basis accounting formula (Exhibit Bra-613). Is the Panel correct in understanding that Brazil's formula does not includes amounts for (1) claims paid after 1992 under pre-1992 guarantees; (2) fees paid on pre-1992 guarantees? If so, please explain the relevance or non-relevance of including recoveries under pre-1992 guarantees in light of the non-inclusion of costs and other revenues related to the same guarantees. 165. The United States respectfully refers the Panel to its own response to this question667 as well as to the comments of the United States below in response to Brazil's answer to Question 114.
Questions to the United States