(i) Subsidy Programs 27. In U.S. – OCTG from Argentina (21.5), the Appellate Body recalled that determining the scope of "measures taken to comply", or the absence thereof, involves an examination of the recommendations and rulings contained in the original panel report, which is adopted by the Dispute Settlement Body ("DSB").22 28. With respect to the subsidy programs, the issue that divides the Parties is whether the original panel's findings of "present" serious prejudice included findings regarding the programs themselves. Brazil has presented a straightforward reading of the original panel report that logically ties together: (1) the panel's identification of the measures at issue in the "present" serious prejudice section; (2) its reasoning regarding the "effect" of those measures, which included a lengthy exposition of the "effects" of the programs; (3) its reasoning for declining to examine Brazil's claims of threatened of serious prejudice; (4) its reasoning for declining to examine Brazil's claims of "as such" violations; and (5) its description of the implementation action that the United States was obliged to take.
29. Brazil has addressed these factors in detail in earlier submissions, and will not repeat its arguments.23 All of these factors point in one direction: the original panel's findings of "present" serious prejudice included the subsidy programs, as well as the payments mandated by these programs. In these circumstances, the EC's arguments on the nexus between the programs and the payments, and the United States' criticism of those arguments, are moot because they are premised on the assumption that the original panel made no findings regarding the programs.
30. In rebutting Brazil's reading of the original panel report, the United States relies heavily on fragments of Brazil's arguments in the original proceedings in an attempt to demonstrate that the original panel's findings did not include the programs. However, as the Appellate Body held in U.S. – OCTG from Argentina (21.5), the DSB's recommendations and rulings are framed in terms of the findings made by the original panel and the Appellate Body, and not by the complainant's arguments.24 The compliance Panel must, therefore, focus on the original panel's findings, and the reasoning explaining those findings.
31. The United States accuses Brazil of "grasp[ing] at isolated statements in the original panel report".25 However, it is the United States that relies on isolated phrases, and misreads the original panel report. The United States attaches considerable importance to the alleged temporal limitation on the scope of the measures. Yet, it asserts no basis in the original panel report for its conclusion that the original panel's findings were limited to payments made in MY 1999-MY 2002.
32. The original panel's general description of the measures at issue included the statement that "[t]he programmes and legislation identified [in Brazil's request for establishment of a panel] include payments made before the date of establishment of the Panel, and those made subsequently."26 This statement reveals that the panel saw a necessary link between the programs and payments because it stated expressly that the programs "include payments". Further, the relevant "payments" were found to be both those made before and those to be made after the date of establishment.
33. The United States also contends that a footnote in the Peace Clause section of the report decisively addresses the scope of the measures addressed in the separate "present" serious prejudice section.27 This is absurd, because the original panel included a separate statement of the measures at issue in each section of the report. The footnote in the Peace Clause section, by its own terms, does not address the other sections of the report. It cannot, therefore, alter the scope of the measures examined in the "present" serious prejudice section.
34. Instead, in that section, in paragraph 7.1107 of the report, the original panel stated that serious prejudice measures included the "legislative and regulatory provisions", in addition to the payments.28 The United States' explanation of this statement is that the reference to the "legislative and regulatory provisions" merely captures the "application" of those provisions.29 This is a distortion of the panel's words. As Brazil has noted, the original panel refers to the "provisions" as measures, without any qualification or other hint that the "provisions" are not, in fact, measures – as the United States now argues.30 Further, it would have been utterly redundant for the original panel to identify the "application" of the "provisions" separately from the listed payments, because the payments are the "application" of the provisions.
35. The United States also suggests that it is not "surprising" that the original panel considered the operation of the subsidy programs in examining the effects of payments.31 However, the United States overlooks that, in examining the effects of the three programs, the panel referred to them as the "three measures" and the "subsidies in question".32 36. Thus, once again, the original panel stated that the programs themselves were the "measures"; and it examined "their effects" in a particular reference period, finding that these effects included "present" serious prejudice to the interests of Brazil. It concluded that the United States was "obliged to take action concerning its present statutory and regulatory framework as a result of our 'present' serious prejudice finding."33
37. In its 2 April responses, the United States also suggests that, if the original panel's findings included the programs, this would erode the distinction between "as such" and "as applied" findings.34 This is incorrect. The original panel found that an examination of the "effects" of the subsidies (programs and payments) "cannot be conducted in the abstract".35 The original panel, therefore, examined the effects of the subsidies (programs and payments), in the marketplace, in a defined reference period developed by the panel. Accordingly, the original panel did not find that the programs "as such" cause adverse effects at all times. Brazil has demonstrated, in these proceedings, that subsequent to the implementation period, the unchanged programs and new mandatory payments continue to cause adverse effects, as shown by the analysis of their effects in a different reference period.
38. Finally, the United States has failed to offer any explanation whatsoever why the original panel would have decided not to rule upon Brazil's threat claims, and its "as such" claims, if the "present" serious prejudice claims were limited to payments last made in MY 2002 – more than a year before the original panel issued its ruling. If the United States were correct, the original panel chose to rule exclusively on past payments that it knew might no longer produce "effects" in the marketplace because, by the time of its ruling, these payments had been superseded by payments made in MY 2003 and MY 2004; and it simultaneously chose not to rule on subsidy programs and future payments that it knew would still be producing "effects" during the implementation period.
39. It is simply not credible to believe that the original panel would have decided not to rule on the threat and "as such" claims in these circumstances. Nothing suggests that the original panel decided to undermine the utility of its own work in this way. To the contrary, the original panel was highly sensitive to the importance of implementation of its rulings, and decided not to rule on the threat and "as such" claims because "the United States is obliged to take action concerning its present statutory and regulatory framework as a result of our 'present' serious prejudice finding."36 40. In sum, the marketing loan and counter-cyclical subsidy programs, including payments mandated under these programs, are properly within the compliance Panel's terms of reference because the original panel's "present" serious prejudice findings included these programs.
(ii) Payments in MY 2005 and Thereafter
41. The second category of measures that Brazil challenges in these proceedings covers payments made under the marketing loan and counter-cyclical programs. Brazil's arguments have focused on the adverse effects caused by these measures in MY 2005 and thereafter. Although the United States disputes that the original panel made findings on the subsidy programs, it accepts that, at a minimum, the panel made findings regarding payments made in MY 1999 to 2002. Even on the assumption that the United States is correct (quod non), Brazil demonstrates in this section, as it did in its 26 February responses37, that the marketing loan and counter-cyclical payments made in MY 2005 and thereafter must be regarded as (WTO-inconsistent) "measures taken to comply" because of their extremely close connection to the payments found to be causing serious prejudice in the original proceedings. These arguments are, obviously, made without prejudice to Brazil's principal argument that the original panel found that the subsidy programs, including the payments mandated by the programs, were found to be WTO-inconsistent.
42. In U.S. – OCTG from Argentina (21.5), the Appellate Body last week reiterated that it is for a compliance panel to determine whether the measures listed in a panel request are "measures taken to comply".38 As noted above, citing the Appellate Body ruling in U.S. – Softwood Lumber IV (21.5), the panel in U.S. – Gambling (21.5) also recently ruled that measures cannot be excluded from the scope of compliance proceedings "due to the purpose for which they have been taken".39 It is, therefore, irrelevant whether the United States granted the new marketing loan and counter-cyclical payments for the specific purpose of complying with the DSB's recommendations.
43. Rather, as the United States accepts, the determination whether the new payments are "measures taken to comply" depends on the closeness of their relationship ("interrelatedness") to the DSB's recommendations.40 Because the DSB's recommendations are "directed" at the measures originally found to be WTO-inconsistent, the compliance Panel must assess the relationship between the alleged measures taken to comply and the original measures.41
44. In U.S. – Softwood Lumber IV (21.5), the Appellate Body also held that a compliance panel must examine the alleged measures taken to comply "in their full context, including how such measures are introduced into, and how they function within, the particular system of the implementing Member."42 Further, in its 2 April responses, the United States acknowledges that, in U.S. – Softwood Lumber IV (21.5), Australia – Leather (21.5) and EC – Bed Linen (21.5), measures that "undid" or "undermined" the implementing Member's compliance efforts were found to have a sufficiently close connection to the DSB's recommendations to be "measures taken to comply".43
45. In view of these considerations, the new payments are (WTO-inconsistent) "measures taken to comply" with the DSB's recommendations regarding the original payments. These payments and the new payments collectively constitute an unbroken stream of identical subsidies. As Brazil has noted, the payments subject to the DSB's recommendations and the payments subject to these proceedings are mandated by the very same subsidy programs under the FSRI Act of 2002; they are made to the same recipients; they support the same crop; and they are granted on the same terms and conditions.44 Thus, under U.S. domestic law, the original and the new payments are all "introduced", and "function", in precisely the same way.45 46. Significantly, the new payments "undermine" – indeed, eviscerate – the United States' compliance efforts. Assuming that the original panel confined its findings to payments (quod non), the United States came under an obligation, on 21 March 2005, to take steps to remove the adverse effects of, at a minimum, the marketing loan and counter-cyclical payments made in MY 1999 to MY 2002, or to withdraw these payments.
47. Yet, instead of taking any action of that nature, the United States simply continued to provide the very same marketing loan and counter-cyclical payments throughout MY 2005, and thereafter. Thus, rather than taking appropriate implementation action, the United States simply substituted the WTO-inconsistent payments with new payments that, given the annual nature of both the payments and the crops, superseded the adverse effects of the original payments. Thus, the effects of the original payments have simply been replaced by adverse effects caused by the new payments. The United States thereby makes effective implementation under Article 7.8 impossible. As the Appellate Body held in U.S. – FSC (21.5 II), a Member fails to implement when it "replaces" one WTO-inconsistent subsidy with another.46
48. The United States' sole defense to this line of argument is that Brazil attempts to "add" to the original measures found to be WTO-inconsistent by challenging the new payments, which were not found to be WTO-inconsistent.47 Brazil is not seeking to "add" anything to the original ruling. Brazil accepts that the new payments were not part of the DSB's recommendations because the original panel exercised judicial economy with respect to the threat claims that would have included the new payments when they were still possible future payments. In U.S. – OCTG from Argentina (21.5), the Appellate Body held that complaining Members are not prevented from making claims in Article 21.5 proceedings that were the subject of judicial economy in the original proceedings.48 In short, complaining Members are not prejudiced in compliance proceedings by the original panel's decision to exercise judicial economy.
49. Thus, in the circumstances of this dispute, where possible future payments were challenged in an original threat claim that was subject to judicial economy, nothing in the DSU prevents those payments from being "measures taken to comply" after they are actually made, provided that they have a sufficiently close connection to the DSB's recommendations.
50. Finally, the United States incorrectly rejects the view that WTO dispute settlement becomes a "moving target", and is reduced to a "Groundhog Day", if the U.S. approach is accepted.49 The United States observes that the Parties are "bound" by the "outcome" of the original dispute.50 Yet, the United States believes that it can evade the "outcome" of the original panel's "present" serious prejudice findings regarding payments simply by making more payments. After every round of payments, it says that the complaining Member could contest the new payments solely in new proceedings. However, on this view, the complaining Member could never take retaliatory action under Article 22 of the DSU for an endless stream of identical recurring payments because there would never be any compliance measures. As a result, the WTO disciplines regarding the "present" effects of the most obvious form of subsidies – cash payments – would be reduced to inutility.
(iii) Conclusion 51. In conclusion, Brazil argues that the marketing loan and counter-cyclical subsidy programs are properly within the panel's terms of reference because the original panel's rulings, and the DSB's recommendations, regarding "present" serious prejudice include these programs.
52. In addition, Brazil argues that subsidy payments made in MY 2005, and thereafter, are "measures taken to comply" with the DSB's recommendations regarding payments made in MY 1999 to MY 2002 because of the extremely close connection between these new payments and the DSB's recommendations. The new payments cause "present" serious prejudice.
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?
53. Brazil's comments on the United States' answer to Question 44 also address relevant aspects of the United States' answer to this question. Brazil also notes that the United States acknowledges that the "group of agricultural products" eligible to receive ECGs has not been altered since the original proceedings.51
54. The United States professes "difficult[y]" in seeing why a Member would comply with the DSB's recommendations relating to subsidies provided to one product by providing subsidies in respect of other products.52 There are very straightforward reasons why a Member may wish to adopt precisely this course of action. Subsidies are, generally, provided to benefit producers, not products. A Member may very well attempt to maintain the level of prior support afforded to a particular group of producers by altering the group of products eligible to receive subsidies. In that event, a "disagreement" may arise as to whether the subsidies granted to different products under the compliance measure are consistent with the WTO covered agreements. The implementing Member could argue that the DSB's recommendations did not require it to take action with respect to the newly eligible products and, in consequence, this element of the measure is not a measure taken to comply. Yet, this is a good example of why the Appellate Body confirmed in U.S. – OCTG from Argentina (21.5) that Article 21.5 disputes extend to assessing "fully" the "consistency with a covered agreement" of a measure taken to comply "in its totality", and are not limited by the terms of the DSB's recommendations.53
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? 55. Brazil refers the compliance Panel to its comments on the U.S. response to question 45, above.
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) 56. Brazil refers the compliance Panel to its comments on the U.S. response to question 45, above.
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)
57. Brazil makes claims regarding the non-existence of compliance measures between 21 September 2005, the end of the implementation period under Article 7.9 of the SCM Agreement, and 1 August 2006, when the United States adopted certain compliance measures with respect to the Step 2 program. The United States response is that "Brazil has not identified any textual basis that requires the Panel to make findings regarding compliance as of the end of the six-month period set out in Article 7.9 of the SCM Agreement rather than as of the date of panel establishment pursuant to Article 21.5 of the DSU."54
58. This argument is absurd. Article 7.9 of the SCM Agreement provides a clear textual basis for Brazil's claim. The provision states:
In the event the Member has not taken appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six months from the date when the DSB adopts the panel report or the Appellate Body report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request.
59. The provision sets forth that the DSB "shall", by negative consensus, authorize "countermeasures" when ("in the event") the implementing Member fails to implement "within six months" of the date of adoption. Thus, according to the treaty text, a right to "countermeasures" arises on that date, subject only to negative consensus. By pursuing its claim regarding the non-existence of measures on 21 September 2005, Brazil seeks a multilateral basis for the DSB to authorize countermeasures against the United States for its failure to take any implementation measures by the date required in Article 7.9 of the SCM Agreement.
60. Brazil also notes that additional textual support for its position is found in the DSU. Although Articles 7.8 and 7.9 are "special or additional rules and procedures" under Article 1.2 of the DSU, they do not supplant the DSU. Instead, the DSU continues to apply to the extent that the rules in the DSU do not conflict with the special or additional rules.55
61. Articles 3.7 and 21.3 of the DSU indicate that "prompt compliance" with the DSB's recommendation, in principle, implies "immediate" compliance.56 If "immediate" compliance is not "practicable", Article 21.3 envisages, as an exceptional matter, a grace period for implementation. Accordingly, under these provisions, the implementing Member must have complied with the DSB's recommendations, at the latest, by the end of the implementation period. None of these rules in the DSU conflicts with Article 7.9 of the SCM Agreement.
62. Under Article XVI:4 of the WTO Agreement, the United States was bound to comply with its WTO obligations in the SCM Agreement and the DSU by the end of the six month implementation period. Under Article 21.5 of the DSU, as part of the "continuum of events"57 from the original proceedings, a complaining Member is entitled to obtain a ruling, for purposes of its compensation rights in the dispute, that the implementing Member failed to implement by the required date.
63. Besides being supported by the text of the covered agreements, Brazil's position is fully supported by the ruling of the compliance panel in Australia – Salmon (21.5), which ruled that Australia had failed to take appropriate compliance measures with effect from the end of the implementation period.58 It stated that "Australia was under an obligation to comply with DSB recommendations and rulings by the end of the reasonable period of time. If it did not do so, Australia could face suspension of concessions or other obligations under Article 22.6 of the DSU."59
64. Brazil's argument does not preclude a Member from coming into compliance with its WTO obligations after the end of the implementation period. Nor does it exclude measures from the scope of compliance proceedings simply because they were not adopted during the implementation period. However, if the implementing Member chooses to implement later than required by the SCM Agreement and the DSU, the complaining Member is entitled to a finding by a compliance panel to that effect, and to seek "countermeasures" for the delay.
65. The United States relies on two panel reports in which the panel ruled that the appropriate date for declaring the non-existence of compliance measures is the date of the compliance panel's establishment. However, these panels failed to consider the significance of this date for the implementing Member's compensation rights. The United States also refers to the fact that the parties in those disputes entered into sequencing agreements, like the agreement in this dispute, which address procedures under Articles 21 and 22 of the DSU. However, these agreements do not diminish the substance of complaining Member's rights under the covered agreements. In particular, the sequencing agreement in this dispute does not, in any way, diminish Brazil's right to seek authorization for countermeasures under Article 7.9 of the SCM Agreement for the United States' failure to implement by 21 September 2005.60 B. Claims of Brazil regarding present serious prejudice