WT/DS267/R/Add.1 
Page A-1 
  
  
ANNEX A 
  
INITIAL BRIEFS OF PART IES AND THIRD PARTIES 
 
 
Contents Page 
Annex A-1 Initial Brief from Brazil (5 June 2003) A-2 
Annex A-2 Initial Brief from the United States (5 June 2003) A-10 
Annex A-3 Third Party Initial Brief from Argentina (10 June 2003) A-15 
Annex A-4 Third Party Initial Brief from Australia (10 June 2003) A-18 
Annex A-5 Third Party Initial Brief from the European Communities 
(10 June 2003) A-20 
Annex A-6 Third Party Initial Brief from India (10 June 2003) A-25 
Annex A-7 Third Party Initial Brief from New Zealand (10 June 2003) A-27 
Annex A-8 Third Party Initial Brief from Paraguay (10 June 2003) A-28 
Annex A-9 Comments of Brazil on the Initial Briefs (13 June 2003) A-29 
Annex A-10 Comments of the United States on the Initial Briefs (13 June 2003) A-38 
 WT/DS267/R/Add.1 
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ANNEX A-1 
 
 
BRAZIL’S BRIEF ON PRELIMINARY ISSUE REGARDING THE “PEACE 
CLAUSE” OF THE AGREEMENT ON AGRICULTURE 
 
5 June 2003 
 
 
TABLE OF CONTENTS 
 
Page 
 
I. INTRODUCTION AND SUMMARY ............................................................................... 2 
 
II. ANALYSIS OF THE PHRASE "EXEMPT FROM ACTIONS" ................................... 3 
 III. THE CONTEXT OFF ARTICLE 13 DEMONSTRATES THAT THERE IS 
 NO LEGAL REQUIREMENT FOR THE PANEL TO FIRST MAKE A FINDING 
 ON THE PEACE CLAUSE BEFORE PERMITTING BRAZIL TO SET OUT 
 ITS ARGUMENT AND CLAIMS REGARDING US VIOLATIONS OF 
 THE SCM AGREEMENT ................................................................................................. 5  
IV. RESOLUTION OF THRESHOLD ISSUES PRIOR TO PROVIDING  
 PARTIES THE OPPORTUNITY TO PRESENT ALL OF ITS EVIDENCE  IS CONTRARY TO THE PRACTICE OF EARLIER PANELS ................................... 6 
 
V. BRAZIL WILL BE PREJUDICED BY SEPARATE HEARINGS ON THE 
 PEACE CLAUSE ISSUE .................................................................................................... 8 
 VI. CONCLUSION ................................................................................................................ .... 9 
 
 
I. INTRODUCTION AND SUMMARY  
 
1. Brazil responds to the Panel’s 28 May 2003 request for a briefing on the following issue:   
Whether Article 13 of the Agreement on Agriculture precludes the Panel from 
considering Brazil’s claims under the Agreement on Subsidies and Countervailing 
Measures in these proceedings in the absence of a prior conclusion by the Panel that certain conditions of Article 13 remain unfulfilled.
1 
                                                      
1 The Panel also “invites the parties to explain their interpretation of the words ‘exempt from actions’ 
as used in Article 13 of the Agreement on Agriculture, as well as bringing to the Panel’s attention any other 
relevant provisions of the covered agreements and any other relevant considerations which the parties consider should guide the Panel’s consideration of this issue.”  WT/DS267/R/Add.1 
 Page A-3 
  2. The short answer to this question is “no”.  There is no procedural rule or legal requirement for a panel to make such a preliminary finding.  The phrase “exempt from actions” in Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture (AoA) means that if all the conditions of 
Article 13(b)(ii) and 13(c)(ii) are fulfilled ( i.e., there is peace clause protection), a complaining 
Member cannot receive authorization from the DSB to obtain a remedy against another Member’s 
domestic and export support measures that otherwise would be subject to the disciplines of certain 
provisions of the Agreement on Subsidies and Countervailing Measures (ASCM or SCM Agreement) or Article XVI of GATT 1994.  But neither the ph rase  “exempt from actions” nor AoA Article 13 
compel the Panel to first make a peace clause finding before considering the substance of Brazil’s 
ASCM and GATT Article XVI claims.   
 
3. Article 13 of the Agreement on Agriculture is not a “special and additional” rule set out in Appendix 2 to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).  Article 19 of the AoA makes all DSU provisions applicable to the AoA.  Pursuant to DSU 
Article 11, a panel must make an “objective assessment of the facts of the case”.  Assessing and 
weighing all relevant facts – including rebuttal facts – obtained during the normal two meeting panel 
process is essential to resolve properly fact-intensive issues relating to the peace clause.  This Panel should follow the lead of previous panels that made similar complex threshold findings in final panel reports.  
 
4. Brazil will be prejudiced by delays in the process because a number of Brazil’s claims are not 
dependent on any resolution of the “peace clause”.  Much of the proof required for demonstrating 
that the US has no peace clause protection under Articl es 13(b)(ii) and 13(c)(ii) is the same evidence 
demonstrating US violations under the SCM Agreement.  Requiring separate briefings, hearing, 
presentation of factual evidence and legal argumen t for such inter-connected “peace clause” issues 
would seriously disrupt Brazil’s presentation of its evidence, lead to duplication of its efforts, delay 
the proceeding, and increase Brazil’s financial and human resource costs.  
 
II. ANALYSIS OF THE PHRASE “EXEMPT FROM ACTIONS” 
  
1. The Panel has requested that Brazil address the meaning of the phrase “exempt from actions” in AoA Article 13.  In the view of Brazil, this phrase means that a complaining Member cannot 
receive authorization from the DSB to obtain a remedy against another Member’s domestic or export 
support measures that otherwise would be subject to the disciplines of certain ASCM and GATT 
1994 provisions if those measures are in compliance with the various peace clause provisions.  It 
does not mean that a Panel may not hear evidence or consider Brazil’s ASCM or GATT 1994 claims while it decides whether all the peace clause conditions have been fulfilled.  In sum, this phrase in no 
way suggests that a panel must make a finding that the peace clause provisions are unfulfilled before 
proceeding with the other claims.    
 
2. The phrase “exempt from actions” is used, as relevant to this dispute, in AoA Articles 13(a), 13(b)(ii), and 13(c)(ii).  The dictionary definition of “actions” is “the taking of legal steps to establish 
a claim or obtain a remedy.”
2  In a multilateral system such as the WTO (like GATT 19473 before it), 
“actions” are taken collectively by Members.  DSU Ar ticle 2.1 (last sentence) emphasizes this notion 
                                                      
2 New Shorter Oxford Dictionary, Volume 1 (1993 Edition), at 22.   
3 Article XXV of GATT 1994 provides for “joint action” by the contracting parties to “further the 
objectives of this Agreement”.  The decision by the contracting parties to approve the Tokyo Round results in 
1979 was entitled “Action by the CONTRACTING PARTIES on the Multilateral Trade Negotiations”.  BISD 26S/201.  WT/DS267/R/Add.1 
Page A-4   in stating that “only those Members that are parties to that Agreement may participate in decisions or actions taken by the DSB with respect to that dispute.” (emphasis added)  “Actions” include 
decisions made by the Dispute Settlement Body (DSB) to adopt rulings and recommendations of panels and the Appellate Body.  Article XVI:1 of GATT 1994 also provides for another action, a 
decision by the relevant WTO body to hold consultations with a subsidizing Member to discuss what 
steps that Member will take to remove the serious prejudice or threat caused by its subsidies.
4  And 
“actions” also include the enforcement of remedies authorized by the DSB pursuant to DSU Article 22.  In sum, “actions” are multilaterally agreed decisions of WTO bodies including the DSB.     
3. The ordinary meaning of the word “exempt” is “grant immunity or freedom from liability to 
which others are subject”.
5   The chapeau of Article 13 states that the period of exemption is “during 
the implementation period”, i.e., until 1 January 2004.  
 4. Combining these definitions of “actions” and “exempt,” the term “exempt from action” in 
Article 13(b)(ii) means that before 1 Jan uary 2004, a complaining Member cannot receive 
authorization from the DSB to obtain a remedy against another Member’s domestic support measures 
that otherwise would be subject to the disciplines of Article XVI:1 and ASCM Articles 5 and 6.  And “exempt from action” in the context of Article XVI:1 would mean that the WTO could not take a decision to require a Member to consult with the WTO on how the Member will eliminate serious 
prejudice or the threat of serious prejudice caused by that subsidy.  However, the immediate context 
of the phrase “exempt from actions” in Articles 13(a), 13 (b)(ii) and 13(c)(ii) make clear that the 
“exemption” is not absolute but rather subject to a number of conditions:  
 
 Article 13(a) only permits green box domestic subsidies to be exempt from the types of 
determinations listed in Article 13(a) (i), (ii) or (iii) if they “conform fully to the provisions of Annex 2” of the AoA.  If a domestic support measure does not comply with one of a number of 
requirements of the “green box” provisions of Annex 2, then such domestic support would be 
evaluated under the peace clause provisions of Article 13(b) and could be subject to a remedy 
determination by the DSB and/or the WTO.  
 
 Under the provisions of peace clause Article 13(b )(ii), “amber” and “blue” box domestic support 
measures provided during any marketing year between 1995-2003 are only exempt from determinations by the DSB and/or the WTO relating to paragraph 1 of Article XVI of GATT 1994 (not Article XVI, paragraph 3) and Articles 5 and 6 (not Article 3) of the SCM Agreement “provided that such measures do not grant suppor t to a specific commodity in excess of that 
decided during the 1992 marketing year”.  If the quantity of amber and/or blue box support granted in any marketing year from the 1995-2003 period is greater than that decided during marketing year 1992, then the subsidy programme is not “exempt” from such determinations.   
 
 Export subsidies under the peace clause provisions of AoA Article 13(c)(ii) are only exempt from 
determinations by the DSB and/or the WTO relating to Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement if they “conform fully to the provisions of Part V of [the AoA]”.  
Thus, if export subsidy measures are inconsistent wi th the provisions of AoA Articles 8, 9 or 10, 
then they are no longer exempt from such determinations.   
 
                                                      
4 See, e.g., Report of the Working Party on Article XVI:1 discussions on EC- Refunds on Exports of 
Sugar , BISD 28S/80.  
5 New Shorter Oxford Dictionary, Volume 1 (1993 Edition), at 878.   
  WT/DS267/R/Add.1 
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  5. In sum, “exempt from actions” means that a complaining Member cannot receive authorization from the DSB to obtain a remedy against another Member’s domestic or export support measures that are “peace clause” protected.  Yet,  as described below, the phrase “exempt from 
actions” when viewed in the broader context of DSU provisions does not require  the Panel to first 
make a peace clause compliance finding before hearing or considering any of the evidence or 
arguments relating to the various ASCM or GATT 1994 claims.   
 
III. THE CONTEXT OF ARTICLE 13 DEMONSTRATES THAT THERE IS NO LEGAL 
REQUIREMENT FOR THE PANEL TO FIRST MAKE A FINDING ON THE PEACE CLAUSE BEFORE PERMITTING BRAZIL TO SET OUT ITS ARGUMENT AND CLAIMS REGARDING US VIOLATIONS OF THE SCM AGREEMENT 
 
1. There is nothing in the text of Article 13 or other provisions of the AoA, the SCM Agreement, or any other WTO Agreement requiring the Panel to make a preliminary factual and 
legal finding on the applicability of the peace clause before examining Brazil’s evidence and 
argument regarding US violations of the SCM Agreement or GATT 1994.    
 2. First, and most importantly, Annex 2 of the DSU Agreement is the closed list of “special and additional” rules and procedures that trump the normal rules of dispute settlement.  This list does not 
include Article 13 or any other AoA provisions.  Thus, resolution of the “peace clause” issues, like 
other issues raised by Brazil’s request for establishment of a panel, must be resolved using normal 
DSU rules and procedures.   
 3. Second, AoA Article 13 does not exclude AoA Article 19 which states that the “provisions of 
Articles XXII and XXIII of GATT 1994, as elaborated and applied by the Dispute Settlement 
Understanding, shall apply to consultations and the settlement of disputes under this Agreement ” 
(emphasis added).  Among the DSU procedures applicable to AoA Article 13 is DSU Article 11 
which provides, in part:     
[a] panel should make an objective assessment of the matter before it, including an 
objective assessment of the facts of the case and the applicability of and conformity with the relevant covered agreements, and make such other findings as will assist the 
DSB in making the recommendations or in giving the rulings provided for in the 
covered agreements. 
4. Article 11 contemplates that a panel must make an “objective assessment of the facts of the 
case”.  It does not state that a panel must conduct such an assessment by first examining part of the 
facts of a case before it then examines other facts.  Further, Article 11 contemplates that the parties 
will have the full opportunity to search for and present rebuttal facts.  This is accomplished through 
the normal two meeting panel process – not in a single truncated meeting.  It is also accomplished through the exchange of rebuttal submissions.  
5. Review by a panel of all the facts including rebuttal facts is necessary before deciding 
whether the peace clause is applicable or not.  This follows from the inter-related nature of the proof 
necessary to demonstrate the peace clause and ASCM actionable and prohibited export subsidy 
claims.  As the Panel will discover shortly u pon reviewing Brazil’s First Submission, the facts 
relevant to the application of the “peace clause” largely overlap with facts relevant to determining 
whether the programmes at issue are “actionable” or  “prohibited export subsidies”.  Consider the 
following:   
 WT/DS267/R/Add.1 
Page A-6   
 Each of the domestic support subsidies at issue in  Brazil’s actionable subsidy claims are also at 
issue in Brazil’s proof regarding the absence of US peace clause protection for marketing years 
1999-2002.  For the purposes of AoA Article 13(b)(ii) the “amber” box subsidies include marketing loan/loan deficiency payments; crop insurance payments; Step-2 payments; production flexibility contract payments; direct payments; marketing loss assistance payments; counter-
cyclical payments, and cottonseed payments.  Proof of both peace clause and actionable subsidies 
require the same detailed descriptions of the type, nature, extent, and history of each of these US 
domestic support programmes. 
 
 Brazil has made claims under the AoA and the ASCM regarding prohibited export subsidies 
under the US Step-2 programme and US export credit guarantee programmes.  Brazil will demonstrate that these two export subsidies do not “conform fully to the provisions of Part V of 
this Agreement” in the sense of AoA Article 13(c);  obviously, Brazil's evidence and argument 
regarding the lack of conformity of these two measures with Part V of the AoA largely overlaps 
with the evidence and argument necessary to demonstrate a violation of ASCM Articles 3.1(a) and (b). 
 
6. This close overlap of proof for both peace clause and actionable and prohibited subsidy 
claims highlights the need for the Panel to examin e all the “facts of the case” together – including 
rebuttal facts presented by Brazil to contest US assertions.  Such a determination can only be made after collecting information in an iterative process.     7. DSU Article 11 also requires a panel to consider the “applicability” of the “relevant covered agreements”.  This includes deciding whether actions are exempt from the covered  agreements.  But 
Article 11 contains no requirement for a special briefing, meeting or determination by a panel to resolve such applicability or exemption.   8. Of course, when fulfilling its obligations under DSU Article 11, the Panel may well need to organize its assessment of the facts in its final determination by first examining and deciding issues related to the peace clause.  The Appellate Body in Brazil Aircraft held that this is what the panel 
should have done in deciding the very similar peace-clause-like issues under ASCM Articles 27.2(b) and 27.4.
6  But there is nothing in DSU Article 11 or  any other WTO provision mandating that Brazil 
present its evidence relating to the peace clause alone, divorced from factual evidence and argument relating to the SCM Agreement.  As described below, such a requirement would be inconsistent with the previous practice of panels and prejudicial to Brazil’s efforts to make a coherent and unified presentation of its case.   
IV. RESOLUTION OF THRESHOLD ISSUES PRIOR TO PROVIDING PARTIES THE 
OPPORTUNITY TO PRESENT ALL OF ITS EVIDENCE IS CONTRARY TO THE 
PRACTICE OF EARLIER PANELS 
 
1. Many panels have faced preliminary threshold issues under DSU Article 6.2 and other WTO 
Agreements.  These preliminary issues have involved whether panels have the jurisdiction to resolve 
and make recommendations concerning certain claims  and measures.  Many of these preliminary 
issues involved far less complex facts than are presented by the peace clause in this dispute.  Despite 
this, many panels waited to resolve these threshold jurisdictional issues until the final determination 
                                                      
6 Appellate Body Report, Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R 
(adopted 2 August 1999), paras. 143-44.    WT/DS267/R/Add.1 
 Page A-7 
  after reviewing all the evidence and arguments.
7  Other panels have decided these threshold issues 
after the first meeting of the panel with the parties where the complaining party had an opportunity to present its evidence.
8  
 
2. The closest case to the peace clause issue presented here was addressed in Brazil – Export 
Financing Programme for Aircraft .9  That dispute involved Articles 27.2(b) and 27.4 of the SCM 
Agreement, which exempts certain developing country Members from obligations under ASCM Article 3.1(a) provided that such a Member has complied with certain stated condiditons.
10  The 
Appellate Body discussed the application of this peace-clause-like provision in Brazil Aircraft.11 
                                                      
7 WTO Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/R 
(adopted 20 August 1999), para. 9.15 (Panel rejected request for preliminary ruling based claims under DSU 
Article 6.2 and decided issues in final report); WTO Panel Report, Egypt – Definitive Anti-Dumping Measures 
on Steel Rebar from Turkey , WT/DS211/R (adopted 1 October 2002), para. 7.27-7.31 (Panel determined in 
final report that certain claims were not within its terms of reference); WTO Panel Report, India – Measures 
Affecting the Automotive Sector , WT/DS146/R and WT/DS/175/R  (adopted 5 April 2002),  paras. 7.44-7.103 
(Panel rejected India’s threshold res judicata claims in final panel report); WTO Panel Report, United States – 
Anti-Dumping Duty and Dynamic Random Access Semiconductors (DRAMS) of One Megabit or more From 
Korea , WT/DS99/R (adopted 19 March 1999), para. 6.17 (Panel ruled in final report granting US’s preliminary 
objections that certain AD measures predated the WTO and could therefore not be subject to challenge); WTO Panel Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/R, WT/DS10/R and WT/DS11/R (adopted 1 
November 1996), para. 6.5 (Final report determined that a claim was outside of the Panel’s terms of reference); 
WTO Panel Report United States – Definitive Safeguard Measures on Circular Welded Carbon Quality Line 
Pipe from Korea , WT/DS202/R (adopted 8 March 2002), para. 7.121-7.126 (Panel rejected a Korean claim as 
beyond its terms of reference in the final panel report); WTO Panel Report, United States – Anti-Dumping 
Measures on Certain Hot-Rolled Steel Products from Japan , WT/DS184/R (adopted 23 August 2001), para. 
7.22 (final report determined that the “adverse facts available“ claim was beyond its terms of reference).   
8 WTO Panel Report, European Communities – Anti-Dumping Duties on Malleable Cast Iron Tube or 
Pipe Fittings from Brazil , WT/DS219/R (not yet adopted), para. 7.14 (preliminary finding made following first 
meeting with the parties that certain claims were not within its terms of reference); WTO Panel Report, 
United States – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel Flat Products from Germany , WTDS213/R (adopted 19 December 2002), para  8.1 –8.2 and footnote 224 (Panel decided at end of 
first meeting that two claims were outside its terms of reference and provided reasoning in final Panel report);  
WTO Panel Report, United States – Import Measures on Certain Products from the European Communities , 
WT/DS165/R (adopted 10 January 2001), para.  6.11 (Panel issued preliminary ruling regarding scope of 
measures within its terms of reference at the end of the second meeting with the parties);  WTO Panel Report, 
United States – Safeguard Measures on Imports of Certain Fresh, Chilled and Frozen Lamb from New Zealand 
and Australia , WT/DS177/R and WT/DS178/R (adopted 16 May 2001), para. 5.15  (Panel ruled during first 
meeting that panel request was sufficient in covering all the claims brought by Australia and New Zealand). 
9 WTO Panel Report, WT/DS46/AB/R (adopted 2 August 1999). 
10 These provisions provide as follows:   
  
27.2:   The prohibition of paragraph 1(a) of Article 3 [prohibited export subsidies] shall not apply to:  
   **  **  **  ** (b) other developing country Members for a period of eight years from the date of entry into force of 
the WTO Agreement, subject to compliance with the provisions in paragraph 4.   
 
27.4:   Any developing country Member referred to in paragraph 2(b) shall phase out its 
export subsidies within the eight-year period, preferably in a progressive manner. However, a 
developing country Member shall not increase the level of its export subsidies, and shall eliminate 
them within a period shorter than that provided for in this paragraph when the use of such export 
subsidies is inconsistent with its development needs. . . 
11 Appellate Body Report, WT/DS46/AB/R (adopted 2 August 1999).  WT/DS267/R/Add.1 
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In our view, too, paragraph 4 of Article 27 provides certain obligations that developing country Members must fulfill if they are to benefit from this special and differential treatment during the transitional period.  . . . If a developing country 
Member complies with the obligations in Article 27.4, the prohibition on export 
subsidies in Article 3.1(a) simply does not apply.  . . . If [. . .] non-compliance is 
demonstrated, then, and only then, does the prohibition of Article 3.1(a) apply to that 
developing country Member.12 (emphasis added) 
3. The Appellate Body found that the panel should have considered first the threshold issue of 
whether Brazil was in compliance with Article 27.4  before deciding whether Brazil was in violation 
of ASCM Article 3.1(a).13  Yet, there was never a suggestion or finding that the Panel erred by not 
conducting a special briefing and special determination before even accepting arguments of Brazil 
and Canada regarding the ASCM Article 3.1(a) issue.  A finding on the threshold issue in that case, 
as here, was conditioned upon other crucial determinations such as: the definition of subsidy; the moment when a subsidy was granted; the relevant level, etc. In that case, the threshold issue was 
decided by the Panel in the final report only after the parties had a chance to discuss all the related 
issues during the full course of the Panel proceedings. 
 
4. There are a number of other threshold issues in WTO Agreements.  No claim may be brought against a measure under the General Agreement on Trade in Services (GATS) unless the measure falls within the scope of the General Agreement on Trade in Services as defined in GATS Article I.  
No claim may be brought under Article 2 of the Agreement on Technical Barriers to Trade except in 
respect of a measure that is a “technical regulation” as defined by that agreement.  Claims under the 
Agreement on Government Procurement may only be brought concerning procurement of an entity covered by Annex I of that agreement.  While the language of these provisions differs, the effect is the same as the operation of the AoA Article 13 and ASCM Articles 27.2(b) and 27.4 – if the threshold objections are granted, the Panel cannot make a finding that the defending Member has acted contrary to the covered agreements.  Yet none of these provisions have special and additional rules to provide for extraordinary preliminary briefings, meetings, and determinations prior to a panel hearing all of the claims presented.    
V. BRAZIL WILL BE PREJUDICED BY SEPARATE HEARINGS AND BRIEFINGS 
ON THE PEACE CLAUSE ISSUE  
 
1. Brazil has previously described in its letter of 23 May 2003 to the Panel the prejudice that will occur if special meetings and briefings are imposed to resolve peace clause issues.  Such 
prejudice includes requiring Brazil to present the same evidence three – not two times – and in 
having to bring its legal and economic experts to Geneva for an extra meeting. 
 2. In addition, Brazil would note that such special proceedings would cause it prejudice because there would be significantly delays in the resolution of its claims – many of which do not implicate 
the peace clause.  These non-peace clause claims include the following:   
 
 1. Article XVI:3 of GATT 1994 involving all domestic and export subsidies challenged 
by Brazil; 
 2. Article III:4 of GATT 1994 regarding Step-2 domestic payments; 
                                                      
12 Appellate Body Report, WT/DS46/AB/R, paras. 140-41 .     
13 Appellate Body Report, WT/DS46/AB/R, paras. 143-44.    WT/DS267/R/Add.1 
 Page A-9 
   1. Articles 3.1(b) and 3.2 of SCM Agreement regarding prohibited local content Step-2 
domestic payments; 
 2. Articles 3.3 and 9.1(a) of the AoA regarding export subsidies including Step-2 export 
payments; 
 3. Articles 8 and 10.1 of the AoA regarding the GSM 102, GSM 103, and SCGP export 
credit guarantee programmes;  
 1. Articles 8 and 10.1 of the AoA regarding ETI measure (FSC replacement measure).   3. Moreover, Brazil’s proof of these claims involves evidence overlapping with that relevant to 
Brazil’s peace clause claims, as well as with its actionable and prohibited export subsidy claims.  
Given this overlap, a special proceeding on only the peace clause would negatively impact on 
Brazil’s ability to present a coherent and unified presentation of its case.    
VI. CONCLUSION 
 1. For the reasons set forth above, Brazil requests that this Panel find that it is not precluded 
from hearing evidence and considering Brazil’s claims under the ASCM or Article XVI of GATT 1994 without first concluding that the peace clause conditions of AoA Article 13(b)(ii) and 13(c)(ii) 
remain unfulfilled.   
 WT/DS267/R/Add.1 
Page A-10  
 
ANNEX A-2 
 
 
INITIAL BRIEF OF THE UNITED STATES 
ON THE QUESTION POSED BY THE PANEL 
 
5 June 2003 
 
 
A. INTRODUCTION 
 
1. The United States thanks the Panel for this opportunity to comment on the question concerning 
Article 13 of the Agreement on Agriculture  (“Agriculture Agreement”) posed by the Panel in its fax of 
28 May 2003.  The Panel asked the parties to address: 
 
[W]hether Article 13 of the  Agreement on Agriculture  precludes the Panel from considering 
Brazil’s claims under the Agreement on Subsidies and Countervailing Measures  in these 
proceedings in the absence of a prior conclusion by the Panel that certain conditions in Article 
13 remain unfulfilled.  In particular, the Panel invites the parties to explain their interpretation 
of the words “exempt from action s” as used in Article 13 of the Agreement on Agriculture , as 
well as bringing to the Panel’s attention an y other relevant provisions of the covered 
agreements and any other relevant considerati ons which the parties consider should guide the 
Panel’s consideration of this issue. 
2. Article 13 (the “Peace Clause”) precludes the Panel from considering Brazil’s claims under 
Article XVI of the General Agreement on Tariffs and Trade 1994  (“GATT 1994”) and the Agreement 
on Subsidies and Countervailing Measures  (“Subsidies Agreement”) sinc e the US support measures at 
issue conform with the Peace Clause.  The Peac e Clause “exempt[s]” conforming support measures 
“from actions based on” the corresponding provisions of the Subsidies Agreement and the GATT 1994.
1  Read in accordance with the customary rules of interpretation of public international law, the 
phrase “exempt from actions” means “not exposed or subj ect to” a “legal process or suit” or the “taking 
of legal steps to establish a claim”.  Therefore, Brazil cannot maintain any action – and the United 
States cannot be required to defend any such action – based on provisions specified in the Peace Clause
2 since the US support measures for upland cotton conform to the Peace Clause.  In light of the 
correct interpretation of the Peace Clause, the United States respectfully requests the Panel to organize 
its procedures to first determine whether Brazil ma y maintain any action based on provisions exempted 
by the Peace Clause. 
 
3. Consider the alternative approach proposed by Brazil in its 23 May letter – that is, requiring the 
United States to defend the substantive claims at th e same time as arguing the Peace Clause issues.  If 
the Panel were to allow Brazil to proceed with its substantive claims under the Subsidies Agreement 
and GATT 1994 now, and only conclude later (for exam ple, at the time of the issuance of its report) 
that the US measures at issue conform to the Peace Clause based on the facts of this dispute, US 
measures would already have been subject to Br azil’s action based on those claims.  As the 
United States will explain, this  would contradict the ordinary meaning of the phrase “exempt from 
actions” in Article 13, read in its context, and in light of the object and purpose of the Agriculture 
                                                      
1 For example, Article XVI of the GATT 1994 and Part III of the Subsidies Agreement correspond to 
Article 13(a)(ii) of the Agriculture Agreement, GATT 199 4 Article XVI:1 and Articles 5 and 6 of the Subsidies 
Agreement correspond to Article 13(b)(ii) of the Agriculture Agreement, and GATT 1994 Article XVI and Articles 3, 5, and 6 of the Subsidies Agreement correspond to Article 13(c)(ii) of the Agriculture Agreement.. 
2 See WT/DS267/7, at 3 (asserting claims based on Subsidies Agreement Articles 3.1(a), 3.1(b), 3.2, 
5(a), 5(c), 6.3(b), 6.3(c), and 6.3(d) and GATT 1994 Articles XVI:1 and Article XVI:3).  WT/DS267/R/Add.1 
 Page A-11 
 
 
Agreement.  Consequently, to allow Brazil to pr oceed with any action against these US measures that 
are exempt from actions based on such claims w ould contravene the Pea ce Clause and upset the 
balance of rights and obligations of WTO Members.  
 
B. LEGAL INTERPRETATION OF THE PEACE CLAUSE 
 
4. The Peace Clause, Article 13 of the Agriculture Agreement3, governs the treatment during the 
implementation period of the Agreement of certai n domestic support measures and export subsidies 
“notwithstanding the provisions of GATT 1994 and th e Agreement on Subsidies and Countervailing 
Measures".4  For purposes of the Panel ’s question, there would appear to be two interpretive issues.  
The first is straightforward and apparently not in di spute: whether the Peace Clause is in effect for the 
measures at issue.  The second is what is the nature of the treatment under the Peace Clause of 
conforming measures – i.e., what does it mean to  say that conforming measures are “exempt from 
actions”. 
                                                      
 3 The Peace Clause reads:  
 
During the implementation period, notwithstanding the provisions of GATT 1994 and the Agreement on 
Subsidies and Countervailing Measures (referred to in this Article as the “Subsidies Agreement”):  
 
(a) domestic support measures that conform fully to the provisions of Annex 2 to this Agreement shall be:  
(i)  non-actionable subsidies for purposes of countervailing duties;  
(ii)  exempt from actions based on Article XVI of GATT 1994 and Part III of the Subsidies 
Agreement;  and  
(iii)  exempt from actions based on non-violation nullification or impairment of the benefits of 
tariff concessions accruing to another Member under Article II of GATT 1994, in the sense of 
paragraph 1(b) of  Article XXIII of GATT 1994;  
 
(b)  domestic support measures that conform fully to the provisions of Article 6 of this Agreement 
including direct payments that conform to the require ments 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:  
(i)  exempt from the imposition of countervailing duties unless a determination of injury or threat 
thereof is made in accordance with Article VI of GATT 1994 and Part V of the Subsidies 
Agreement, and due restraint shall be shown in initiating any countervailing duty 
investigations;  
(ii)  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; and  
(iii)  exempt from actions based on non-violation nullification or impairment of the benefits of 
tariff concessions accruing to another Member under Article II of GATT 1994, in the sense of 
paragraph 1(b) of Article XXIII of GATT 1994, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year;
 
 
(c)  export subsidies that conform fully to the provisions of Part V of this Agreement, as reflected in each 
Member's Schedule, shall be:  
(i)  subject to countervailing duties only upon a determination of injury or threat thereof based on 
volume, effect on prices, or consequent imp act in accordance with Article VI of GATT 1994 
and Part V of the Subsidies Agreement, and due restraint shall be shown in initiating any 
countervailing duty investigations;  and  
(ii)  exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the 
Subsidies Agreement.  
 
Agriculture Agreement, Article 13 (footnote omitted). 
4 Agriculture Agreement, Article 13 (chapeau).  Artic le 21.1 of the Agriculture Agreement also makes 
it clear that the Subsidies Agreement and GATT 1994 only apply “subject to” the provisions of the Agriculture 
Agreement, including Article 13 (the Peace Clause). WT/DS267/R/Add.1 
Page A-12  
 
 
 1.  Duration of the Peace Clause: The “Implementation Period” 
 
5. The Peace Clause is in force at present.  The first words of the Peace Clause (“During the 
implementation period”) establish the duration of the treatment afforded by this provision.  Article 1(f) 
of the Agriculture Agreement defines “implementatio n period” as “the six-year period commencing in 
the year 1995” but goes on to specify that “for purposes of Article 13, it means the nine-year period 
commencing in 1995”.  That is, Members determined that exempting certain measures from certain actions based on otherwise applicable WTO provisions was desirable for a time period longer  than the 
period for the phase-in of all other commitments under the Agriculture Agreement.  Thus, the Peace 
Clause currently continues to exempt conforming m easures – whether US, Brazilian, or of any other 
Member – from actions under the corresponding provisions of the GATT 1994 and the Subsidies 
Agreement.  
 2.  Effect of the Peace Clause: “Exempt from Actions” 
 
6. For purposes of this dispute, all of the rele vant provisions of the P eace Clause utilize the same 
language and construction: conforming measures “sh all be . . . exempt from actions based on” 
specified provisions of the WTO agreements.  The critical phrase “exempt from actions” is not defined 
in the Agriculture Agreement.  According to the customary rules of interpretation of public international law
5, these terms should be interpreted according to their ordinary meaning in their 
context, in light of the object and purpose of the Agreement.6 
 
7. The ordinary meaning of the word “exempt” is “[n]ot exposed or subject to something 
unpleasant or inconvenient; not liable to a charge, tax, etc. (Foll. by from, of .)".7  The ordinary meaning 
of the word “action” is “[t]he taking of legal steps to establish a claim or obtain remedy; the right to institute a legal process” and “[a] legal process or suit".
8  A legal dictionary provides further 
explanation of the term “action”: 
 
Term in its usual legal sense  means a lawsuit  brought in a court; a formal complaint  within the 
jurisdiction of a court of law. . . . . The legal or formal demand of one's right  from another 
person or party made and insisted on in a court of justice.  An ordinary proceeding in a court 
of justice by which one party pr osecutes another for the enforcem ent or protection of a right, 
the redress or prevention of a wrong, or the punishment of a public offence.  It includes all the 
formal proceedings  in a court of justice attendant upon the demand of a right made by one 
person of another in such court,  including an adjudication  upon the right and its enforcement 
or denial by the court.9 
Thus, according to the ordinary meaning of the terms, “exempt from action” means “not exposed or 
subject to” the “taking of legal steps to establish a claim”, such as a “formal complaint” or any “formal 
proceedings”, including an “adjudicati on” of the claim.  An even si mpler formulation would be “not 
liable to”  a “legal process or suit”. 
                                                      
5 See Understanding on Rules and Procedures Governing the Settlement of Disputes , Article 3.2 (The 
dispute settlement system “serves to preserve the rights and obligations of Members under the covered 
agreements, and to clarify the existing provisions of those agreements in accordan ce with customary rules of 
interpretation of public international law.”). 
6 The customary rules of interpretation of public international law are reflected in part in Article 31(1) 
of the Vienna Convention, which reads: “A treaty sha ll be interpreted in good faith in accordance with the 
ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and 
purpose.” 
7 The New Shorter Oxford English Dictionary , vol. 1, at 878 (first definition as adjective & noun) 
(italics in original). 
8 The New Shorter Oxford English Dictionary , vol. 1, at 22 (first and second definitions). 
9 Black’s Law Dictionary  at 28 (6th ed. 1990) (emphasis added).  WT/DS267/R/Add.1 
 Page A-13 
 
 
 8. Relevant context for the phrase “exempt from actions” includes the Understanding on Rules 
and Procedures Governing the Settlement of Disputes  (“DSU”), which applies to “disputes brought 
pursuant to the consultation and dispute settlement provi sions of the agreements listed in Appendix 1 to 
this Understanding (referred to in this Understa nding as the ‘covered agreements’)”.  The covered 
agreements, of course, include the Agriculture Agreem ent and the Subsidies Agreement.  Article 3.7 of 
the DSU states: “ Before bringing a case , a Member shall exercise its judgement as to whether action  
under these procedures would be fruitful” (emphasis added).  Similarly, Article 4.5 of the DSU states: “In the course of consultations  in accordance with the provisions of a covered agreement, before 
resorting to further action  under this Understanding, Members should attempt to obtain satisfactory 
adjustment of the matter” (emphasi s added).  Thus, these provisions s uggest that “action” based on the 
relevant provisions woul d include all stages of  a dispute, including th e “bringing [of] a case”, 
consultations, and panel proceedings.
10 
 9. In addition, Article 7, which forms part of  Part III of the Subsidies Agreement (entitled 
“Actionable Subsidies”), serves as context for the term “exempt from  actions.”  Article 7 provides 
procedures (including consultations , panel proceedings, and remedies)  to enforce the legal rights 
contained in Article 5 (on “adverse ef fects”) and Article 6 (on “serious prejudice”).  Article 7 states in 
its introductory phrase that its procedures apply “[e]xcept as provided in Article 13 of the Agreement on Agriculture".
11  Thus, these provisions also support reading “exempt from actions” in Article 13 to 
mean “not subject to” the “taking of legal steps to  establish a claim”.  Footnote 35 of the Subsidies 
Agreement provides additional context that may help  explain that “exempt from action” includes not 
resorting to dispute settlement.  Footnote 35, which deals with “non-actionable"12 subsidies, states that 
“[t]he provisions of Parts III [on actionable subsidies] and V [on countervailing measures] shall not be 
invoked  regarding measures considered non-actionable in accordance with the provisions of Part IV".13  
As otherwise relevant provisions cannot be “i nvoked” for non-actionable subsidies, footnote 35 
supports reading “ exempt from action” as not resorting to dispute settlement by asserting legal claims. 
 10. This interpretation of “exempt from actions” meshes with the object and purpose of the Agriculture Agreement.  The Agreement represents the outcome of long and difficult negotiations to move towards the “long-term objective . . . to provide for substantial progressive reductions in 
agricultural support and protection sustained over an agreed period of time, resulting in correcting and 
preventing restrictions and distortions in world agricultural markets".
14  Members therefore agreed to 
the Peace Clause, recognizing that agricultural subsidies could not be eliminated immediately and needed, under certain conditions, to be exempted from the Subsidies Agreement and GATT 1994 subsidies disciplines.  
C. CONCLUSION: BRAZIL MAY NOT BRING, AND THE PANEL MAY NOT ADJUDICATE, A 
SUBSIDIES AGREEMENT OR GATT 1994 ARTICLE XVI ACTION AGAINST US MEASURES CONFORMING TO THE PEACE CLAUSE 
 
11. Brazil’s approach – that both the applicability of the Peace Clause and Brazil’s Subsidies 
Agreement and GATT 1994 Article XVI claims be cons idered at the same time – would contravene the 
plain meaning of the Peace Clause by subjecting US m easures to the “taking of legal steps to establish 
a claim”.  Under Brazil’s approach, the US measur es would be subject to an action based on the 
                                                      
 10 As further support for the fact that “action” includes dispute settlement, DSU Article 3.10 
provides that:  “It is understood that requests for conciliation and the use of the dispute settlement procedures should not be intended or considered as contentious acts . . .”  (emphasis added). 
11 Subsidies Agreement, Article 7.1. 
12 The ordinary meaning of the term “actionable” is “[a]ffording ground for an action at law”.  The New 
Shorter Oxford English Dictionary , vol. 1, at 22. 
13 Subsidies Agreement, Article 10 fn. 35 (emphasis added). 
14 Agriculture Agreement, preamble (third paragraph). WT/DS267/R/Add.1 
Page A-14  
 
corresponding provisions of the Subsidies Agreement and GATT 1994 at the same time that the Panel would be reviewing the applicability of the Peace Clause.  Brazil’s approach would ignore the plain meaning of the provisi ons of the Peace Clause exempting these measures from actions. 
 
12. Accordingly, the United St ates respectfully requests the Pa nel to find that measures that 
conform to the Peace Clause are exempt from any action, including action under the DSU, based on the corresponding provisions of the Subsidies Agreement and the GATT 1994.  As a result, the United States is not required to defend those measures in any action based on Brazilian claims 
exempted by the Peace Clause. 
  WT/DS267/R/Add.1 
 Page A-15 
 
 
ANNEX A-3 
 
 
ARGENTINA'S THIRD PARTY INITIAL BRIEF 
 
10 June 2003 
 
 1.  Argentina would like to thank the Panel for the opportunity to submit, as third party to the dispute, written comments concerning whether Ar ticle 13 of the Agreement on Agriculture (AoA) 
precludes the Panel from considering Brazil´s claims under the Agreement on Subsidies and 
Countervailing Measures (SCM Agreement) in the absence of a prior conclusion by the Panel that 
certain conditions of Article 13 remain unfulfilled.  To that respect, Argentina states the following:  
 
2.  The text of Article 13 of the AoA does not require the Panel to make a preliminary finding on 
the applicability of the peace clause before exam ining Brazil´s claims under the SCM Agreement or 
GATT 1994.  If the negotiators had considered su ch preliminary finding was necessary, they would 
have set it forth.   3.  Indeed, a textual analysis of Article 13 of the AoA reveals that “actions” , and not the analysis 
of claims under Article XVI of GATT 1994 or Articles 3, 5 or 6 of the SCM Agreement, can only be 
precluded if all conditions established in  paragraphs b) (ii) or c) (ii) of the referred Article 13 are met.  
 4.  To that regard, the Appe llate Body has established: 
 
“The duty of a treaty interpreter is to exami ne the words of the treaty to determine 
the intentions of the parties. This should be done in accordance with the principles of 
treaty interpretation set out in Article 31 of the Vienna Convention. But these principles of interpretation neither require nor condone the imputation into a treaty 
of words that are not there or the importation into a treaty of concepts that were not 
intended.”1 
 The terms “ exempt from actions”  as stated in Article 13 of the Agreement on Agriculture:  
 
5.  From Argentina´s point of view, in the context of Article 13 of the AoA the words “exempt 
from actions” do not amount to an impossibility to request a panel procedure.  “Exempt from actions”  
means that a finding of inconsistency with Article s XVI of GATT 1994 or Articles 3, 5 and 6 of SCM 
Agreement will not be possible if the legal requ irements for the exemption are fulfilled.  The 
immediate context of the terms “ exempt from actions”  -i.e., paragraphs b) and c)- confirms this 
interpretation since that exemption require a particul ar threshold, i.e., that domestic support measures 
and export subsidies “conform fully” (t o different provisions of the AoA). 
 6. Nevertheless, it is precisely through the pane l procedures that the fulfilment of those legal 
requirements will be determined.  Argentina agrees w ith Brazil´s statement in paragraph 6 of its Brief 
that the word “actions” in the context of Article 13 of the AoA refers to decisions of WTO competent 
bodies, such as the DSB when it discharges its dut ies by establishing a panel.  A different 
interpretation would imply giving the measures alle gedly 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 
                                                      
1 Appellate Body Report, India-Patents , adopted 16 January 1998, WT/DS50/AB/R, para. 45. 
(Emphasis added). WT/DS267/R/Add.1 
Page A-16  
 
 7.  Therefore, the words “exempt from actions” do not preclude a Panel from considering a claim 
under the SCM Agreement or GATT 1994 while it deci des whether the Peace Clause conditions have 
been fulfilled.   
8.  Argentina considers that there is no doubt that “the Peace Clause currently continues to 
exempt conforming measures from actions under the corresponding provisions of the GATT 1994 and 
the Subsidies Agreement”.2  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.  When 
considering the interpretative issu es for purposes of the Panel's questi on at paragraph 4 of its Brief, 
the US seems to omit this issue by stating that wh at appears to be in dispute is the nature of the 
treatment of conforming measures under the Peace Clause.  However, from Argentina's point of view, what is important here is to determine at this stage of the proceedings the treatment under the Peace Clause of measures that are supposed not to be in conf ormity with the legal requirements needed to be 
exempted from actions. 
 9.  In addition, the fulfilment of the legal conditions set forth under Article 13 is a matter of fact that necessarily requires to be elucidated during pa nel procedures.  If not, how can this issue be 
elucidated where, as in the present case, the US  did not state which was its 1992 domestic support 
level and did not answer the specific questions  during the consultations?  Only through  panel 
proceedings could those issues be elucidated. 
 10.  On the other hand, as Brazil stated in paragraph 17 of its Brief
3, there is no WTO provision 
obliging a Member to present evid ence relating to the Peace Clause in a manner that is divorced from 
factual evidence and allegations under the SCM Agreement and/or GATT 1994.  As stated by Brazil 
in paragraphs 13 and 14 of its Brief, according to  Article 11 of the DSU a panel must make an 
objective assessment of the facts of the case and not of part of them before examining others, specially when, as in the case at hand, there is an overlap between the ev idence related  to the 
requirements of Art. 13 of the AoA and the evidence  related to the actionable and prohibited subsidy 
claims.  
11.  Argentina considers that the text of Article 13 of the AoA does not ban a Panel from  
considering altogether a defence invoked under the P eace Clause and the allegations of inconsistency 
under GATT 1994 or the SCM Agreement.  If a prel iminary ruling on the applicability of the Peace 
Clause were necessary before being able to exam ine Brazil´s claims under the SCM Agreement or 
GATT 1994, the terms “ exempt from actions”  would have too broad a sense.  It would amount to the 
creation of a new obligations for Members clearl y not envisaged in the text of Art. 13.  
 12.  Finally , the same reasoning could apply to ot her preliminary issues, su ch us the objections to 
the consistency of a Panel´s terms of reference with  Article 6.2 of the DSU or the general exceptions 
under Article XX of GATT 1994.  However, different Pa nels and the Appellate Body have made their 
findings on those issues altogether with th eir findings regarding substantive claims. 
 
 Other relevant provisions of the covered agreements: 
 
13.  The SCM Agreement  is applicable both for agricultural and non-agricultural products.  It is 
true that Article 7 of the SCM Agreement states th at the request of consultations is subject to 
Article 13 of the AoA.  However, in the case at hand the US did not put it forward neither during 
                                                      
2 US Initial Brief on Question Posed by Panel, 5 June 2003. 
3 Brazil´s Brief on Preliminary Issue Regarding the “Peace Clause” of the Agreement on Agriculture, 
5 June 2003.  WT/DS267/R/Add.1 
 Page A-17 
 
 
consultations nor during the meetings where the establishment of the Panel was requested, thus 
engaging itself in such procedures.  
 Other considerations that should gu ide the assessment of this issue :  
 
14.  Argentina considers that the provisions contained in Article 13 of the AoA have an 
exceptional nature.  This would imply that the Me mber who alleges to be protected by the Peace 
Clause has the burden of proving the fulfilment of its legal requirements.  As long as the US does not demonstrates prima facie  that it fulfils all the conditions that would allow a protection  against a claim 
by virtue of Article 13 of the AoA, the Pane l should consider as appropriate the claims under 
Article XVI of GATT 1994 or Articles 3, 5 and 6 of the SCM Agreement. 
 
15.  Finally, as stated by Brazil in paragraphs 13  and 14 of its Brief, according to DSU Article 11 
a panel must make an objective assessment of the fa cts of the case and not of part of them before 
examining others, specially when, as in the case at ha nd, there is a need to clarify closely related  
issues of fact that relate both to the fulfilment of  the conditions set forth by the Peace Clause and to 
the substantive claims regarding actionable and prohibited subsidies. 
 
Conclusion 
 
16.  According to the above statements, Argentin a considers that Article 13 of the AoA does not 
preclude the Panel from hearing evidence and cons idering Brazil´s claims under the SCM Agreement 
or GATT 1994 while it decides whether the Peace Cl ause conditions of Article 13 have or have not 
been met.  WT/DS267/R/Add.1 
Page A-18  
 
 ANNEX A-4 
 
 
AUSTRALIA'S WRITTEN COMMENTS 
 
10 June 2003 
 
1. I refer to your faxed letter of 28 May 2003 in which you invited third parties to the dispute to 
submit any written comments they may have in relation to the following:    
whether Article 13 of the Agreement on Agriculture  precludes the Panel from 
considering Brazil’s claims under the Agreement on Subsidies and Countervailing 
Measures  in these proceedings in the absence of a prior conclusion by the Panel that 
certain conditions of Article 13 remain unfulfilled.  In particular, the Panel invite the parties to explain their interpretation of the words “exempt from action” as used in 
Article 13 of the Agreement on Agriculture , as well as bringing to the Panel’s 
attention any other relevant provisions of  the covered agreements and any other 
relevant considerations which the part ies consider should guide the Panel’s 
consideration of this issue.  For greater clarity, the Panel invites the parties, during this initial stage of the proceedings, to focu s on matters of legal interpretation, rather 
than upon the submission of any factual evidence that might be associated with the 
substantive elements of Article 13.   
2. Please note that, for the purpo ses of Australia’s comments in re lation to the issues identified 
in the previous paragraph, references to “Article 13” refer to Article 13(a)(ii), 13(b)(ii) and 13(c)(ii).   
There is nothing in Article 13 of the Agreement on Agriculture  – nor indeed in the Dispute Settlement 
Understanding (“the DSU”)  – that would preclude the Panel from considering claims under the 
Agreement on Subsidies and Countervailing Measures  in the absence of a prior conclusion by the 
Panel that certain conditions of Article 13 remain unfulfilled.   
 3. Article 13 of the Agreement on Agriculture  provides a limited, conditional and time-limited 
exemption from actions based on Article XVI of GATT 1994 and certain provisions of the Agreement 
on Subsidies and Countervailing Measures  (“the specified provisions”) in respect of measures which 
conform fully to the respective provisions of the Agreement on Agriculture  and to Article 13 itself.  
Article 13 does not preclude per se  claims based on the specified provisions, that is, Article 13 does 
not prevent the specified provisions being invoked.  Rather, Article 13 is in the nature of an 
“affirmative defence” for measures which are in consistent with the specified provisions.
1   
 
4. Viewing Article 13 of the Agreement on Agriculture  as an affirmative defence gives proper 
meaning to that provision, as well as to Article 21 of the Agreement on Agriculture  and Articles 3.1, 
6.9 and 7.1 of the Agreement on Subsidies and Countervailing Measures .  This view would also be 
consistent with the interpretive principle of e ffectiveness, which the Appellate Body has found should 
guide the interpretation of the WTO Agreement.2   
 
5. In assessing an affirmative defence based on Article 13 of the Agreement on Agriculture , the 
proper application of that provision would require the Panel to consider the conditions listed in 
Article 13 (“the prescribed conditions”), that is:   
                                                      
1 See, for example, United States – Measures Aff ecting Imports of Woven Wool Shirts and Blouses from 
India , WT/DS33/AB/R, page 16.   
2 United States – Continued Dumping and Subsidy Offset Act of 2000 , WT/DS217/AB/R, 
WT/DS234/AB/R, paragraph 271.  WT/DS267/R/Add.1 
 Page A-19 
 
 
  
 as appropriate, whether the measure at issue cons titutes a domestic support measure or an export 
subsidy within the meaning of Annex 2 to, or Articles 6 or 1(e) of, the Agreement on Agriculture ;  
and, if so,  
 
 as appropriate, whether the measure at issue conforms fully to the provisions of Annex 2 to, or 
Article 6 or Part V of, the Agreement on Agriculture ;  and  
 
 as appropriate, whether measures falling with in the provisions of Article 6 of the Agreement on 
Agriculture  grant support to a specific commodity not in excess of that decided during the 1992 
marketing year.   
 6. Only if the Panel determines that Article 13 of the Agreement on Agriculture  is relevant 
because the prescribed condi tions are met would it need to consider whether the measures at issue are 
“exempt from actions based on” the specified provisi ons.  In that event, the Panel would need to 
consider whether the measures at issue are “free or released from a duty or liability to which others 
are held”
3 in relation to a proceeding “found[ed], buil[t] or construct[ed] on”4 the specified provisions.  
In other words, if the prescribed conditions are me t, a Member will be immune from liability for a 
measure’s inconsistency with the specified provisions  for the period for which Article 13 applies.   
 7. In this dispute, there is disagreement betw een the parties to the di spute whether the measures 
at issue conform fully to th e respective provisions of the Agreement on Agriculture .  However, 
disagreement between the parties to the dispute does not serve to limit the Panel’s mandate.  There is 
no provision in the covered agreements that a disag reement between the parties to the dispute about 
conformity would serve as a barrier to a Panel’s le gal mandate to examine claims in accordance with 
the provisions of Article 3.2 and 11 of the DSU.  There is, therefore, no requirement that the Panel reach a conclusion that certain conditions of Article 13 of the Agreement on Agriculture  remain 
unfulfilled before considering claims under the Agreement on Subsidies and Countervailing 
Measures .   
 
                                                      
3 Black’s Law Dictionary , Seventh Edition, Bryan A Garner, Editor in Chief, West Group, St Paul, 
Minn., 1999, page 593.   
4 The New Shorter Oxford English Dictionary , Ed. Lesley Brown, Volume 1, Clarendon Press, Oxford, 
1993, page 187.   
 WT/DS267/R/Add.1 
Page A-20  
 
 ANNEX A-5 
 
 
COMMENTS BY THE EUROPEAN COMMUNITIES ON CERTAIN 
ISSUES RAISED ON AN IN ITIAL BASIS BY THE PANEL 
 
10 June 2002 
 
 
TABLE OF CONTENTS 
 
I. INTRODUCTION ............................................................................................................... ... 20 
II. THE QUESTION AT ISSUE FALLS WITHIN THE PANEL’S DISCRETION 
AS TO THE ORGANIZATION OF  ITS OWN PROCEDURES ....................................... 21 
III. SEVERAL FACTORS MILITATE IN FAVOUR OF EXAMINING THE 
EVIDENCE AND ARGUMENTS PRESENTED IN RESPECT OF 
ARTICLE 13 OF THE AGREEMENT ON  AGRICULTURE AT THE SAME 
TIME AS THE OTHER CLAIMS ........................................................................................ 23 
A. T HE APPLICATION OF ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE IS 
DEPENDENT ON THE EXAMINATION OF   QUESTIONS OF SUBSTANCE  ......................................... 23 
B. A SSESSING THE APPLICABILITY OF ARTICLE 13 AS A PRELIMINARY MEASURE MAY 
DELAY THE ISSUANCE OF THE REPORT  ...................................................................................... 23 
C. T HIRD PARTY DUE PROCESS RI GHTS MAY BE INFRINGED BY A DECISION TO SPLIT THE 
PROCEDURE INTO THREE STAGES  .............................................................................................. 23 
IV. CONCLUSION ................................................................................................................ ....... 24 
 
 
I. INTRODUCTION  
 
1. The Panel has asked the Parties to this dispute,  together with the third parties, to comment on 
the following question:  
[W]hether Article 13 of the Agreement on Agriculture  precludes the Panel from 
considering Brazil’s claims under the Agreement on Subsidies and Countervailing 
Measures  in these proceedings in the absence of a prior conclusion by the Panel that 
certain conditions in Article 13 remain unfulfilled.  In particular, the Panel invites the parties to explain their interpretation of the words “exempt from actions” as used in 
Article 13 of the Agreement on Agriculture , as well as bringing to the Panel’s 
attention any other relevant provisions of  the covered agreements and any other 
relevant considerations which the part ies consider should guide the Panel’s 
consideration of this issue. 
2. The European Communities understands the positions of the two parties as follows.  The 
United States is arguing for a multi stage procedure – first the Panel should deal with this initial issue, 
second, it should examine whether the US measures at issue fall under Article 13 of the Agreement on 
Agriculture , and finally, and only if the measures do not fall under Article 13 of the Agreement on 
Agriculture , should the Panel examine whether thes e measures are consistent with the Agreement on  WT/DS267/R/Add.1 
 Page A-21 
 
 
 Subsidies and Countervailing Duties  (SCM Agreement ).1  On the other hand, Brazil considers that the 
Panel should, after settling this initial issue, examine Brazil’s claims under Article 13 of the 
Agreement on Agriculture  and the SCM Agreement simultaneously, treating Brazil’s claims under 
Article 13 of the Agreement on Agriculture  as a threshold issue.2  Neither party appears to suggest that 
this issue is anything other than a substantive issue. 3  
 
3. The parties submissions concern the ma nner in which the Panel should organise its 
procedures.  In other words, should it hear arguments and evidence on Brazil’s claims under 
Article XVI GATT and the SCM Agreement  before it has decided whether the United States can avail 
itself of Article 13 of the Agreement on Agriculture .  The European Communities considers that this 
issue falls within the Panel’s discretion as to the organization of its procedures. Such discretion is, 
nevertheless, not without its limits.  The European Communities considers that there are a number of factors which require the Panel to exercise its disc retion so as to examine the evidence and arguments 
presented by the parties with re spect to both Article 13 of the Agreement on Agriculture  and 
Article XVI GATT and the SCM Agreement  at the same time.  The European Communities sets out its 
arguments on these issues in more detail in the sections below. 
 
II. THE QUESTION AT ISSUE FALLS WITH IN THE PANEL’S DISCRETION AS TO 
THE ORGANISATION OF ITS OWN PROCEDURES 
 
4. Both parties seem  to consider that the Panel is required to rule, as a matter of substance, on 
whether the US measures fall under Article 13 of the Agreement on Agriculture , and if not, whether 
they are consistent with Article XVI GATT and the SCM Agreement . Brazil’s contention that the US 
measures are inconsistent with Article XVI GATT and the SCM Agreement , because they are not 
covered by Article 13 of the Agreement on Agriculture  requires the Panel to determine whether 
Article 13 is applicable.  Similarly, the United States’ claim that Article 13 of the Agreement on 
Agriculture  prevents the Panel from ruling on Brazil’s ot her claims requires adjudication of the issue 
of the applicability of Article 13.  5. The European Communities finds support for it s view that the choice between a single and 
multistage procedure is a matter for the Panel’s discretion in the fact that Article 13 of the Agreement 
on Agriculture  is not set up as a specific rule which can be distinguished from the normal DSU 
procedures.  Thus, for instance, Article 13 is not mentioned in Annex 2 of the DSU listing special or 
additional rules and procedures contained in the c overed agreements.  Moreover, Article 19 of the 
Agreement on Agriculture  states that the provisions of Artic le XXII and XXIII GATT, as elaborated 
in the DSU, apply to the Agreement on Agriculture .  Consequently, there are no special rules foreseen 
in respect of Article 13 in the event that a Memb er requests dispute settlement in which it may be 
raised as an issue. 
 6. In order further to demonstrate that this is a matter for the Panel’s discretion, it is instructive to consider the United States’ arguments on the meaning of exempt from action”.  The United States argues that the meaning of the term “exempt from  action” is that no formal proceedings can be 
                                                      
1 In para. 2 of its initial brief, the US argues 
 
 “[t]he United States respectfully requests the Pane l to organize its procedures to first determine 
whether Brazil may maintain any action based on provisions exempted by the Peace Clause.” 
2 Brazil concludes its initial brief as follows: 
 
 “[ ..] Brazil requests that this Panel find that it is not precluded from hearing evidence and considering 
Brazil’s claims under the ASCM or Article XVI of  GATT 1994 without first concluding that the peace 
clause conditions of AoA Article 13(b)( ii) and 13(c)(ii) remain unfulfilled.” 
3 For instance, that the arguments on Article XVI  GATT and the SCM Agreement are not within the 
terms of reference of the Panel. WT/DS267/R/Add.1 
Page A-22  
 
 launched with respect to the matter exempt from action, and that in the WTO, this would mean that a 
Member could not request cons ultations and later request the establishment of a panel.
4  T h e  
implications of this are unclear however.  The logi cal conclusion would appear to be that the United 
States is suggesting that Brazil should first bring a panel arguing that Article 13 of the Agreement on 
Agriculture  is not applicable, and then (if it is successful)  bring a second panel to adjudicate its claims 
under Article XVI GATT and the SCM Agreement ?  This notion seems implausible for a number of 
reasons. First, in considering whether Article 13 of the Agreement on Agriculture  is applicable, the 
first Panel would not be adjudicating a dispute but would be requested to issue a declaratory judgement.  Second, a Member is not under an obligat ion to act consistently with Article 13 of the 
Agreement on Agriculture  – failing to respect Article 13 implies that a Member no longer enjoys the 
protection thereof.  Consequently, and third, Article 13 of the Agreement on Agriculture  can only be 
seen as a defence against a claim brought under othe r aspects of the WTO Agreements which regulate 
the provision of subsidies.  It would seem bizarre if, before Brazil could bring a claim with respect to 
subsidies which it considered did not respect the US’s WTO obligations, Brazil had first to establish 
that potential US de fences did not apply. 
 
7. The European Communities notes that, although this situation is the logical continuation of the US interpretation of the term “exempt from action”, the United States does not suggest that Brazil should have launched two successive WTO panels.  Rather it maintains that the Panel’s hearing 
argument and evidence on Article XVI GATT and the SCM Agreement  would amount to an “action” 
which cannot be brought against it until it is determined that the US measures do not conform to 
Article 13 of the Agreement on Agriculture .  Why the United States cons iders that hearing evidence 
would amount to such a prohibited “action”, while re questing consultations or the establishment of a 
panel does not amount to maintaining an “action” is unclear.  Indeed, the European Communities 
would presume that the United States would agree that Article 13 of the Agreement on Agriculture  has 
the ultimate effect of not requiring any subsidy maintained consistently with Article 13 of the 
Agreement on Agriculture  and otherwise inconsistent with the SCM Agreement  to be brought into 
conformity with the provisions of the SCM Agreement  (typically through its withdrawal).  For the 
European Communities, therefore, the issue of wh ether a measure falls under Article 13 is necessarily 
a question which a Panel must decide before it deci des whether the measure might violate Article XVI 
GATT or the SCM Agreement .  However, the mere fact that the Article 13 issues must be decided 
before the other claims are decided does not imply that a panel, when it is  examining evidence and 
considering arguments with respect to Article 13 of the Agreement on Agriculture , is precluded from 
hearing the evidence and arguments re lating to Article XVI GATT or the SCM Agreement  until after 
it has decided on the applicability of Article 13 of the Agreement on Agriculture . 
 8. In conclusion, the Panel has substantial di scretion in deciding how it will manage these 
issues. Article 12.1 DSU makes it quite clear that the Working Procedures set out in Appendix 3 of 
the DSU may be departed from if the Panel decides th is is appropriate.  Therefore, it is a matter for 
the Panel’s discretion whether to arrange a multistag e procedure as proposed by the United States or a 
single stage procedure as proposed by Brazil.  9. The European Communities considers that th e normal procedure proposed by Brazil should 
be followed by the Panel for the reas ons set out in the next section. 
 
                                                      
4 See paras. 7 and 8 of the US initial Submission.  WT/DS267/R/Add.1 
 Page A-23 
 
 
 III. SEVERAL FACTORS MILITATE IN FAVOUR OF EXAMINING THE EVIDENCE 
AND ARGUMENTS PRESENTED IN RESPECT OF ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE AT THE SAME TIME AS THE OTHER 
CLAIMS 
 
10. The European Communities submits that the Panel should consider evidence and argument 
relating to both the applicability of Article 13 of the Agreement on Agriculture , and the other 
provisions which Brazil has alleged the Unite d States has acted inconsistently with. 
 
A. THE APPLICATION OF ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE IS 
DEPENDENT ON THE EXAMINATION OF   QUESTIOnS OF SUBSTANCE  
 
11. As the United States and Brazil appear to have recognised, the question of the applicability of 
Article 13 of the Agreement on Agriculture  is dependent on the assessment of substantive issues, 
notably the conformity of the measures in question with other provisions of the Agreement on 
Agriculture .  In order for the Panel to establish whethe r Article 13 applies, the Panel will have to 
consider detailed arguments and evidence.  For that reason, the applicability of Article 13 should be subjected to the normally applicable procedures by which Panel deal with complex issues of fact and 
law and not adjudicated in some form of preliminary procedure.  The European Communities note, for 
instance, that this was the approach taken by the panel in the United States – Export Restraints  
dispute, which refused to rule on a number of preliminary objections brought by the United States (as the defendant) which went to the substance of the matter.
5  
 
B. ASSESSING THE APPLICABILITY OF ARTICLE 13 AS A PRELIMINARY MEASURE MAY 
DELAY THE ISSUANCE OF THE REPORT 
 
12. In the same vein, it can be noted that hearing evidence and considering arguments on the 
applicability of Article 13 would inevitably require a considerable amount of time, as will hearing and 
assessing the arguments and evidence on the other is sues which could only be considered after the 
preliminary decision on Article 13 was taken.  Given the substantial number of claims brought, their 
complex nature, and the substantial interest in this dispute from third parties, the Panel may, if it splits up the dispute into three stages, have problems issuin g its report within nine months, as it is required 
to do under the Article 12.9 DSU.  
 
13. The European Communities also has some symp athy for the concerns set out by Brazil, in 
section V of its Initial Submission, as to the effect of splitting the procedure on Brazil’s ability to present its case.  
C. THIRD PARTY DUE PROCESS RIGHTS MAY BE INFRINGED BY A DECISION TO SPLIT THE 
PROCEDURE INTO THREE STAGES 
 
14. As the Panel is aware, Article 10.3 DSU provi des that third parties are entitled to receive the 
submissions of the parties to the first meeting with the Panel.  If the first panel meeting is limited to 
considering the applicability of Article 13 of the Agreement on Agriculture  and thus parties 
submissions are limited to that question, the third pa rties will not have an opportunity to be heard on 
issues other than Article 13 of the Agreement on Agriculture .  If the Panel decides to adopt a three 
stage procedure, in order to avoid such a situati on arising, the European Communities respectfully 
submits that the Panel should make provision to ensure  that third parties have adequate access, and the 
opportunity to be heard on all matters (that is, also in the third stage of procedures).  Inevitably, 
                                                      
5 Panel report, United States – Measures Treating Export Restraints as Subsidies , WT/DS194/R, 
adopted 23 August 2001, para. 8.2. WT/DS267/R/Add.1 
Page A-24  
 
 however, setting up such a procedure will involve additional work for both the Panel and the 
Secretariat.  
IV. CONCLUSION 
 
15. In conclusion, the European Communities re spectfully submits that, while the Panel is 
obliged to decide on the applicability of Article 13 of the Agreement on Agriculture  before it may take 
a decision with respect to Brazil’s claims under Article XVI GATT and the SCM Agreement  it is not 
precluded from considering evidence or argument on these claims until after it has decided on the applicability of Article 13 of the Agreement on Agriculture .  As the European Communities has 
explained above, there are several reasons militating in favour of the Panel considering all arguments 
and evidence simultaneously.   WT/DS267/R/Add.1 
 Page A-25 
 
 
 ANNEX A-6 
 
 
INDIA’S COMMENTS ON PRELIMINARY ISSUE 
REGARDING THE PEACE CLAUSE OF THE 
AGREEMENT ON AGRICULTURE 
 
10 June 2003 
 
 1. India thanks the panel for being provided an  opportunity to comment on the submissions of 
Brazil and the United States on the following question concerning Article 13 of the Agreement on 
Agriculture posed by the Panel:  
Whether Article 13 of the Agreement on Ag riculture precludes the Panel from 
considering Brazil’s claims under th e Agreement on Subsidies and Countervailing 
Measures in these proceedings in the absence of a prior conclusion by the Panel that 
certain conditions of Article 13 remain unfulfilled.
1   
2. India notes that both Brazil and the United St ates evidently agree that “exempt from actions” 
means that a complaining Member cannot receive authorization from the DSB to obtain a remedy 
against another Member’s domestic or export suppo rt measures that are in compliance with various 
provisions of the Peace Clause.  In other words, a measure must be in conformity with: (a) provisions 
of Annex 2 of the Agreement on Agriculture in respect of green box domestic support measures; (b) 
provisions of Article 6 of the Agreement on Agri culture in respect of amber and blue box support 
measures; and (c) Part V of the Agreement on Agriculture as reflected in each member’s Schedule in respect of export subsidies to attract the exempt ion from obtaining a remedy under the Peace Clause. 
 
3. However the United States seems to argue in various paragraphs of its submission, including 
in paragraphs 7, 9 and 12, that this exemption ex tends to “any action, including action under the DSU, 
based on the corresponding provisions of the S ubsidies Agreement and GATT 1994”.  The 
United States thereby suggests that resort cannot be had to the dispute settlement proceedings by 
asserting legal claims in respect of measures claimed by a Member to be Peace Clause protected.    
4. Thus, on the question posed by the Panel, the United States is of the view that the Panel 
should organize its procedures to first determine wh ether Brazil may maintain any “action” based on 
provisions exempted by the Peace Clause.  On the other hand, Brazil has asserted that the phrase  
“exempt from actions” in Article 13 of the Agreem ent on Agriculture does not compel the Panel to 
first make a Peace Clause finding before considering th e substance of Brazil’s other claims.    
 
5. The United States seeks to interpret “action” to “include all stages of a dispute, including the “bringing [of] a case,” consul tations, and panel proceedings.”  Subsequently, the United States 
suggests a reading of “exempt from actions” in Article 13 to mean “not subject to” the “taking of legal steps to establish a claim” or “not resorting to dispute settlement by asserting legal claims”.  
 
6. In India’s view, if the interpretation of “exempt from actions” under Article 13 of the Agreement on Agriculture, as sought by the United States, extends to exemption from “any action” 
                                                      
1 The Panel also “invites the parties to explain their interpretation of the words ‘exempt from actions’ 
as used in Article 13 of the Agreemen t on Agriculture, as well as bringi ng to the Panel’s attention any other 
relevant provisions of the covered agreements and any ot her relevant considerations which the parties consider 
should guide the Panel’s consideration of this issue.” WT/DS267/R/Add.1 
Page A-26  
 
 such that resorting to dispute settlement by asserti ng legal claims is precluded in respect of Peace 
Clause protected measures, then consequences foll ow that have systemic implications.  This 
interpretation would result in countries being prec luded from even resorting to the dispute settlement 
process in respect of measures claimed by the country to be complained against to be conforming to the Peace Clause unless there is a prior finding on the lack of conformity of the measure with the 
Peace Clause.  This interpretation of “exempt from actions” taken to its logical end would imply that 
even consultations under the DSU can not be sought in respect of such a measure, unless there is a 
prior finding on non-conformity of the measure with the Peace Clause.  A complaining country would therefore have to resort to the dispute settlement pr ocess twice in resp ect of the same measure; first, 
for obtaining a finding whether the measure is in conformity with the Peace Clause and, if not, then 
whether the measure is in conformity with oblig ations under various WTO Ag reements.  In India’s 
view this result is neither desirable nor envisaged  under the DSU or any other covered agreements.  
 7.  India believes that neither the phrase  “exempt from actions” nor Article 13 of the Agreement on Agriculture compel the Panel to first make a peace clause finding before considering the substance 
of Brazil’s claims in various issues in this disput e.  India is of the view that Article 13 of the 
Agreement on Agriculture is not a “special and additi onal” rule set out in Appendix 2 to the DSU.  
Article 19 of the Agreement on Agriculture makes all DSU provisions applicable to the Agreement on Agriculture.  Thus there is no legal basis under the DSU or any of the covered agreements that would 
support the two stage approach suggested by the Un ited States in this dispute whereby the Panel 
would first make a Peace Clause finding befo re considering claims on other agreements.  
 
8. In conclusion, India believ es that the phrase “exempt from actions” when viewed in the 
context of DSU provisions does not require  the Panel to first make a Peace Clause non-compliance 
finding before hearing or considering any of the ev idence or arguments relating to the various claims 
under other agreements. 
  WT/DS267/R/Add.1 
 Page A-27 
 
 
 ANNEX A-7 
 
 
THIRD PARTY COMMEN TS BY NEW ZEALAND 
ON PRELIMINARY ISSUE REGARDING 
ARTICLE 13 OF THE AGREE MENT ON AGRICULTURE 
("THE PEACE CLAUSE") 
 
10 June 2003 
   New Zealand welcomes the opportunity to comment on the preliminary issue addressed in the Panel's 28 May 2003 request: 
 
"Whether Article 13 of the Agreement on Agriculture precludes the Panel from considering Brazil's claims under the Agreement on Subsidies and Countervailing 
Measures in these proceedings in  the absence of a prior conclusion of the Panel that 
certain conditions of Article 13 remain unfulfilled …" 
 In New Zealand's view, a Panel is not require d to make any prior conclusion concerning the 
applicability of Article 13 (the "Peace Clause") be fore proceeding to hear evidence and submissions 
relating to substance of legal claims brought un der the Agreement on Subsidies and Countervailing 
Measures (ASCM) and GATT Article XVI.  New Zeala nd notes in this regard that the overlapping 
nature of the evidence required to establish bot h the applicability of the Peace Clause as well as 
actionable and prohibited subsidies claims would ma ke a separation of submissions and hearings on 
each aspect artificial.   In relation to the Panel's request for views on the term "exempt from actions" in Article 13(b)(ii) and 13(c)(ii), Ne w Zealand considers that these wo rds simply mean that a Member 
cannot receive authorization from the DSB to obtain a remedy against another Member's domestic or 
export support measures that are otherwise protected by the "Peace Clause".  New Zealand does not 
consider that this phrase should be interpreted so as to suggest that substantive claims under the 
ASCM and GATT Article XVI can only be addressed in  written or oral submissions after a Panel has 
made a ruling that the Peace Clause apply.  
 In summary, New Zealand considers that the Panel is not precluded from hearing evidence 
and considering claims under the Agreement on Subsidies and Countervailing Measures or 
Article XVI of the GATT without first concluding that Peace Clause conditions remain unfulfilled. WT/DS267/R/Add.1 
Page A-28  
 
 ANNEX A-8 
 
 
SUBMISSION OF PARAGUAY 
COMMENTS ON THE "P EACE CLAUSE" 
 
10 June 2003 
 
  Paraguay does not see how, under the provisions  of the Dispute Settlement Understanding 
(DSU), the Panel can establish that a matter calls fo r a "preliminary and special ruling" when the DSU 
does not provide for such a procedure.  
 If this were so, many complaints would be subject to the prior demonstration of the existence 
of the conditions for bringing the action, when in fact, what needs to be resolved is the main subject of the dispute and the effects caused by  the failure to comply with the rules and regulations of world 
trade.  
 Paraguay considers that to set a precedent of this kind would be to undermine the DSU's 
purpose of providing a flexible and prompt dispute settlement procedure, since countries would be 
faced with an unnecessary delay in the process involving costs and time beyond their "predictions".   Since there is no established procedural rule in this respect, the Panel must proceed to the 
analysis of the substantive issue, and permit the pa rties, in this case especially Brazil as complainant – 
and by extension Paraguay – to demonstrate that the subsidies and support measures benefiting upland 
cotton have effects on trade and production by the cotton industry in the world.   Paraguay has a supreme interest in ensuring the appl ication of strict justice with respect to this 
complaint, since cotton production is the sustenance of the poorest segments of its population.  
Indeed, 70 per cent of the country's small farmers depend on cotton production for their living. 
  As already stated in the past, of Paraguay's population of approximately 5,300,000, some 150,000 families work in cotton production, and the damage caused by the kinds of subsidies and support measures at issue in this case have caused an exodus of this rural population to urban areas 
with no relief or solution in sight, further aggravating the country's economic situation. 
  In view of the above, Paraguay considers that si nce Article XIII is not a rule forming part of 
the procedural system established by the DSU,  a preliminary ruling by the Panel on the "Peace 
Clause" would be inappropriate. WT/DS267/R/Add.1 
Page A-29 
 ANNEX A-9 
 
 
BRAZIL’S COMMENTS ON THE BRIEFS BY THE UNITED STATES 
AND THE THIRD PARTIES ON CERTAIN PRELIMINARY ISSUES 
REGARDING THE “PEACE CLAUSE” OF THE 
AGREEMENT ON AGRICULTURE 
 
13 June 2003 
 
 
TABLE OF CONTENTS 
 
 
I. INTRODUCTION ........................................................................................................ 30 
 II. THE US TEXTUAL AND CONTEXTUAL ARGUMENTS  
 CONCERNING “EXEMPT FROM ACTIONS” ARE INCONSISTENT 
 WITH THE MULTILATERAL NATURE OF “ACTIONS” UNDER THE 
 DSU AND WITH US CONDUCT IN THIS DISPUTE ............................................ 30 
 III. THE NARROW INTERPRETATION OF THE WORD “ACTION”  
 SUGGESTED BY THE UNITED STATES IS NOT SUPPORTED BY ALL  
 THREE AUTHENTIC VERSIONS OF THE AOA .................................................. 32 
 
IV. THE OVERLY-BROAD US DEFINITION OF “EXEMPT FROM   ACTION” IMPROPERLY CREATES NEW OBLIGATIONS   AND PROCEDURES NOT CONTEMPLATED IN THE AOA OR THE DSU .... 33 
 
V. THE US PROPOSAL FOR A SEPARATE PROCEEDING FOR PEACE  
 CLAUSE ISSUES WOULD EFFECTIVELY ADD AOA ARTICLE 13   TO THE CLOSED LIST OF SPECIAL AND ADDITIONAL PROVISIONS   IN DSU APPENDIX 2 AND GIVE AOA ARTICLE 13 A SCOPE THAT  
 WAS NOT INTENDED BY AOA DRAFTERS ........................................................ 33 
 
VI. A SPECIAL PEACE CLAUSE PROCEDURE WOULD AMOUNT TO   HAVING THE PANEL ISSUE A DECLARATORY JUDGMENT FOR   THE US AFFIRMATIVE DEFENCE ........................................................................ 35 
 
VII. CONCLUSION ............................................................................................................. 3 7WT/DS267/R/Add.1 
Page A-30  
 
 I.    INTRODUCTION  
 
1. Brazil welcomes the opportunity to provide its comments regarding the third party submissions of Argentina, Australia, the Europ ean Communities, India, New Zealand, and Paraguay 
filed on 10 June 2003, and to respond to the Initial Brief of the United States of America on the 
Questions Posed by the Panel (US Initial Brief), filed on 5 June 2003.  
 
II. THE US TEXTUAL AND CONTEXTUAL ARGUMENTS CONCERNING “EXEMPT 
FROM ACTIONS” ARE I NCONSISTENT WITH THE MULTILATERAL NATURE 
OF “ACTIONS” UNDER THE DSU AND WITH US CONDUCT IN THIS DISPUTE 
 
2. The customary rules of interpretation of public international law do not support the United States’ reading of Article 13 of the Agreement on Agriculture (AoA).  The United States relies on a legal dictionary for a definition of “action” and then concludes incorrectly that “action” means any “proceeding in a court of justice” including any “legal steps to establish a claim”.
1  T h i s  
interpretation misreads Article 13 because it starts from fundamentally mistaken premises.  
 3. A WTO panel is not a “court” because the WTO panel process is founded on, and guided by, 
collective  action by the Members.  A lawsuit in a US or Brazilian court of law starts automatically 
when a plaintiff takes the “action” of filing pape rs that are in the proper form.  But a DSU panel 
proceeding commences only when the Members of the WTO take collective  “action” to establish the 
panel.  The DSU rules “elaborate and apply”
2 the rules in GATT Article XXIII:2, which speak of an 
investigation by the CONTRACTING PARTIES – which under GATT Article XXV:1 are all the contracting parties "acting jointly".  Whereas a US  or Brazilian judge has broad powers conferred on 
him or her constitutionally, a WTO panel is a bod y of limited jurisdiction acting only with powers 
delegated to it by the DSB.  For example, defending parties challenge claims as going beyond the 
terms of reference under DSU 6.2, because the terms of reference define th e limits of the powers 
delegated to the panel by the DSB through the DSB's action to establish the panel.   4. The “negative consensus” provisions in DSU Article 16.4 further support Brazil’s position that “action” in AoA Article 13 must be interpreted as joint action by WTO Members.  Decisions of a 
court are directly and immediately binding on the part ies to the litigation, but  such is not the case for 
decisions of a panel or the Appellate Body.  Instead, the drafters of the DSU decided that the 
Members acting jointly would retain ultimate control of whether a panel or Appellate Body report has 
any binding effect.  Similarly, the recommendations  and rulings referred to in DSU Articles 21 and 22 
are not recommendations and rulings of a panel or  the Appellate Body, but are recommendations and 
rulings of the DSB.  Accordingly, DSU 21.7 refers to further  actions that the DSB must consider 
when a matter (not an “action”) has been raised by a developing country.   
 5. The United States misinterprets DSU Article 3.7.
3  In this provision (“Before bringing a case, 
a Member shall exercise its judgment as to whet her action under these procedures would be fruitful"), 
“actions” could and should be read in a collective  context, as referring to the DSB’s action  to adopt a 
panel report and (if need be) to authorize suspensi on of concessions.  DSU Article 3.7 transposed a 
provision in the 1979 Understanding Regarding Notif ication, Dispute Settlement and Surveillance4 
                                                      
1 US Initial Brief, para. 7.   
2 AoA Article 19: provides that “The provisi ons of Articles XXII and XXIII of GATT 1994, as 
elaborated and applied by the Dispute Settlement Understanding, shall apply to consultations and the settlement 
of disputes under this Agreement.” 
3 US Initial Brief, para. 8.  
4 Adopted on 28 November 1979; BISD 26S/210.  The full text is set out in the GATT Analytical Index 
(6th Ed., 1995) at page 632. DSU Article 3.7 transposes paragraph 4 of the Agreed Description of the  WT/DS267/R/Add.1 
 Page A-31 
 
 
 which refers to "action under Article XXIII:2."  As discussed in Brazil’s Initia l Brief, such “action” 
has always meant joint action by the CONTRACTING PARTIES, not individual action by a 
particular contracting party.  Article 3.7 simply restates the common-sense advice that litigants must consider in advance whether the pers uasive effect of a collective dete rmination of rule violation and a 
collective authorization of suspen sion of concessions would be usef ul in eliminating the concrete 
problem.  It cannot be read to suggest that any Member should be able to pressure another into 
dropping a valid legal claim by arguing that enforcing rights through litigation is not “fruitful.”   6. The United States also misinterprets DSU Article 4.5 ("before resorting to further action under this Understanding, Members should attempt to obtain satisfactory adjustment of the matter.").
5  
Read correctly, DSU Article 4.5 simply refers to  the “action” of the DSB to grant a request for 
establishment of a panel.6  Thus, Article 4.5 urges a Member to attempt to obtain satisfactory 
adjustment of the “matter” (not the “action”) before  it requests the DSB to take action to establish a 
panel.   
7. The United States also cites footnote 35 of the SCM Agreement (“The provisions of Parts III 
and V shall not be invoked regarding measures considered non-actionable in accordance with the 
provisions of Part IV.”).
7  Yet “shall not  be invoked” is a different legal standard that goes 
substantially farther than “shall be . . . ex empt from actions.” Under footnote 35, no DSB 
authorization could be obtained to establish a panel against a non-actionable subsidy granted by 
another Member.  By contrast, AoA Article 13 exempts certain agricultural subsidies from actions by 
the DSB adopting a panel or Appellate Body report or authorizing suspension of concessions, but only 
under certain conditions .  The DSB can only take “actions” agains t such subsidies if it decides that 
those conditions are unfulfilled (based on the re commendations in the report of the panel and/or 
Appellate Body).  But this conditionality means that a panel must address the conditions of the peace 
clause if they are invoked by the Member providing the domestic support – as the United States 
appears to have indicated it will do in this dispute.   If the drafters had intended to protect agricultural 
subsidies against even an invocation of Part II and III of the SCM Agreement, they would have said 
so, and they did not.   8. The United States argues in paragraph 9 th at its subsidies are even “exempt” from 
consultations under the DSU.  Paragraph 9 highli ghts the logical challenges presented by the US 
argument—particularly in light of the fact, di scussed below, that Article 13 does not create any 
exception to the normal rules of WTO dispute settlement.    9. Moreover, the United States’ own conduct in th is dispute is at odds with paragraph 9 of the 
US brief.  Brazil’s consultation re quest dated 3 October 2002 clearly stated that “the United States has 
no basis to assert a defence under Article 13(b)(ii) . . . [and] Article 13(c)(ii) of the Agreement on 
Agriculture . . ”.
8  Yet, the United States said nothing duri ng three rounds of consultations about any 
requirement for a separate panel proceeding regardi ng the peace clause.  Brazil’s panel request also 
referred to the lack of any basis for the Un ited States to assert a peace clause “defence”.9  The DSB 
minutes reflect that the United States did not men tion the peace clause at all in the meetings of the 
                                                                                                                                                                     
Customary Practice of the GATT in th e Field of Dispute Settlement (Ar ticle XXIII:2) annexed to the 1979 
Understanding; paragraph 4 appears on page 635. 
5 US Initial Brief, para. 8.  
6 DSU Article 4.5 was a transposition of paragraph 4 in the Agreed Description of the Customary 
Practice of the GATT in the Field of Dispute Settlement annexed to the (Tokyo Round) Understanding 
Regarding Notification (BISD 26S/210;  The full text is set out in the GATT Analytical Index on page 635).  That provision refers to "action under Article XXIII:2."  As  discussed by Brazil, such  “actions” are multilateral 
actions by the CONTRACTING PARTIES, not individual action by a particular contracting party.  
7 US Initial Brief, para. 9. 
8 WT/DS267/1 at 3. 
9 WT/DS267/7. WT/DS267/R/Add.1 
Page A-32  
 
 DSB that considered the panel request.
10  The first official US assertion regarding special procedural 
requirements relating to the peace clause did not come  until a meeting in the office of the Director of 
the Legal Services Division, on 25 March 2003, on e week after the Panel was established on 18 
March 2003.   
10. In considering the US request for a specia l “peace clause” proceeding, the Panel should take 
note that the panel and Appellate Body in the US - FSC  dispute rejected US procedural claims of an 
allegedly defective EC consultation request.  In that  dispute the United States engaged in three rounds 
of consultations without mentioning the problem  once and then attempted to raise the defect 
consultations request as a preliminary objection to the panel.  The panel and the Appellate Body both 
rejected the objection.  As the Appellate Body found:   
 
It seems to us that, by engaging in consultations on three separate occasions, and not even raising its objections in the two DSB meetings at which the request for establishment of a panel was on the agenda, the United States acted as if it had 
accepted the establishment of the Panel in this  dispute, as well as the consultations 
preceding such establishment.  In these ci rcumstances, the United States cannot now, 
in our view, assert that the European Communities' claims under Article 3 of the SCM 
Agreement  should have been dismissed and that the Panel's findings on these issues 
should be reversed.
11  
11. In this dispute, the United States sat mute on the subject of peace clause procedures through 
three rounds of consultations and two DSB meetings.  Had the United States raised this particular 
procedural issue on a timely basis, other WTO Members may have reserved their rights under DSU Article 10.  To permit such an issue to be raised  on such an untimely basis also denies those other 
Members their rights under the DSU.  
III. THE NARROW INTERPRETATION OF THE WORD “ACTION” SUGGESTED BY 
THE UNITED STATES IS NOT SUPPO RTED BY ALL THREE AUTHENTIC 
VERSIONS OF THE AOA 
 
12. As argued in Brazil’s Initial Brief of 5 June , Brazil believes that the word action refers to 
collective actions of the WTO Members, and not to actions by individual Members.  Brazil further 
submits that the meaning  the United States tries to  impute to the word “action” is too narrow and 
inadequate.  13. Brazil recalls that the three versions of  the WTO Agreements are authentic.  The US 
interprets the word “action” in the English version as “legal process or  suit”.  Brazil agrees that this is 
a possible meaning of the word, but so is “the process or condition of acting or doing”; or “a thing 
done, a deed, an act...; habitual or ordinary deeds”.
12  Therefore, the word action in the English 
language could mean either a legal process or a simple act or deed.  14. The French version uses the word “action” which also allows both connotations.  It could 
have the ordinary connotation of: “ce que fait  qqn et par quoi il réalise une intention ou un 
impulsion;” “exercice de la faculté d’agir;” but it could also have the more specific meaning of the 
“exercice d’un droit en justice”.
13 
  
                                                      
10 WT/DSB/M/143, WT/DSB/M/145. 
11 WT/DS108/AB/R, “United States – Tax Treatmen t for “Foreign Sales Corporations”, para. 165. 
12 The New Shorter Oxford English Dictionary, 1993 edition. 
13 Le Petit Robert, Nouvelle édition ... 1982.  WT/DS267/R/Add.1 
 Page A-33 
 
 
 15. The Spanish version however does not allow such interpretative flexibility.  The word used in 
Article 13 is not the word “acción”, which would allow the arguable double meaning of the English and French versions: “resultado de hacer” or “ [e]n sentido procesal , derecho a acudir a un juez o 
tribunal ...”
14 (emphasis added).  The word used in Article 13 of the Spanish version is “medidas.”  
While “medidas” could mean “disposición, prevención ... tomar, adoptar medidas”15, it could not 
possibly have the connotation of a legal action.  Again, while the dictionary meanings of the word 
“acción” do include the poss ibility of a judicial  measure, the same is not true for the word “medidas”. 
 16. Therefore, the Panel must avoid an interpretation of Article 13 that is possible in only two of the authentic versions, while there is another plausi ble – and in fact more adequate – interpretation 
that is equally possible in all th ree authentic versions.  The Panel must accordingly reject the narrow 
interpretation suggested by the Un ited States for the word “action”. 
 
IV. THE OVERLY-BROAD US DEFINI TION OF “EXEMPT FROM ACTION” 
IMPROPERLY CREATES NEW OBLIGATIONS AND PROCEDURES NOT 
CONTEMPLATED IN THE AOA OR THE DSU 
 
17. The United States argues that the word “action”  means “all stages of the dispute, including 
the ‘bringing [of] a case,’ consul tations, and panel proceedings”.
16  Brazil agrees with the arguments 
advanced by Argentina17, the European Communities18 and India19 that this broad US interpretation 
would exempt measures allegedly covered by the “peace clause” exemption from any aspect of the 
DSU, including consultations.  As India and the Eur opean Communities correctly point out, the result 
would logically lead to two separate panel proceed ings – an initial proceeding deciding the peace 
clause issues, and after the issuance of a decision, the initiation of a second proceeding beginning with consultations to challenge the measures under the ASCM.
20  Yet, as these and other third parties 
highlight, there is no textual requirement or provision in the AoA, the DSU, or any other WTO 
provision for such a two-panel or two-stage process to resolve peace  clause issues.   
 
V. THE US PROPOSAL FOR A SEPARATE PROCEEDING FOR PEACE CLAUSE 
ISSUES WOULD EFFECTIVELY ADD AOA ARTICLE 13 TO THE CLOSED LIST OF SPECIAL AND ADDITIONAL PROVISIONS IN DSU APPENDIX 2 AND GIVE AOA ARTICLE 13 A SCOPE THAT WAS NOT INTENDED BY AOA DRAFTERS 
 
18. The United States’ initial brief makes no reference to DSU Appendix 2, even though this provision was a key issue raised in Brazil’s 23 May le tter to the Panel.  Brazil repeats that Appendix 2 
provides a closed list of all the “special and additional” provisions that trump the normal rules of dispute settlement under the DSU.  Article 13 does not appear in Appendix 2.  Set forth below are two 
additional reasons in support of this argument.   
 19. First, providing a special proceeding for dete rmining peace clause defences would effectively 
add Article 13 to DSU Appe ndix 2.  In the first dis pute settlement proceeding on Guatemala Cement, 
the panel found that Article 17 of the Anti-Dumping Agreement (ADA)  replaced the DSU system as a 
whole because ADA Articles 17.4-17.7 were listed as special and additional provisions in Appendix 2 
                                                      
14 Diccionario de la Lengua Española (Real Academia Española), vigésima segunda edición, 2001. 
15 Id. 
16 US Initial Brief para. 8.  
17 Argentina’s Third Party Initial Brief, para. 6;   
18 Initial Submission by the European Communities, paras. 6-7; 
19 India’s comments on preliminary issue regarding th e Peace Clause of the Agreement on Agriculture, 
para. 6.    
20 Initial Submission by the European Communities, para s. 6-7; India’s comments  on preliminary issue 
regarding the Peace Clause of the Agreement on Agriculture, para. 6.    WT/DS267/R/Add.1 
Page A-34  
 
 even though ADA Articles 17.1-17.3 were not included.
21  The Appellate Body reversed the panel’s 
implied determination to treat ADA Articles 17.1-17.3 as special and additional rules when it found that DSU provisions generally do not apply to  disputes brought pursuant to the ADA:     
 
Article 17.3 of the Anti-Dumping Agreement  is not listed in Appendix 2 of the DSU 
as a special or additional rule and procedur e.  It is not listed precisely because it 
provides the legal basis for consultations to be requested by a complaining Member under the Anti-Dumping Agreement.
22    
The special or additional provisions listed in Appendix 2 of the DSU are designed to 
deal with the particularities of dispute settlement relating to obligations arising under 
a specific covered agreement, while Article 1 of the DSU seeks to establish an 
integrated and comprehensive dispute settlement system for all of the covered agreements of the WTO Agreements as a whole. . . 
23  
20. The effect of the United States argument and in terpretation of “action” in this case would be 
to include AoA Article 13 as a special and additional rule in Appendix 2.  Were the Panel to agree 
with the United States, it would create a precedent for applying a special procedure whenever a peace 
clause defence might be invoked.  However, this is precisely what the Appellate Body rejected in Guatemala Cement, emphasizing that the WTO’s dispute settlement system is a unified  system, not 
one fragmented according to topic.
24  
 21. Second, the negotiating history confirms that  AoA Article 13 was not intended to alter normal 
dispute settlement procedures.  The concept of “due restraint” first appeared in Article 18.2 of the 
Agriculture text in the Dunkel Draft of December 1991, which provided:   
On the basis of the commitments undertaken in the framework of this Agreement, Members will exercise due restraint in the application of their rights under the 
General Agreement in relation to produc ts included in the reform programme.
25  
The concept of special and additional provisions and Appendix 2 then emerged during the work of the 
Legal Drafting Group on dispute settlement in Sp ring 1992.  The final Legal Drafting Group DSU text 
dated 15 June 1992 included AoA Article 18.2 in its Appendix 2, as a special and additional provision.
26  
 
22. The United States and the EC then reached the Blair House Agreements in November 1992, 
providing inter alia  for the Dunkel Draft text of Article 18.2 to  be deleted, and for the insertion in the 
AoA of a text corresponding to the present Article 13.  In the fall of 1993, the Institutions Group discussed both institutions and dispute settlement;  the DSU text resulting from its work, as circulated on 15 November 1993, placed AoA Article 18.2 in brackets.
27   
 
23. During this period, further discussions also took place on the AoA.  After a US-EU settlement 
in early December 1993 adjusting the Blair House de al, the Blair House changes as adjusted were 
                                                      
21 Guatemala – Anti-Dumping Investigation Re garding Portland Cement from Mexico, WT/DS60/R,  
22 WT/DS60/AB/R, para. 64.  
23 Id.,  para. 66. 
24 Id., para. 67. 
25 MTN/TNC/W/FA, 20 December 1991, page L.11.  
26 Brazil Exhibit 1 (hereinafter Brazil will refer to its exhibits as “Exhibit Bra-1,  2 , 3 etc.”) Excerpt of 
Draft Understanding on Rules and Procedures Governing the Settlement of Disputes , Job No. 968, 
15 June 1992.   
27 Exhibit Bra-2.  Excerpt of Draft Understanding on Rules and Procedures Governing the Settlement 
of Disputes , 15 November 1993.    WT/DS267/R/Add.1 
 Page A-35 
 
 
 made to the AoA.  In the December 15, 1993 Final Act, the text of the AoA reflected those changes 28, 
and Appendix 2 of the DSU29 included no reference to the AoA.  The negotiating record thus confirms 
that if negotiators had intended to include the peace clause in Appendix 2, they had ample opportunity to do so.  The changes in the “peace clause” co mponent of the Blair House agreements involved 
deleting former Article 18.2, which was a dispute settlement provision listed in Appendix 2, and 
substituting Article 13.  However,  although Article 13 limits the ultimate “action” that the DSB may 
take, as a drafting matter it is not placed together with the dispute settlement provisions of the AoA, it 
is not labeled as a dispute settlement provision, and it is not included in Appendix 2 of the DSU.  Reading Article 13 as the United States requests w ould be inconsistent with DSU Article 3.2 by 
impermissibly altering the balance of rights and ob ligations in the WTO and its dispute settlement 
procedures. 
 24. Furthermore, AoA Article 13 deliberately mak es no reference to any provisions relating to 
dispute settlement under the Agreement on Agriculture  itself (Article 19) or other relevant WTO 
Agreements (ASCM Articles 4 and 7; DSU or  GATT 1994 Articles XXII and XXIII).  The AoA 
Article 13 drafting denotes that Uruguay Round ne gotiators were concerne d about the relationship 
between substantive provisions of the SCM Ag reement (Articles 3, 5 and 6) and GATT 1994 
(Article XVI) and the substantive provisions on do mestic support and export subsidies under the AoA. 
In short, what Article 13 does is to protect Memb ers that comply with Article 13 conditions from 
actions derived from a violation of the substantive provisions cited therein, namely ASCM Articles 3, 5 and 6 and GATT 1994 Article XVI. What Article 13 does not, given the way it was drafted, is to 
shield Members from the dispute settlement procedures which would be necessary to identify or to 
confirm the substantive violation of those Articles.  25. Had the AoA drafters intended to carve dome stic support and/or expor t subsidy measures out 
of the WTO dispute settlement mechanism they would have done it expressly, but they did not.  This 
is further confirmed by the example of Article 6 of  the TRIPS Agreement, which clearly states that 
the issue of the exhaustion of intellectual pr operty rights cannot be addressed through dispute 
settlement.
30  Unlike AoA Article 13, TRIPS Article 6 expressly prohibits a Member from resorting to 
the WTO dispute settlement mechanism to challenge cer tain matters.  Against all these evident facts, 
the only argument the US has to read a prohibition to  resort to dispute settlement into Article 13 is 
based on a groundless definition of “action”, as shown above. 
 
VI. A SPECIAL PEACE CLAUSE PROCEDURE  WOULD AMOUNT TO HAVING THE 
PANEL ISSUE A DECLARATORY JUDGMENT FOR THE US AFFIRMATIVE DEFENCE 
 
26. Brazil’s request for the establishment of a pane l (as well as its consultation request) stated that 
the “United States has no basis to assert a defence unde r Article 13(b)(ii) . . . and Article 13(c)(ii) of 
the Agreement on Agriculture . . .”.
31  The third-party statements of the European Communities, 
Australia, and Argentina agree with Brazil’s descrip tion of the peace clause as a “defence”.  Each of 
these third parties agree that the United States is re quired to assert and prove that all the peace clause 
conditions apply.  For example, the European Communities stated that AoA Article 13  
 
can only be seen as a defence against a claim brought under other aspects of the WTO Agreements which regulate the provision of subsidies.  It would seem bizarre if, 
                                                      
28 MTN/FA II/A1A-3, Arts. 13, 19. 
29 MTN/FA II/A2, Appendix 2. 
30 TRIPs Article 6 reads: “ For the purposes of dispute settlement under this Agreement, subject to the 
provisions of Articles 3 and 4 nothing in this Agreement shall be used to address the issue of the exhaustion of 
intellectual property rights.”  
31 WT/DS267/7 WT/DS267/R/Add.1 
Page A-36  
 
 before Brazil could bring a claim with respec t to subsidies which it considered did not 
respect the US’s WTO obligations, Brazil had first to establish that potential US defences did not apply.
32  
27. In addition, Australia argues that “Article 13 is in the natu re of an ‘affirmative defence’ for 
measures which are inconsistent with the specified provisions”. 33 Argentina also takes the view that 
this provision is in the nature of an affirmative defence, stating that “the Member who alleges to be 
protected by the Peace Clause has the burden of pr oving the fulfillment of  its legal requirement”.34  
 28. The United States’ Initial Brief alleges in pa ragraph 2 that “the US support measures at issue 
conform with the Peace Clause”.  Based on this alle gation, the United States concludes that “Brazil 
cannot maintain any action – and the United States cannot be required to defend any such action. . .”
35  
The United States has not labeled this as a defence,  or an “affirmative defence”.  However, this 
assertion by the United States suggests its intent to invoke such a defence as part of its First Submission that it will file on 11 July 2003.
36    
 
29. Brazil agrees with the European Communities , Australia and Argentina that the peace clause 
is a defence requiring the United States – not Brazil – to demonstrate that it has met all of its conditions.  Brazil also agrees with the European Co mmunities that it would be bizarre if Brazil were 
required to establish that potential US defences did not apply before it could bring its own claims.  
And Brazil further agrees with the Eu ropean Communities that what th e United States is requesting in 
this dispute is effectively a “declaratory judgment” that the United States defe nces of the peace clause 
do or do not apply.   
 30. Brazil will present evidence in its First Su bmission that the US measures do not meet the 
conditions of the various peace clause provisions.  Braz il will do this because the United States is on 
record before this Panel in asserting that its support measures are fully in compliance with the peace 
clause.  However, Brazil is not required to pres ent any evidence on the peac e clause to assert its 
actionable and prohibited subsidy claims under the AS CM.  Rather, this is the US burden defending 
against Brazil’s various claims.  The time and place for the Panel to hear and consider any evidence 
proffered by the US in any such defence is during the normal panel process, as Brazil has argued in 
this Comments, in its Initial Brief and in its letter dated 23 May 2003.  There is no basis for the United States to demand, or for the Panel to grant,  a declaratory judgment that the US peace clause 
defences are legitimate or not.     
  
VII.   CONCLUSION 
 
31. For the reasons set forth above, Brazil’s Initial  Brief and its letter dated 23 May 2003, Brazil 
requests that this Panel find that it is not precl uded from hearing evidence and considering Brazil’s 
claims under the ASCM or Article XVI of GATT 199 4 without first concluding that the peace clause 
conditions of AoA Article 13(b)(ii) a nd 13(c)(ii) remain unfulfilled.   
                                                      
32 EC Initial Submisson, para. 6.   
33 Australia Initial Submission paras. 4-7.  
34 Argentina Initial Submission, para. 14.   
35 US Initial Brief, para. 2.   
36 By contrast, the United States did not invoke the peace clause defence in US - FSC even though the 
EC request for the establishment of a panel included claims under ASCM Article 3.1(a) with respect to export 
subsidies for agricultural products.  AoA Article 13(c) conditiona lly exempts those claims from “actions.”     WT/DS267/R/Add.1 
 Page A-37 
 
 
 ANNEX A-10 
 
 
COMMENTS OF THE UNIT ED STATES ON THE 
COMMENTS BY BRAZIL AN D THE THIRD PARTIES 
ON THE QUESTION POSED BY THE PANEL 
 
13 June 2003 
 
 
I.   OVERVIEW 
 
1. The United States thanks the Panel for this opportunity to provide its views on the comments by Brazil and the third parties on the question concerning Article 13 of the Agreement on Agriculture  
(“Agriculture Agreement”) posed by the Panel in its fax of 28 May 2003.
1  The interpretation of 
Article 13 (the “Peace Clause”) advanced by Brazil  and endorsed by some of the third parties is 
deeply flawed.  Simply put, Brazil  fails to read the Peace Clause acco rding to the customary rules of 
interpretation of public international law.  Its interpretation does not read the terms of the Peace Clause according to their ordinary meaning, ignores relevant context, and would lead to an absurd result.    
2. Brazil reads the Peace Clause phrase “exempt fr om actions” to mean only that “a complaining 
Member cannot receive authorization from the DSB [Dispute Settlement Body] to obtain a remedy  
against another Member’s domestic and export supp ort measures that otherwise would be subject to 
the disciplines of certain provisions of the Agre ement on Subsidies and Countervailing Measures . . . 
or Article XVI of GATT 1994'".
2  However, Brazil’s reading simply ignores parts of the definition of 
“actions” that it quotes:  "The dictionary definition of ‘actions’ is ‘the taking of legal steps to establish 
a claim  or obtain a remedy".3  Thus, while the United States w ould agree that the phrase “exempt 
from actions” precludes “the taking of legal steps to . . . obtain a remedy”, Brazil provides no explanation of why the term “exempt from actions” would not, based on its ordinary meaning, also 
preclude "the taking of legal steps to establish a claim".
4 
 
3. Brazil also bases its reading in part on the assertion that "[ i]n a multilateral system such as the 
WTO (like GATT 1947 before it), ‘acti ons’ are taken collectively by Members".5  Brazil cannot 
explain, however, why “actions” should be limited to only those actions taken collectively.  Read in 
the context of provisions in the WTO agreements in which the term “action” does not refer to collective action by Members, “action” in the Peace Clau se refers broadly to the “taking of legal steps 
to establish a claim or obtain a remedy”. 
 
                                                      
1 The Panel asked the parties to address: “[W]heth er Article 13 of the Agreement on Agriculture 
precludes the Panel from considering Brazil’s claims under the Agreement on Subsidies and Countervailing 
Measures in these proceedings in the absence of a pr ior conclusion by the Panel that certain conditions in 
Article 13 remain unfulfilled.  In particular, the Panel invites the parties to explain their interpretation of the 
words “exempt from actions” as used in Article 13 of th e Agreement on Agriculture, as well as bringing to the 
Panel’s attention any other relevant provisions of the c overed agreements and any other relevant considerations 
which the parties consider should guide the Panel’s consideration of this issue.” 
2 Brazil’s Brief on Preliminary Issue Regarding the “Peace Clause” of the Agreement on Agriculture, 
para. 2 (5 June 2003) (“Brazil’s Initial Brief”) (emphasis added). 
3 Brazil’s Initial Brief, para. 6 (emphasis added). 
4 See infra  part II.A. 
5 Brazil’s Initial Brief, para. 6 (footnote omitted). WT/DS267/R/Add.1 
Page A-38  
 
 4. In addition, Brazil’s suggested reading of the Pe ace Clause would lead to an absurd result.  If 
the phrase “exempt from actions” means nothing mo re than that “a complaining Member cannot 
receive authorization from the DSB to obtain a remedy”, then a panel would be perfectly free to make findings that a measure that conforms to the Peace Clause is inconsistent with the relevant provisions of the General Agreement on Tariffs and Trade 1994  (“GATT 1994”) or the Agreement on Subsidies 
and Countervailing Measures  (“Subsidies Agreement”).  Under the Understanding on Rules and 
Procedures Governing the Settlement of Disputes   (“DSU”), the DSB would be unable to avoid 
adopting the panel findings of inconsistency with the Subsidies Agreement or GATT 1994 or 
recommendations to bring the measure into confor mity, thus depriving the Peace Clause of any 
meaning.  
 
5. The remainder of Brazil’s argu ments do not go to a proper interpretation of the Peace Clause 
under the customary rules of interpretation of public international law and so do not assist in answering the question posed by the Panel co ncerning the Peace Clause.  Nonetheless, the 
United States addresses various of these misplaced concerns.  For example, Brazil argues that the 
Peace Clause is not a special or additional rule set out in Appendix 2 of the DSU; however, the Peace 
Clause need not be a special or additional rule b ecause the Panel may properly deal with the Peace 
Clause issue under normal DSU rules.  Brazil also tries to cite to unrelated issues in completely distinct disputes, arguing that so me of these other panels have delayed making “complex threshold 
findings” until final panel reports.  None of these pa nels is relevant since none of them has been 
presented with the issues presented by the Peace Clau se.  Brazil also asserts that consideration of 
alleged administrative burdens s hould override the plain meaning of the text of the Agriculture 
Agreement – an obviously erroneous approach.  6. As the United States explained in its initial brief on the Panel’s question
6, the phrase “exempt 
from actions” (read in accordance with the customar y rules of interpretation of public international 
law) means “not exposed or subject to” a “legal pr ocess or suit” or the “taking of legal steps to 
establish a claim”.  Therefore, Brazil cannot main tain any action – and the United States cannot be 
required to defend any such action – based on provisions specified in the Peace Clause since the US 
support measures for upland cotton conform to the Peace Clause.  7. In light of the correct inte rpretation of the Peace Clause, th e United States affirms that it 
respectfully requests the Panel to organize its procedures to first determine whether Brazil may 
maintain any action based on provisions exempted by  the Peace Clause.  Bifurcation of the legal 
issues in this proceeding is not only required under the Peace Clause but, as an exercise of the Panel’s discretion to organize its procedures, would assist the Panel in resolving the complex issues involved 
in this dispute in a logical and orderly fashion. 
 
II. BRAZIL’S INITIAL BRIEF DOES NOT READ THE PEACE CLAUSE ACCORDING 
TO THE CUSTOMARY RULES OF  INTERPRETATION  OF PUBLIC 
INTERNATIONAL LAW AND LEADS TO ABSURD RESULTS 
 
A.  THE ORDINARY MEANING OF “EXEMPT FROM ACTIONS” DOES NOT SUPPORT BRAZIL’S 
READING 
 
8. According to the customary rules of interpretation of public international law7, the terms of 
the Peace Clause should be interpreted according to their ordinary meaning in their context, in light of 
                                                      
6 Initial Brief of the United States of America on the Question Posed by the Panel, paras. 6-10 
(5 June 2003) (“US Initial Brief”). 
7 See DSU Article 3.2 (The dispute settlement system “serves to preserve the rights and obligations of 
Members under the covered agreements, and to clarif y the existing provisions of those agreements in 
accordance with customary rule s of interpretation of public international law.”).  WT/DS267/R/Add.1 
 Page A-39 
 
 
 the object and purpose of the Agriculture Agreement.8  The United States agrees completely with 
Brazil in terms of the dictionary definition of “actions”.  Under that definition, “action” means "the taking of legal steps to establish a claim  or obtain a remedy".
9  As the Panel’s question has 
highlighted, one of th e key issues in this dispute is whether the Peace Clause permits Brazil to “take 
legal steps” so Brazil can “establish ” its Subsidies Agreement “claims”. 
 
9. Yet, as soon as Brazil provides the correct defi nition of “action”, Brazil urges an approach 
that would ignore it.  Combining this definition with that for the word "exempt"10, Brazil reads the 
term “exempt from actions” to mean “that a complaining Member cannot receive authorization from the DSB to obtain a remedy against another Member ’s domestic or export support measures that are 
‘peace clause’ protected".
11  Strikingly, neither Brazil nor any of the third parties who share this 
interpretation12 provides any basis in the text of the Peace Clause for ignoring that portion of the 
definition of “actions” that refers to “the taking of legal steps to establish a claim".13 
                                                      
8 The customary rules of interpretation of public international law are reflected in part in Article 31(1) 
of the Vienna Convention, which reads: “A treaty sha ll be interpreted in good faith in accordance with the 
ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and 
purpose.” 
9 Brazil’s Initial Brief, para. 6 (emphasis added). 
10 Brazil has quoted the definition of the word “exempt” when used as a verb.  See The New Shorter 
Oxford English Dictionary , vol. 1, at 878 (1993 ed.) (first definition as transitive verb: “Grant immunity or 
freedom from or from  a liability to which others are subject”) (italics in original).  However, if used as a verb in 
the Peace Clause, the correct form of “exempt” would be “shall be exempted  from actions.”  See id. , vol. 1, at 
878 (examples for first definition of “exempt” as verb: “J. A.  FROUDE  Clergy who committed felony were no 
longer exempted  from the penalties of their crimes.  R. D.  LAING  I was exempted  from military service because 
of asthma.”) (italics added).  As used in the Peace Clause in the construction “shall be . . . exempt  from actions,” 
“exempt” is an adjective.  See id. , vol. 1, at 878 (examples of “exempt” as used in first definition as adjective: 
“R.C.  TRENCH  They whom Christ loves are no more exempt  than others from  their share of earthly trouble and 
anguish.  J.  BERGER  He is exempt  on medical grounds from  military service.”) (italic s added).  Therefore, the 
correct definition of “exempt” as used in the Peace Clause  is “[n]ot exposed or subj ect to something unpleasant 
or inconvenient; not liable to a charge, tax, etc. (Foll. by from, of .).”  Id., vol. 1, at 878 (first definition as 
adjective) (italics in original). 
11 Brazil’s Initial Brief, para. 9; see id. , para. 8. 
12 Regrettably, none  of the third parties (save Australia) even attempts to read the Peace Clause – and in 
particular the phrase “exempt from actions” – according to the customary rules of interpretation of public 
international law.  Australia does offer an interpreta tion of “exempt from actions based on” purportedly using 
the ordinary meaning of the terms, but it appears that Au stralia has interpreted “exempt from actions” merely by 
quoting a definition for “ exempt.”  Compare  Comments of Australia on Question Posed by Panel, para. 7 & 
n. 3, with Black’s Law Dictionary  at 593 (7th ed. 1999) (definition of “e xempt” as adjective: “Free or released 
from a duty or liability to which others are held.”).  Th at is, Australia’s interpretation ascribes no meaning to the 
words “from actions,” reducing them to inutility.  In a ddition to failing to provide any definition for “actions,” 
Australia also fails to examine any context for that term in the DSU and the Subsidies Agreement.  See US 
Initial Brief, paras. 7-10. 
13 Argentina reads “exempt from actions” as meaning that “a finding of inconsistency with 
Articles XVI of GATT 1994 or Articles 3, 5 and 6 of SCM Agreement will not be possible if the legal 
requirements for the exemption are fulfilled.”   Comments by Argentina on Question Posed by Panel, para. 5.  
However, in making this assertion, Argentina neither pr ovides nor attempts to distinguish the ordinary meaning 
of “action” as the “taking of legal steps to establish a claim or obtain a remedy.”  Nor does Argentina explain 
why, if Members only meant to preclude “a finding of inconsistency” with specified provisions, they did not 
simply use the word “finding” – for example, “measures . . . shall be . . . exempt from findings based on” certain specified provisions – when the term “finding” is used at least 12 times in the DSU.  See, e.g. , DSU Article 7.1 
(standard panel terms of reference include “mak[ing] such findings as will assist the DSB in making the 
recommendations or in giving the rulings provided for in that/those agreement(s)”); DSU Article 11 (panel should make an objective assessment of matter before it, including “such other findings as will assist the DSB in 
making the recommendations or in giving the rulings provided for in the covered agreements”); DSU WT/DS267/R/Add.1 
Page A-40  
 
  
10. As the United States has demonstrated, the ordinary meaning of “action” encompasses not 
only the “taking of legal steps to . . . obtain a remedy” but also the “taking of legal steps to establish a claim”.  Other dictionary definitions  of “action” – such as “the right to institute a legal process”, “[a] 
legal process or suit”, “a lawsuit brought in court”, “a formal complaint”, “a legal or formal demand of one’s right”, and “all the formal proceedings in  a court of justice attendant upon the demand of a 
right made by one person of another in such court"
14 – provide additional support for this reading.  
Thus, while the United States agrees that the phras e “exempt from actions” would also preclude “the 
taking of legal steps to . . . obtain a remedy"15, the United States disagrees with Brazil that one may 
ignore that “exempt from actions” also precludes “the taking of legal steps to establish a claim.”  Nothing in the text of the Peace Cl ause authorizes departing from th e ordinary meaning of the Peace 
Clause phrase “exempt from actions” to narrow this text to refer solely  to "obtaining a remedy".
16 
 
B.  THE CONTEXT FOR “EXEMPT FROM ACTIONS” DOES NOT SUPPORT BRAZIL’S READING 
 
11. In its analysis of the phrase “exempt from actions”, Brazil quickly moves beyond the ordinary meaning of the term “action”  it quotes (which enco mpasses “the taking of legal steps to establish a 
claim”) to examine what it deems relevant context for the term.  Brazil asserts that “[i]n a multilateral 
system such as the WTO (like GATT 1947 before it),  ‘actions’ are taken collectively by Members"
17, 
citing DSU Article 2.1 (last sentence), GATT 1994 Article XVI:1, and DSU Article 2218, and 
concludes: "In sum, ‘actions’ are multilaterally  agreed decisions of WTO bodies including the 
DSB."19  Brazil’s argument overlooks the fact that there are numerous instances in various WTO 
agreements in which the term “action ” is used to refer to action by an individual Member, not just 
collective action by Members. 
 
12. Brazil notes that the term “actions” is sometimes used in the DSU to refer to collective “decisions or actions” by the DSB.
20  This observation is accurate, but the conclusion that Brazil 
draws from it is a non sequitur .  The fact that the term “action” can mean “collective decision or 
action by the DSB” does not imply th at the term “action” can mean only “collective decision or action 
by the DSB”. 
 13. Brazil has moreover failed to consider those instances in which the term  “action” is used to 
refer to individual action by Members.
21  For example, Article 3.7 of the DSU, which states that 
“[b]efore bringing a case, a Member shall exercise its judgement as to whether action under these 
                                                                                                                                                                     
Article 12.7 (panel “shall submit its findings in the form  of a written report to the DSB”). There is no basis in 
the text or context of the Peace Clause to read  “actions” to be limited to  “panel findings”. 
14 US Initial Brief, para. 7. 
15 Indeed, this necessarily follows from the fact that, if a party cannot take legal steps to establish a 
claim, it will also be precluded from obtaining a remedy. 
16 We also note that Brazil’s approach of inte rpreting “exempt from actions” as “cannot receive 
authorization . . . to obtain a remedy” appears to overlook the “taking of legal steps” component of even the 
“remedy” portion of the definition of “ action”. 
17 Brazil’s Initial Brief, para. 6 (footnote omitted). 
18 Brazil also asserts that “‘[a]ctions’ include decisi ons made by the Dispute Settlement Body (DSB) to 
adopt rulings and recommendations of panels and the Appellate Body” but provides no reference to a provision of the DSU to support the assertion.  Neither DSU Artic le 16.4 (on adoption of panel reports) nor DSU Article 
17.14 (on adoption of Appellate Body reports) uses the te rm “action” to describe a DSB decision to adopt panel 
and Appellate Body rulings and recommendations. 
19 Brazil’s Initial Brief, para. 6. 
20 For example, Brazil quotes DSU Article 2.1, whic h states that “[w]here the DSB administers the 
dispute settlement provisions of a Plurilateral Trade Agre ement, only those Members that are parties to that 
Agreement may participate in decisions or actions taken by the DSB with respect to that dispute.” 
21 See US Initial Brief, paras. 8-9.  WT/DS267/R/Add.1 
 Page A-41 
 
 
 procedures would be fruitful,” does not by its terms refer to “multilaterally agreed decisions of WTO 
bodies including the DSB”.  Similarly, Article 4.5 of the DSU states: “ In the course of consultations  
in accordance with the provisions of a covered agreement, before resorting to further action  under this 
Understanding, Members should attempt to obtain satisfactory adjustment of the matter” (emphasis added).  In the Subsidies Agreement, subsidie s are divided into prohibited, actionable, and 
non-actionable categories, and a Member may im pose countervailing duties against prohibited and 
“actionable” subsidies without first obtaining authori zation through a “multilaterally agreed decision[] 
of WTO bodies including the DSB".
22  Brazil’s interpretation is at odds with all of these provisions – 
for example, since during consultations the DSB will not have taken any action with respect to a 
dispute, how could a Member attempt to settle a matter before resorting to further  action?  These 
provisions make clear that, read in the context of the DSU and the Subsidies Agreement, “actions” has 
a broader scope than Brazil would like: as indicated by its ordinary meaning, “actions ” refers to “the 
taking of legal steps to establish a claim or obtain a remedy,” encompassing all stages of a dispute – 
obtaining DSB authorization for retaliation would only constitute one, final step.23 
 
14. Indeed, had Members intended the scope of the P eace Clause to be limited solely to collective 
decisions taken by the DSB, they could have used  in the Peace Clause the same construction as used 
in DSU Article 2.1 – for example, “measures . . . sh all be . . . exempt from actions taken by the DSB 
based on” specified provisions.  Members did not do so, however. 
 15. Finally, the United States notes that Brazil  has asserted that GATT 1994 Article XVI:1 and 
DSU Article 22 provide relevant context for the term “actions”.  However, neither of these provisions uses the term “action” at all
24, and they do not support Brazil’s assertion that “actions” in the Peace 
Clause must be read to refer solely to “multilaterally agreed decisions of WTO bodies including the 
DSB.”  Similarly, Brazil refers to GATT 1994 Article  XXV, entitled “Joint Action by the Contracting 
Parties.”  The fact that the drafters referred to this one kind of “action” as joint action only reinforces 
that the term “action” by itself is not intended to be limited to only “joint” or “collective” action.  The 
phrase “contracting parties acting jointly” in  Article XXV would be unnecessary if Brazil’s 
interpretation of “ac tion” were correct.25 
 
                                                      
22 Members are obligated to “take all necessary steps to ensure that the imposition of a countervailing 
duty on any product of the territory of any Member imported into the territory of another Member is in 
accordance with the provisions of Ar ticle VI of GATT 1994 and the terms of this Agreement.”  Subsidies 
Agreement, Article 10 (footnote omitted).  See also  GATT 1994 Article VI:6 (requiring multilateral approval of 
certain exceptional anti-dumping and countervailing duties). 
23 We note that Argentina implicitly concedes that relevant context in the Subsidies Agreement for the 
phrase “exempt from actions” suggests that the term is no t limited to decisions or actions taken by the DSB.  
Argentina recognizes that “[i]t is true that Article 7 of the SCM Agreement states that the request of 
consultations is subject to Article 13 of the AoA”.  Arge ntina’s Third Party Initial Brief, para. 13.  This would 
appear to contradict its reading of “the word ‘actions’ in the context of Article 13 of the AoA [as] refer[ring] to 
decisions of WTO competent bodies, such as the DSB when it discharges its duties by establishing a panel,” id., 
para. 6.  That is, if the Peace Clause precludes a request  for consultations by a Me mber under Article 7 of the 
Subsidies Agreement, the term “actions” in the Peace Clause cannot solely refer to “decisions of WTO 
competent bodies”. 
24 See, e.g.,  GATT 1994 Article XVI:1 (“In any case in which it is determined that serious prejudice to 
the interests of any other contracting party is caused or threatened by any such subs idization, the contracting 
party granting the subsidy shall, upon request, discuss w ith the other contracting party or contracting parties 
concerned, or with the C ONTRACTING PARTIES , the possibility of limiting the subsidization.”); DSU Article 22.6 
(“When the situation described in paragraph 2 occurs, the DSB, upon request, shall grant authorization to 
suspend concessions or other obligations within 30 days of the expiry of the reasonable period of time unless the 
DSB decides by consensus to  reject the request.”). 
25 See GATT 1994 Article XXV (“Wherever reference is made in this Agreement to the contracting 
parties acting jointly they are designated as the C ONTRACTING PARTIES . ”). WT/DS267/R/Add.1 
Page A-42  
 
 C.  BRAZIL’S INTERPRETATION OF THE PEACE CLAUSE WOULD LEAD TO ABSURD 
RESULTS 
 
16. Brazil’s suggested reading of the Peace Clause would rob this provision of any real meaning.  
Brazil would expose measures that conform to the Pe ace Clause to finding of inconsistency with the 
relevant GATT 1994 and Subsidies Agreement provi sions and would expose them to retaliation 
unless  the complaining party were to agree not to adopt the findings or authorize retaliation.   
 
17. Under Brazil’s interpretation, the phr ase “exempt from actions” means only that “a 
complaining Member cannot receive authorization from the DSB to obtain a remedy” – that is, the Peace Clause would exempt conforming measures from actions taken by the DSB to authorize 
remedies but not from findings by the Panel.  A panel would therefore be perfectly free to make 
findings in its final report that a challenged measure that conforms to the Peace Clause is inconsistent 
with, inter alia , the Subsidies Agreement.  Under the DSU, the DSB would be unable to avoid 
adopting the panel findings of inconsistency with the relevant GATT 1994 or Subsidies Agreement 
provisions or recommendations to br ing the measure into conformity.
26  Panel reports are adopted 
automatically by the DSB under the “negative consensus” rule27 and authorization to retaliate is also 
automatically given unless the DSB de cides by consensus against this.28  As a result, the DSB could 
not decline to adopt the report or authorize remedies unless the complaining party agreed.  Thus, 
under Brazil’s reading, the phrase “measures . . . shall be . . . exempt from actions” in the Peace 
Clause would exempt conforming measures from DSB authorization to retaliate, but only if  the 
complaining Member itself agreed not to authorize a remedy.  This would be a strange and strained interpretation of the Peace Clause indeed and would effectively render it inutile, contrary to customary rules of treaty interpretation.  
18. This absurd result would also conflict with  the object and purpose of the Peace Clause and the 
Agriculture Agreement: namely, to exempt agricult ural subsidies, under certain conditions, from the 
subsidies disciplines of the Subsidies Agreement and GATT 1994 while Members continue negotiations to move towards the “long-term objective . . . to provide for substantial progressive reductions in agricultural support and protecti on sustained over an agreed period of time".
29  Brazil 
also has not explained why, on its reading, Members would have chosen to allow actions, with all of 
their attendant burden on Members’ (and the WTO’s) resources, up to but not including authorization 
for retaliation.    
                                                      
26 Under DSU Article 19, “[w]here a panel or th e Appellate Body concludes that a measure is 
inconsistent with a covered agreement, it shall recomm end that the Member concerned bring the measure into 
conformity with that agreement.”  DSU Article 19 (emphasis added) (footnote omitted). 
27 Under DSU Article 16, a panel report “shall be adopted at a DSB meeting unless a party to the 
dispute formally notifies the DSB of its decision to appeal or the DSB decides by consensus not to adopt the report”.  DSU Article 16.4 (footnote omitted). 
28 When a Member “fails to bring the measure found to be inconsistent with a covered agreement into 
compliance therewith or otherwise comply with the recommendations and rulings” and compensation cannot be agreed, the complaining party Member may request authorization from the DSB to suspend concessions, DSU 
Article 22.2, and “the DSB, upon request, shall grant auth orization to suspend concessions or other obligations 
within 30 days of the expiry of the reasonable period of time unless the DSB decides by consensus to reject the request”, DSU Article 22.6. 
29 Agriculture Agreement, preamble (third paragraph).  WT/DS267/R/Add.1 
 Page A-43 
 
 
 III. BRAZIL’S INITIAL BRIEF RAISES A NUMBER OF MISGUIDED CONCERNS 
WHICH CANNOT UPSET THE BALANCE OF RIGHTS AND OBLIGATIONS OF MEMBERS UNDER THE PEACE CLAUSE AND DO NOT SUPPORT CONSIDERING BOTH THE APPLICABILITY OF THE PEACE CLAUSE AND BRAZIL’S SUBSTANTIVE CLAIMS TOGETHER 
 
19. Brazil has advanced a number of other arguments, which relate neither to the ordinary meaning and context of the phrase “exempt from ac tions” nor to the object and purpose of the Peace 
Clause and the Agreement on Agriculture .  These arguments are thus not relevant to the Panel’s task 
of clarifying the meaning of the Peace Clause in a ccordance with customary rules of interpretation of 
public international law.  Nonetheless, an examinat ion of each of Brazil’s arguments reveals that none 
of these concerns is well-founded.  
A. THE PANEL MAY EXAMINE THE APPLICABILITY OF THE PEACE CLAUSE UNDER 
NORMAL DSU RULES 
 
20. Brazil argues that because Article 13 is not a special or additional rule set out in Appendix 2 
of the DSU, Peace Clause issues must be resolv ed using normal DSU rules and procedures, which 
Brazil believes would prohibit reach ing the Peace Clause issue first.  Brazil errs on two counts.  There 
was no need to designate Article 13 of the Agricult ure Agreement as a special or additional rule 
precisely because  the Panel may properly deal with the Peace Clause issue using the flexibility 
inherent in the normal DSU rules.  The DSU, in Ar ticles 12.1 and 12.2, provides the Panel with all the 
authority it needs to organize its working procedur es as it considers best to resolve the matter in 
dispute.30  Under DSU Article 12.1, the Panel is give n the authority to determine its own working 
procedures "after consulting the parties to the dispute".31  Under DSU Article 12.2, moreover, the 
Panel is charged with establishing panel procedures with "sufficient flexibility so as to ensure 
high-quality panel reports".32 
 21. Brazil itself has conceded th e Panel’s broad authority to establish its procedures in its letter of 
23 May 2003, when it wrote of objections relati ng to the scope of a panel request under DSU 
Article 6.2:  "The decision on how to handle such preliminary objections procedurally is a matter of 
panel discretion ".
33  Thus, Brazil implicitly recognizes that the Panel already has the flexibility and 
the authority under normal DSU rules to organize it s procedures to consider and dispose of the Peace 
Clause issue first.  There is no need  for the Peace Clause to be listed  as a “special or additional rule 
and procedure” in DSU Appendix 2 because under normal DSU rules the Panel may bifurcate the 
proceedings in order to respect the balance of rights and obligations of Members under the Peace 
Clause and the Agriculture Agreement – that is, to  ensure that conforming US measures are “exempt 
from actions based on” provisions  specified in the Peace Clause. 
 
                                                      
30 See Comments by the European Communities on certain issues raised on an initial basis by the 
Panel, para. 8 (“In conclusion, the Panel has substantia l discretion in deciding how it will manage these issues. 
Article 12.1 DSU makes it quite clear that the Working Procedures set out in Appendix 3 of the DSU may be 
departed from if the Panel decides this is appropriate.”). 
31 DSU Article 12.1 (“Panels shall follow the Working Procedures in Appendix 3 unless the panel 
decides otherwise after consulting with the parties to the dispute. ”). 
32 DSU Article 12.2 (“Panel procedures should provide sufficient flexibility so as to ensure high-quality 
panel reports, while not unduly delaying the panel process.”). 
33 Letter from Ambassador Luiz Felipe de Seixas Co rrêa, Permanent Mission of Brazil, to Mr. Dariusz 
Rosati, Chairman of Panel, at 3 (23 May 2003) (emphasi s added).  The carry-over paragraph continues: “Where 
preliminary objections have been resolved in advance of other claims, normally they have been resolved in the 
panel’s first meeting, on the basis of the first round of submissions and oral statements.” WT/DS267/R/Add.1 
Page A-44  
 
 22. The United States notes that the Appellate Body has urged panels to adopt working 
procedures providing for preliminary rulings to deal with threshold jurisdictional issues
34, even 
though there are no “special and additional rules” in the DSU providing for these.  In addition, we note that Article 10.3 of the Agriculture Agreement (the  same agreement at issue here) is not listed as 
a “special and additional rule,” but  panels and the Appellate Body ha ve made clear that this provision 
nonetheless governs dispute settlement proceedings by shifting the burden of proof to the responding 
party.
35 
 
23. Finally, Brazil relies on Article 11 of the DSU – pursuant to which a panel “should make an 
objective assessment of the matter before it, including  an objective assessment of the facts of the case 
and the applicability of and conformity with th e relevant covered agreements” – to support its 
position.  Brazil’s reliance on Article 11 is misplaced as shown by a simple examination of the text of 
Article 11.  Article 11 provides the standard of review for panels; it does not guide the procedure used 
by panels.  According to Brazil, DSU Article 11 so mehow mandates that a panel review “all the facts 
including rebuttal facts,” hold two panel meetin gs, and allow for the exchange of rebuttal 
submissions.36  Brazil’s argument is untenable; it would read Article 11 to mandate  a particular series 
of meetings and submissions when Article 11 does not set out any particular procedural steps through 
which a panel “should make an objective assessment of  the matter before it.”  At the same time, 
Brazil argues that the Panel may not , consistent with Article 11, consider the applicability of the Peace 
Clause first because "Article 11 contains no re quirement for a special briefing, meeting or 
determination by a panel to resolve such applicability or exemption."37  Of course, there is nothing in 
the text of Article 11 that supports reading this provision to preclude the Panel’s bifurcating the 
proceeding to respect the balance of rights and oblig ations in the Peace Clause.  However, to be 
consistent with its own argument, Brazil should al so read Article 11 not to mandate any particular 
number or sequence of procedural steps (such as those set out in DSU Appendix 3) that are not required under its terms.  
B. NO PREVIOUS PANEL REPORT HAS EXAMINED THE PEACE CLAUSE, AND OTHER 
PROCEDURAL PROVISIONS CITED BY BRAZIL DO NOT CONTAIN THE PHRASE “SHALL 
BE . . . EXEMPT FROM ACTIONS” 
 
24. Brazil suggests that deciding the issue of the applicability of the Peace Clause in advance of 
Brazil’s substantive Subsidies Agreement and GA TT 1994 claims is "contrary to the practice of 
earlier panels".38  Of course, there is no such practice since this  is the first dispute to face this issue.   
 25. Brazil also argues that there are “a number of other threshold issues in WTO Agreements” but 
that "none of these provisions have special a nd additional rules to provide for extraordinary 
preliminary briefings, meetings, and determinations  prior to a panel hearing on all of the claims 
presented".
39  Brazil’s invocation of previous panel proceedings is inapt.  Brazil has not asserted that 
any of the “threshold” provisions in other WTO agreem ents that it cites or that  have been interpreted 
by previous panels contain the same language as the Peace Clause (that is, “shall be . . . exempt from 
                                                      
34 See Appellate Body Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas , WT/DS27/AB/R, para. 144. 
35 See Appellate Body Report,  Canada – Measures Affecting the Importation of Milk and the 
Exportation of Dairy Products , WT/DS103/AB/RW2, WT/DS113/AB/RW2, paras. 67-75 (second recourse to 
DSU Article 21.5). 
36 See Brazil’s Initial Brief, paras. 11-16. 
37 Brazil’s Initial Brief, para. 16; see id. , para. 11 (“Thus, resolution of the ‘peace clause’ issues . . . 
must be resolved using normal DSU rules and procedures.”). 
38 Brazil’s Initial Brief at 7 (heading IV). 
39 Brazil’s Initial Brief, para. 21.  WT/DS267/R/Add.1 
 Page A-45 
 
 
 actions”).40  Indeed, it is striking that Brazil studiously  avoids comparing the text of any of these 
provisions with the text of the Peace Clause.41 
 26. Given the fact that none  of the other provisions cited by Brazil contains Peace Clause-like 
language, these provisions have little relevance for th e Panel’s interpretation of the Peace Clause.  At 
most, the relevance of these provisions lies in the fact that such “ threshold” provisions do not use 
language that certain measures “shall be . . . exempt from actions.”  This suggests that the distinct language of the Peace Clause was intended to provide a distinct right, and one that differs from rights provided by these other WTO provisions.  
27. We also note Brazil’s argument that in the “closest case to the peace  clause issue presented 
here” – that is, Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R – there was 
“never a suggestion or finding that the panel erre d by not conducting a special briefing and special 
determination” on the “threshold issue whether Braz il was in compliance with Article 27.4” of the 
Subsidies Agreement.  From the Appellate Body repo rt, it would appear that the Appellate Body did 
not address it because no party suggested that this threshold issue had to be taken up as a first stage of 
the proceeding.  Nonetheless, the Appellate Body found that the panel erred in not considering the threshold Article 27.4 issue first.  The Peace Clause  language (“measures . . . shall be . . . exempt 
from actions”) is different and even stronger in requiring that the Peace Clause be taken up first and 
separately, with findings, prior to any consideration of the relevant GATT 1994 and Subsidies Agreement provisions. 
 
C. BRAZIL WILL NOT BE PREJUDICED BY SEPARATE HEARINGS AND BRIEFINGS ON THE 
PEACE CLAUSE ISSUE 
 
28. Brazil, referring to its 23 May letter, argues that it will be prejudiced if the Panel considers 
separately the issue of the applicability of the Peace Clause from Brazil’s substantive claims as this will disrupt "Brazil’s efforts to make a c oherent and unified presentation of its case"
42 and result in 
greater expense to Brazil "in having to bring its legal and economic experts to Geneva for an extra 
meeting."43  Of course, any concerns that Brazil’s presentation of its case may be affected cannot 
supersede the rights and obligations of Members as  set out in the covered agreements – including the 
Peace Clause.  In fact, the Peace Clause resolves any issue of how to account for burdens on parties since it provides that the responding party’s measures are exempt from any action based on the relevant GATT 1994 and Subsidies Agreement provisi ons – it exempts the responding party from the 
burden of having to respond to the complaining part y’s claims.  Brazil ignores this aspect of the Peace 
Clause.  In any event, we note that bifurcating this proceeding to ensure  that these conforming US 
measures are exempt from action based on Peace Clause-specified provisions will reduce , rather than 
increase, the amount of work involved for both parties.  Here, dealing with the Peace Clause issue 
first will resolve that part of the dispute, savi ng both parties further work, since the US measures 
conform to the Peace Clause.  And in  general, such an approach simply means that a panel would deal 
                                                      
40 For example, arguments that a particular claim is not within a panel’s terms of reference under DSU 
Article 6.2 do not involve any textual mandate that measures “shall be . . . exempt from actions.”  What Brazil calls the “closest case to the peace clause issue presen ted here” involved Articles 27.2(b) and 27.4 of the 
Subsidies Agreement, neither of which says that measures “shall be . . . exempt from actions based on” specified 
provisions.  See Brazil’s Initial Brief, para. 19 (quoting Appellate Body discussion of Subsidies Agreement 
Articles 27.2(b) and 27.4 in Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R; Subsidies 
Agreement Article 27.2 states that the “prohibition of paragraph 1(a) of Article 3 shall not apply to” developing 
country Members in compliance with Article 27.4).  Other provisions cited by Brazil (Article 1 of the General 
Agreement on Trade in Services , Article 2 of the Agreement on Technical Barriers to Trade , and Annex I of the 
Agreement on Government Procurement ) similarly do not provide a legal right not to be subject to actions. 
41 See Brazil's Initial Brief, paras. 18-21. 
42 See Brazil’s Initial Brief, paras. 17. 
43 Brazil’s Initial Brief, para. 22. WT/DS267/R/Add.1 
Page A-46  
 
 in sequence with the issues it would otherwise have to confront in a dispute.  Because no additional 
issues would be covered (and needless work on certain claims might be avoided) , it would not appear 
that additional effort on the part of a panel or the parties would be required. 
 29. We also note in any event that Brazil’s con cerns about duplication of its factual presentation 
and increased expense seem overstated.  Even if this were a dispute where the relevant measures did 
not conform to the Peace Clause, Brazil misunderstands  the process.  The fact that some of the same 
evidence might be relevant to Peace Clause as well as Subsidies Agreement claims does not mean that 
the evidence would have to be intr oduced twice.  Once Brazil’s factual evidence were introduced, if it 
were relevant to later stages of the proceeding,  it could of course be used for that purpose.
44  Thus, 
there should be no duplication of its factual presen tation and no additional burden to Brazil on that 
count.  Similarly, with respect to  concerns about the additional e xpenditure of resources should the 
Panel bifurcate this proceeding, the full-time pres ence of Brazil’s private-sector counsel in Geneva 
should alleviate some of the expense that extra meetings (which there is no reason to assume would be needed since the US measures conform to the Peace Clause) might entail.  In  any event, however, the 
United States finds it difficult to believe that Brazil would bring an action with claims under 17 
different provisions of the WTO agreements with respect to programs under at least 12 US statutes and not expect that the resulting dispute woul d involve additional complications and all the 
accompanying demands for time and resources.  30. Finally, the United States notes that Brazil h as raised the issue that separate hearings and 
briefing on the Peace Clause issue "would cause it prejudice because there would be significant[] 
delays in the resolution of its claims – many of which do not implicate the peace clause".
45. While, on 
its face, Brazil’s list of “non-peace clause claims” appears to include claims based on provisions specified in the Peace Clause
46, Brazil’s point is not raised by the Panel’s question.  If the Panel 
requests the parties to give their views on the question of what should happen with any claims in this 
action based on provisions not  specified by the Peace Clause, th e United States would be pleased to 
do so.  
IV. WERE THE PANEL TO CONSIDER THAT  THE PEACE CLAUSE DOES NOT REQUIRE 
THAT THE PANEL DETERMINE WHETHER US MEASURES ARE EXEMPT FROM 
ACTIONS BEFORE CONSIDERING BRAZIL’S SUBSIDIES AGREEMENT AND GATT 1994 
ARTICLE XVI ACTION, THE PANEL SHOULD EXERCISE ITS DISCRETION TO 
BIFURCATE THE PROCEEDING  
 
31. Putting aside the arguments related to prej udice and expense which have been discussed 
above, the United States notes that, in the course of  allegedly discussing the “context” for the Peace 
Clause, Brazil makes an argument that speaks not to  any relevant context but to the Panel’s exercise 
of its discretion to organize its procedures.  Brazil argues that the “close overlap of proof for both 
peace clause and actionable and prohibited subsidy claims highli ghts the need for the Panel to 
examine all the ‘facts of the case’ together".47  First, in this context, the United States has noted, and 
Brazil and the European Communities apparently agr ee, that the Panel enjoys significant discretion 
under DSU Articles 12.1 and 12.2 to organize its work ing procedures as it considers best to resolve 
the matter in dispute.   
 
                                                      
44 To put it simply, “Brazil exhibit 419” (for example) would remain “Brazil exhibit 419” – it would 
not change simply because it was now being cited in a different argument. 
45 Brazil’s Initial Brief, para. 23. 
46 Brazil argues that its “non-peace clause claims in clude . . . Article XVI:3 of GATT 1994 involving 
all domestic and export subsidies cha llenged by Brazil.”  Brazil’s Initial Br ief, para. 23.  However, the Peace 
Clause explicitly states that conforming “export subsidies . . . shall be . . . exempt from actions based on Article XVI of GATT 1994.”  Agriculture Agreement, Article 13(c)(ii). 
47 Brazil’s Initial Brief, para. 15.  WT/DS267/R/Add.1 
 Page A-47 
 
 
 32. However, even were the Panel to conclude  that Article 13 does not require the Panel to 
determine whether US measures are in breach of the Peace Clause and no longer “exempt from 
actions based on” specified provisions, the significa nce and wording of the Peace Clause in this 
dispute would mean that the Panel should exercise its discretion to bifurcate this proceeding.  The 
Peace Clause would remain a significant, decisive i ssue.  As noted above, bifurcating the proceedings 
would save both parties as well as the Panel significant time and work since it will render it 
unnecessary to address the relevant GATT 1994 and Subsidies Agreement claims.  33. Furthermore, given that Brazil has signall ed that its Peace Clause arguments alone will 
involve "the presentation of considerable fact ual evidence and expert econometric testimony"
48, it 
would appear that to hear Brazil’s substantive clai ms at the same time would significantly complicate 
the Panel’s work.  The apparent complexity of  Brazil’s Peace Clause evidence also calls into 
significant question the likelihood that the timetable requested by Brazil is realistic with respect to the legitimate interests of the United States to defend its position.  Finally, we note that, by seeking to have the Panel consider both the Peace Clause issue and Brazil’s substantive claims at the same time, 
Brazil may be attempting to prejud ice the US rights of defence – part icularly since, even on Brazil’s 
mis-reading of the Peace Clause, th e US measures are “exempt from acti ons”, Brazil is not entitled to 
obtain any remedy from the DSB.
49 
 34. The United States also disagrees in any event that the “close overlap of proof for both peace 
clause and actionable and prohibited subsidy claims highlights the need for th e Panel to examine all 
the ‘facts of the case’ together”.  For example, to establish its “serious prejudice” claims, Brazil must 
present evidence showing that the United States has caused “adverse effects” through “the use of any 
subsidy” (Subsidies Agreement, Artic le 5(c)) and evidence on “the effect of the subsidy” (Subsidies 
Agreement, Article 6.3(b), (c), (d)).  Neither of thes e showings is relevant to the issue of whether US 
measures have breached the Peace Clause.   
 
35. Frankly, if Brazil’s Peace Clause arguments will involve extensive factual and econometric 
evidence, it is difficult to understand why the Panel would be  better  served by considering this 
“considerable” evidence and testimony at  the same time that it receives even more  evidence and 
testimony on other, unrelated issues.  Thus, even if one hypothesized that  the Peace Clause does not 
require the Panel to consider the issue of its applicability prior to examining Brazil’s substantive 
claims and that the Panel solely needed to consider how to take the Peace Clause issue into account in 
exercising its discretion to organize its procedures,  the United States submits that the Panel’s work 
would be facilitated by focusing on the legally and logically distinct Peace Clause issue first.
50 
 
                                                      
48 Letter from Ambassador Luiz Felipe de Seixas Corrêa, Permanent Mission of Brazil, to 
Mr. Dariusz Rosati, Chairman of Panel, at 4. 
49 See Brazil’s Initial Brief, para. 9 (“In sum, ‘exempt from actions’ means that a complaining Member 
cannot receive authorization from the DSB to obtain a remedy against a nother Member’s domestic or export 
support measures that are ‘peace clause’ protected.”). 
50 See Appellate Body Report,  Brazil – Export Financing Programme for Aircraft , WT/DS46/AB/R, 
paras. 142-44 (finding that panel should have considered threshold Article 27.4 issue before examining whether 
export subsidy had been provided under Subsidies Agreement Article 3.1(a)); European Communities – Regime 
for the Importation, Sale and Distribution of Bananas , WT/DS27/AB/R, para. 144 (noting that panels would be 
better served by adopting working procedures providing for preliminary rulings to deal with threshold 
jurisdictional issues). WT/DS267/R/Add.1 
Page A-48  
 
 V.  OTHER ARGUMENTS BY THIRD PARTIES 
 
A. GIVEN DSU RULES, THE PANEL’S ORGANIZA TION OF ITS PROCEDURES REPRESENTS 
THE FIRST OPPORTUNITY TO ARREST BRAZIL’ S ACTION 
 
36. India and the European Communities have s uggested that, taken to its logical extreme, 
reading “actions” as the “taking of legal steps to es tablish a claim” would require a complaining party 
to bring two actions: first, an action to establish that the Peace  Clause does not apply to certain 
measures, and second, if a panel were to find the Peace Clause inapplicable, an action challenging the 
measures based on the provisions specified in the Peace Clause.  While this issu e is not pertinent to 
the Panel’s question concerning Article 13, the United States notes that it has not advanced such an 
interpretation by, for example, asking the Panel to find that it could not be established.51  Thus, this 
issue is not before the Panel, and India’s and the EC’s arguments are irrelevant.  Rather, we have 
requested more modestly that the Panel, consistent  with the Peace Clause, structure its procedures so 
that US measures will in fact be exempted from  Brazil’s action based on provisions specified in the 
Peace Clause at the earliest possible juncture under the DSU.  37. As these third parties apparently fail to appreciate, prior to this moment, DSU rules provided for the dispute to proceed through consultations and panel establishment automatically, regardless of 
the US insistence that its measures conform to the Peace Clause.  Although the United States has 
maintained at each and every st age that the challenged measures conform to the Peace Clause, the 
United States could not have stopped Brazil from asking for consultations
52, nor could it reasonably 
have been expected to refuse an en tire request for consultations because  it contains a request contrary 
to the Peace Clause, nor could the United States have  prevented the establishment of this Panel.  As a 
responding party cannot prevent panel establishment from  occurring, it will inevitably be forced to 
argue to a panel that the panel’s procedures should be structured so that the party’ s challenged 
measures are not subject, from that point on, to actions based on provisions specified in the Peace 
Clause.  Thus, given the automaticity in DSU rules relating to consultations and panel establishment, 
the Panel’s organization of its procedures provides th e first opportunity to arrest Brazil’s “taking of 
legal steps to establish a claim”, and this is all the United States has asked the Panel to do. 
 
B. CONTRARY TO THE SUGGESTION BY SEVE RAL THIRD PARTIES, THE PEACE CLAUSE IS 
NOT AN AFFIRMATIVE DEFENCE 
 
38. Australia and the European Communities have  each asserted that the Peace Clause is an 
affirmative defence.53  The United States believes that they are in error.  However, this issue is not 
                                                      
51 We also note that this potential question relating to whether a panel could have been established 
given the applicability of the Peace Clause could arise even under Brazil’s interpretation of “exempt from 
actions”.  Brazil states that “actions are multilaterally  agreed decisions of WTO bodies including the DSB”.  
However, “exempt from actions” would then seem to  reach DSU Article 6.1, under which the DSB takes a 
“multilaterally agreed decision” to establish a panel to  consider a matter.  Thus, under Brazil’s own logic, 
“exempt from actions” in the Peace Clause should also prec lude a decision by the DSB to establish a panel and 
not just a decision to authorize remedies.  Argentina implicitly concedes the point when it states that it “agrees 
with Brazil’s statement in paragraph 6 of its Brief that th e word ‘actions’ in the context of Article 13 of the AoA 
refers to decisions of WTO competent bodies, such as the DSB when it discharges its duties by establishing a 
panel ”.  Argentina’s Third Party Initial Brief, para. 6 (emphasis added). 
52 However, the United States notes that Argentina (in paragraph 13 of its “Third Party Initial Brief”) 
accepts that under Article 7 of the Subs idies Agreement, a Member is not to  request consultations on measures 
conforming to the Peace Clause. 
53 See Comments by Australia, para. 4 (10 June 2003); Comments by the European Communities on 
certain issues raised on an initial basis by the Panel, para. 6 (dated 10 June “2002” on first page, 2003 in the 
heading).  WT/DS267/R/Add.1 
 Page A-49 
 
 
 raised by the Panel’s question concerning Article 13, and there is no need to discuss it further at this 
time.  
VI. CONCLUSION: BRAZIL MAY NOT BRING, AND THE PANEL MAY NOT 
ADJUDICATE, A SUBSIDIES AGR EEMENT OR GATT 1994 ARTICLE XVI 
ACTION AGAINST US MEASURES CONFORMING TO THE PEACE CLAUSE 
 
39. For the reasons set out above and in its in itial brief on the Panel’s question concerning the 
Peace Clause, the United States respectfully request s the Panel to find that measures that conform to 
the Peace Clause are exempt from any action, including action under the DSU, based on the 
corresponding provisions of the Subsidies Agreem ent and the GATT 1994.  As a result, the 
United States is not required to defend those measures in any action based on Brazilian claims 
exempted by the Peace Clause.  WT/DS267/R/Add.1 
 Page B-1 
 
 
  
 
ANNEX B 
 
 
SUBMISSION OF PARTIES AN D THIRD PARTIES FOR THE 
FIRST SESSION OF THE FIRST  SUBSTANTIVE MEETING 
 
 
Contents Page 
Annex B-1 Executive Summary of the Submission of Brazil B-2 
Annex B-2 Executive Summary of the Submission of the United States B-10 
Annex B-3 Third Party Submission of Argentina B-18 
Annex B-4 Third Party Submission of Australia B-36 
Annex B-5 Third Party Submission of Benin B-51 
Annex B-6 Third Party Submission of Canada B-58 
Annex B-7 Third Party Submission of China B-71 
Annex B-8 Third Party Submission of the European Communities B-78 
Annex B-9 Third Party Submission of New Zealand B-87 
Annex B-10 Third Party Submission of Paraguay B-100 
Annex B-11 Third Party Submission of Chinese Taipei B-104 
 WT/DS267/R/Add.1 
Page B-2  
 
  
ANNEX B-1 
 
 
EXECUTIVE SUMMARY OF BRAZIL’S FIRST SUBMISSION 
TO THE PANEL REGARDING THE “PEACE CLAUSE” 
AND NON-PEACE CLAUSE  RELATED CLAIMS 
 
 
Introduction 
 
1. Brazil’s first submission initially addresses issu es relating to the substantive interpretation of 
Article 13 of the Agreement on Agriculture (AoA ), known as the “peace clause,” and details the 
evidence demonstrating that the Un ited States has no basis to assert  a peace clause defence regarding 
Brazil’s actionable and prohibited subsidy claims.  The second part of Brazil’s first submission sets 
forth the evidence and arguments concerning claims involving the following US measures: Step 2 export payments, the US export credit guarantee programmes (GSM 102, GSM 103 and SCGP) and the ETI Act subsidies. These three subsidies do not fu lly conform to the provis ions of Part V of the 
Agreement on Agriculture and, t hus, the United States has no peace clause protection from claims 
under the SCM Agreement.  Step 2 export payments , the three export credit guarantee programmes 
and the ETI Act subsidies also violate ASCM Article 3. 1(a) and 3.2.  Finally, Brazil demonstrates that 
Step 2 domestic payments violate ASCM Article 3.1(b) and GATT Article III:4. 
 
Issues Regarding the Peace Clause in AoA Article 13  
 
2. The peace clause of AoA Article 13 is in  the nature of an affirmative defence. The 
United States has indicated that it will invoke a p eace clause defence.  To do so, the United States 
bears the burden of proof that US domestic suppor t and export subsidies to upland cotton are provided 
in conformity with the requirements of the pea ce clause.  Based on public international law and 
Appellate Body jurisprudence on the allocation of the burden of proof, AoA Article 13 is an 
affirmative defence because it provides an excep tion to a legal regime otherwise applying to 
agricultural support measures.  It does not alter the scope of other provisions providing positive 
obligations on Members, and is not itself a positive obligation. It simply allows Members to maintain measures otherwise inconsistent with their WTO ob ligations exempt from actions, provided that the 
measures meet the conditions specified in AoA Article 13. 
 
3. In accordance with Article 31 of the Vienna Convention , the appropriate interpretation of AoA 
Article 13(b)(ii) is the following:  Members may assert a peace clause defence under AoA Article 13(b)(ii) only if the total quantity of support granted through all non-“green box” domestic support 
measures ( i.e., measures that do not fully comply with the provisions of AoA Annex 2) to a specific 
commodity in any marketing year from 1995-2003 does not exceed the quantity of non-“green box” 
domestic support decided to be granted in MY 1992.  The only “decision” made by the United States 
“during” MY 1992 was to grant (i.e., make actual  expenditures) of $1.994 billion in non-“green box” 
support to upland cotton pursuant to the terms of the 1990 FACT Act.   4. The evidence regarding the amount of non-“green box” US support to upland cotton granted 
in MY 1999-2002 is based largely on USDA docu ments, which show that US non-“green box” 
domestic support decided to be authorized and pa id to upland cotton increased to $3,445 million in 
MY 1999, was $2,311 million in MY 2000, and incr eased to a new record high of $4,093 million in 
MY 2001 (for a crop valued at $3,312 million).  Br azil estimates that US non-“green box” domestic 
support for MY 2002 (which will end on 31 July 2003) is $3,113 million.  This estimate is based on 
the last available data and the requirements set out in the 2002 FSRI Act.   WT/DS267/R/Add.1 
 Page B-3 
 
 
  
5. Thus, the evidence reveals that the amount of non-“green box” support granted in MY 1999-2002 exceeds the level of support “decided” by the United States in MY 1992.  Therefore, the United States does not enjoy peace clause exemption from actions based on ASCM Article 5 and 6 and Article XVI:1 of GATT 1994 involving non-“gre en box” domestic support to upland cotton. 
 
6. Brazil’s calculation of the MY 1999-2002 reflects the appropriate set of non-“green box” domestic support measures granted to upland cotton.  The United States notified to the WTO Committee on Agriculture that the following programmes are “amber box” support for MY 1999:  Step 2 payments, loan deficiency payments, marketing loan gains, crop insurance payments, 
cottonseed payments, and market loss assistance paym ents. The structure of the first five of these 
domestic support programmes is substantially th e same in MY 2000-2001 and under the 2002 FSRI 
Act as it was in MY 1999.  There is also no indication that these five programmes should not continue to be treated as non-“green box” domestic support to upland cotton for the purposes of MY 2002.  Therefore, the support under these five programmes, as well as market loss assistance payments, are 
non-“green box” support to upland cotton and are pr operly included in the set of domestic support 
measures for purposes of assessing possible US  peace clause exemption from action.  
 7. With respect to production flexibility contra ct payments (PFC), direct payments (DP) and 
counter-cyclical payments (CCP), the evidence demons trates that these payments are also non-“green 
box” support granted to upland cotton.  The basi s of this conclusion is summarized below. 
 
8. Production Flexibility Contract Payments (PFC) : There are two reasons why PFC payments 
are not properly “green box” support. First, PFC payments are inconsistent with AoA Annex 2 
paragraph 6(b), because Section 118(b) of the 1996 FAIR Act and the regulations implementing the 
PFC programme eliminates or reduces payments if producers grow certain products – fruits, 
vegetables and wild rice – on contract acreage.  
 9. AoA Annex 2 paragraph 6(b) re quires that the “amount” of payments “shall not be related to 
or based on, the type of production…”  The object an d purpose of paragraph 6(b), based on its text and 
context, is to ensure that decoupled “green box” payments are not focused or channelled for a single 
product or a particular sub-set of products.  It covers only completely  decoupled domestic support 
measures.  Paragraph 6(b) seeks to guarantee that a producer who receives such payments can produce 
any product covered by the Agreement on Agriculture.   10. Section 118(b) of the 1996 FAIR Act a nd its regulations make it clear that the amount  of PFC 
payments in any given marketing year between 1996 and 2001 was related to or was based on the type 
of production undertaken by a producer who entered in to a PFC contract.  The general rule is that 
“planting fruits and vegetables (except lentils, mung beans, and dry peas) shall be prohibited on 
contract acreage”.  If fruits and vegetables are gr own on contract acreage, then the regulations provide 
that “the Deputy Administrator shall terminate the contract with respect to the producer on each farm 
in which the producer has an inte rest”.  The regulations also provide that in less serious cases of 
violation, the penalty may be a re duction of contract payments equal to the market value of the fruits 
and vegetables or the contract payment for each acre used for fruits and vegetables.  Thus, the PFC 
payments are not “decoupled income support” as set out in AoA Annex 2 paragraph 6(b) and 
therefore, are not “green box” support.  11. The second reason that PFC payments provide d to upland cotton producers are not properly 
“green box” support is that they are inconsistent with the “fundamental” requirement in AoA Annex 2 
paragraph 1 that they have “no, or at most minima l, trade distorting effects or effects on production”.  
The quantity or level of production or trade distorti ng effects need only be very minimal to trigger 
denial of “green box” status under AoA Annex 2.  This follows from the text of AoA Annex 2 
paragraph 1, which contains the phrase s “no,” “at most,” and “fundamental”. 
 WT/DS267/R/Add.1 
Page B-4  
 
 12. The record in this case demonstrates that PFC payments have had more than “at most” a 
“minimal” effect on production of US upland cotton during MY 1999-2002.  Almost all upland cotton producers participated in the PFC programme.  Furthermore, domestic US upland cotton producers 
view PFC payments as an important component of payments provided to upland cotton farmers.  The percentage of subsidization by PFC payments re lative to the market valu e measured by the price 
received by US upland cotton producers represents  between 14 and 17 per cent for period MY 1999-
2001.  This provides US producers with a significa nt advantage in export competition with producers 
in the rest of the world who do not receiv e such a level of (or any) subsidies. 
 13. The PFC payments also have production effect s because of the very high cost of production 
for upland cotton in the United States.  Given th e high US costs, without 14-17 per cent subsidies 
some higher-cost US producers would likely stop producing upland cotton.  This would have resulted in lower levels of US upland cotton produc tion.  USDA economists have acknowledged the 
production-enhancing effects of PFC payments.  Th ey have also identified likely patterns of 
production effects. 
 
14. Because the quantity  or level  or trade distorting effects need only be very minimal to trigger 
denial of “green box” status under AoA Annex 2, th e evidence of the production enhancing effects of 
PFC payments necessitates the conclusion that PFC payments are not properly included within the AoA Annex 2 “green box”.  They are, thus, properl y included within the domestic support measures to 
be used for the calculation of the amount of domestic support to upland cotton for MY 1999, 2000 and 
2001.  
 15. Direct payments (DP) : with the passage of the new FSRI Act in May 2002, PFC payments 
were discontinued and replaced with DP.  These began to be paid in MY 2002 and will be paid until 
the end of MY 2007.  USDA has identified the DP programme as the direct successor to the PFC 
programme under the 1996 FAIR Act. 
 16. There are three reasons why DP are not properly within AoA Annex 2.  First, as with PFC payments, the amount of DP are related to or based on the type of production undertaken in any year after the base period in violation of AoA A nnex 2 paragraph 6(b). Th e 2002 FSRI Act and its 
implementing regulations eliminate or limit the amount of DP if base acreage is used for the 
production of certain crops, i.e., fruits, vegetables and wild rice.  
 17. Second, the DP provisions of the 2002 FSRI Ac t violate AoA Annex 2, paragraph 6(a) and (b) 
because producers were permitted to “update” their base acreage using MY 1998-2001 production totals.  This is inconsistent with A nnex 2, paragraph 6(a), which requires a single , fixed base period for 
a programme of support.  The object and purpose of Ao A Annex 2 paragraph 6(a) and (b) is to ensure 
that Members do not permit payments to incre ase over time in a manner linked to increases in 
production over time.  This also follows from the AoA Annex 2 paragraph 1 requirement that “green box” support measures have no or at most minimal production effects.  That can only occur if the base (i.e., the base for increased payments) does not adap t to recent changes in the production of a farmer. 
 
18. The major structural elements of the PFC programme and the DP programme are the same for 
both programmes in terms of the basic types of crops  covered, the producer’s obligations to receive 
payments, prohibited plantings of certain crops, a nd freedom to receive payments for one crop and 
farm another crop.  The change from the PFC programme to the DP programme is not “de-coupling” but rather “re-coupling” of MY 2002 and futu re DP with MY 1998-2001 production.   
 
19. One third of farms receiving PFC payments between MY 1996-2001 updated their acreage for the DP programme using MY 1998-2001 production da ta. Thus, interpreting AoA Annex 2 paragraph 
6(a) and (b) to permit an updating of the “fixed” ba se period by essentially changing the name of the 
“PFC payment” programme to DP programm e would render these provisions a nullity. 
  WT/DS267/R/Add.1 
 Page B-5 
 
 
 20. Third, DP also have more than “at most  minimal” production and trade-distorting effects 
contrary to the chapeau of AoA Annex 2 paragr aph 1.  DP, like PFC payments, can increase 
production of upland cotton through (1) a direct weal th effect through risk aversion reduction, (2) a 
wealth facilitated increased investment reflecting reduced credit constraints, and (3) a secondary 
wealth effect resulting from the increase in investment.  In addition, the updating of base acres in the 
2002 FSRI Act created an ongoing produc tion-enhancing effect because farmers will expect future 
updates and continue to maintain high levels a nd even increase production between MY 2002 - 2007.  
Continued low cotton prices will increase the need of producers to protect their base as a hedge against 
low prices.  In addition, US upland cotton producers are among the world’s highest cost producers.  That means that the amount of DP (and CCP) is critical to the economic survival of many US upland 
cotton producers.  Thus, there will be a very strong  incentive to maintain and increase upland cotton 
base in anticipation of future base updates in future farm legislation to offset potentially lower world prices.  21. In sum, DP are properly included within the set of domestic support measures to be used for 
calculating the amount of domestic support to upland cotton for MY 2002.  
  22. Counter-Cyclical Payments (CCP) : are non-“green box” domestic support because they are 
inconsistent with AoA Annex 2 pa ragraphs 6(a), 6(b) and 6(c). Fi rst, like PFC and DP, CCP  are 
inconsistent with Annex 2 paragraph 6(b) because the CCP programme eliminates or limits the amount of payments for those  producers who grow fruits, vegetables and wild rice on base acres.  
 
23. Second, CCP also violate AoA Annex 2 para graph 6(c) because the amount of payments is 
based on current market prices.  The ordinary meaning of AoA Anne x 2 paragraph 6(c) is that any 
direct income support to a producer of agricultural products must not be linked to an international or 
domestic price established after the base period, i.e., to a current price. CCP  are not based on the 
prices of upland cotton production that took place in a prior base period but rather on prices of present 
production.  As the current upland cotton prices rece ived by US farmers fluctuate between $0.52 and 
$0.6573 per pound, the amount of payments for each year between MY 2002-2007 changes.  This is inconsistent with AoA Annex 2 pa ragraph 6(c), which requires that payments cannot be based on “the 
prices…applying to any production undertaken in an y period after the base period”.  But the CCP 
programme has no fixed “base period” for the purposes of setting “prices”.  It uses current prices, i.e., 
prices that apply to current production and, thus, to a “production undertaken in a period after the base 
period”.   24. Third, like PFC and DP, CCP have production a nd trade distorting effects in violation of AoA 
Annex 2 paragraph 1.  The new CCP programme fo r upland cotton is one of the main sources of 
increased payments for US cotton producers betw een the 1996 FAIR Act and the 2002 FSRI Act.  The 
payments to US upland cotton farmers in MY 2002 will exceed $1 billion and represent over 32 per cent of the market value of US upland cotton.  USDA economists have acknowledged that CCP have 
identifiable and measurable production effects.   25. In sum, CCP are non-“green box” domestic support properly included within the set of 
domestic support measures to be used for calculating the amount of domestic support to upland cotton 
for MY 2002.   26. DP and CCP are support to upland cotton : DP and CCP made in MY 2002 are support to 
upland cotton within the meaning of AoA Article 13(b)(ii).  The great majority of upland cotton 
producers are enrolled in the programmes and will receive the full amount of these payments in MY 
2002.  Most of the producers of upland cotton in MY 2002 used upland cotton base acres to produce upland cotton.  US farms growing the bulk of upla nd cotton tend to grow upland cotton year after year 
because of considerable investments in cotton-specific equipment and the lack of alternative crops.  
Thus, most farmers with cotton “base acreage” genera lly do not use that base acreage to grow other WT/DS267/R/Add.1 
Page B-6  
 
 crops.  In addition, CCP create incentives to main tain upland cotton production at the level of the base 
period in order to minimize the risk of low revenues.  27. In sum, the United States cannot successfull y invoke peace clause protection against Brazil’s 
actionable subsidy claims under ASCM Arti cles 5 and 6 or Brazil’s claims under GATT 
Article XVI:1.     
 28. Export Subsidy Peace Clause Issues Under AoA Article 13 (c):  The United States also has no 
peace clause protection under AoA Article 13(c) fo r claims against export subsidies under the SCM 
Agreement regarding Step 2 export payments, the export credit guarantees and subsidies provided 
under the ETI Act.  AoA Article 13(c) can only be invoked by a WTO Member as an affirmative 
defence if that WTO Member can demonstrate th at its export subsidies “conform fully to the 
provisions of  Part V” of the AoA.  Part V of the AoA consists of Articles 8 to 11.  A Member violates 
Part V of the AoA if it provides export subsidie s for products for which it has not undertaken any 
export subsidy reduction commitments; or second, if it has export subsidy reduction commitments for 
the product under consideration, but exceeds the ma ximum amount of export subsidies to or the 
maximum value of the product that it has scheduled to be exported with the assistance of export subsidies.  The United States does not enjoy peace clause protection for the agricultural export subsidies challenged by Brazil under the SCM Agreem ent because – as Brazil demonstrates – each of 
the subsidies at issue does not full y conform to Part V of the AoA. 
 
Brazil’s Claims Regarding Prohibited US Export and Local Content Subsidies   
 
29. The United States maintains three types of export subsidies related to US upland cotton and other commodities.  These subsidies violate AoA Articles 3.3, 8 and 10.1 and are prohibited under ASCM Articles 3.1(a) and 3.2.  Brazil challenge s all three measures to th e extent they provide 
subsidies to upland cotton.  In addition, it chal lenges the export credit guarantee programmes for all 
products covered.  30. The first measure, the Step 2 export programme, relates solely to exports of US upland cotton and provides grants to exporters.  The second group of measures are three export credit guarantee 
programmes – the General Sales Manager 102 (“GSM 102”), the Ge neral Sales Manager 103 (“GSM 
103”) and the Supplier Credit Guarantee Programme (“SCGP”) – provided by the United States in 
connection with the export of agricultural goods in general.  The third measure providing export 
subsidies is the FSC Repeal and Extraterritorial In come (ETI) Act of 2000, by which the United States 
provides tax breaks for exporters of US products , including agricultural products such as upland 
cotton. 
 
31. Step 2 Export Payments:   Section 1207(a) of the 2002 FSRI Act mandates Step 2 export 
payments contingent on the export of US upland cotton lint.  Section 1207(a) of the 2002 FSRI Act 
requires USDA to pay US exporters the difference be tween higher priced US upland cotton and the 
average of the five lowest price quotes for exports of upland cotton worldwide (Cotlook’s A-Index).  The size of this subsidy averaged 8 per cent of the price received by US producers between MY 1999-
2001 and an estimated 9.9 per cent in MY 2002.   
 32. Step 2 export payments constitute export subsidies within the meaning of the AoA. The Appellate Body has indicated that context for inte rpretation of an “export subsidy” under the AoA is 
found in the ASCM. Step 2 export payments involve grants within the meaning of ASCM Article 
1.1(a)(1)(i), as the US Government pays money to US exporters.  Such grants are direct transfers of 
economic resources  for which the US Government receives no consideration.  Step 2 export payments 
constitute “free money” for which exporters incur no corresponding obligations and, thus are made for 
“less than full consideration”.  They, therefore,  confer a benefit within the meaning of ASCM 
Article 1.1(b).  Finally, Step 2 payments are also export contingent within the meaning of ASCM  WT/DS267/R/Add.1 
 Page B-7 
 
 
 Article 3.1(a) because exporters are only eligible to receive Step 2 export payments if they produce 
evidence that they have  exported an amount of US upland cotton. 
 33. Section 1207(a) of the 2002 FSRI Act requires th e US Secretary of Agriculture to make Step 2 
export payments to eligible exporters upon proof of the export of US cotton.  Therefore, Section 
1207(a) of the 2002 FSRI Act is inconsistent wi th AoA Articles 3.3 and 8, because it requires 
payments of export subsidies to upland cotton without the United States having undertaken any export subsidy reduction commitments under the AoA.  Thus, the United States has no peace clause 
protection against claims made under the ASCM for Step 2 export payments.  In addition, for the same reasons the Step 2 export payments violate AoA Articles 3.3 and 8, Section 1207(a) of the 2002 FSRI 
Act also mandates payment of export subsidies in  violation of ASCM Articles 3.1(a) and 3.2.  
 34. Export Credit Guarantee Programmes:   The United States, through the US Commodity Credit 
Corporation (CCC), operates three export credit gua rantee programmes – Gene ral Sales Manager 102 
(GSM 102), General Sales Manager 103 (GSM 103)  and the Supplier Credit Guarantee Programme 
(SCGP).  The programmes guarantee the repayment of  loans granted to foreign importers of all US 
agricultural commodities and are not limited to upl and cotton.  Brazil’s also challenges the whole 
programmes, not just as they  relate to upland cotton. 
 35. USDA export data demonstrates that US exports of most scheduled commodities exceed the respective US quantitative export subsidy reduc tion commitment.  For unscheduled commitments, 
there is no such commitment, which means that every export of these commod ities is in excess of the 
United States’ commitments.  In Canada – Dairy Article 21.5 (II) , the Appellate Body characterized 
export subsidy claims under the AoA as involvi ng both a “quantitative aspect” and an “export 
subsidization aspect”.  It held that AoA Article  10.3 allocates the burden of proof for the export 
subsidization part to the defending Member – in this case the United States – if the complaining 
Member – in this case Brazil – establishes that th e level of exports in exceeds of the export subsidy 
reduction commitments.  Therefore, the United States bears the burden to prove that its excess exports did not benefit from export subsidi es, including export credit guarantees 
 36. Nevertheless, Brazil also provides evidence th at the three export credit guarantee programmes 
are export subsidies within the meaning of the AoA.  The Appellate Body in US – FSC held that 
export subsidies within the meaning of the SCM Ag reement are also export subsidies for the purposes 
of the AoA.  Brazil demonstrates in two distin ct ways that GSM 102, GSM 103 and SCGP are “export 
subsidies”.  First, context for determining whet her the US programmes are export subsidies under the 
AoA is provided by reference to ASCM Annex I, Item (j) of the Illustrative List of Export Subsidies. 
Item (j) provides that export credit guarantee progr ammes are export subsidies if they are operated “at 
premium rates which are inadequate to cover the long-term operating costs and losses of the 
programme”.  Second, export credit guarantees also constitute export subsidies under the AoA and in 
light of the Appelllate Body decisions in US- FSC  and Canada – Dairy,  if they involve “financial 
contributions” that confer “benefits” and are cont ingent upon export performance within the meaning 
of ASCM Articles 1.1 and 3.1(a).  
37. US documents demonstrate that GSM 102, GS M 103 and SCGP are export subsidies because 
they are operated at premium rates which are far below the level necessary to cover the programmes 
operating costs and losses.  The programmes are, thus , export subsidies as defined in item (j) of the 
Illustrative List of Export Subsidies. Under Appella te Body and panel jurisprudence, export subsidies 
defined in the ASCM Agreement are relevant cont ext for a finding of export subsidies under the AoA. 
Therefore these three programmes constitute expor t subsidies within the meaning of the AoA. 
 38. In addition, GSM 102, GSM 103 and SCGP are export subsidies within the meaning of the AoA because they are financial contributions  consis tent with ASCM Article 1.1(a)(1)(i), and confer 
benefits within the meaning of ASCM Article 1.1(b).   The United States itself, in its budget, treats 
them as subsidies.  In addition, no such guarantees are commercially available in the marketplace.  WT/DS267/R/Add.1 
Page B-8  
 
 GSM 102, GSM 103 and SCGP are, furthermore, c ontingent upon export performance within the 
meaning of ASCM Article 3.1(a).  Thus, the pr ogramme constitutes export subsidies within the 
meaning of both the SCM Agreement and the AoA.  39. The export subsidies GSM 102, GSM 103 and SCGP result in, or threaten to lead to, 
circumvention of the United States’ export subsidy commitments within the meaning of AoA 
Article 10.1.  GSM 102, GSM 103 and SCGP, in so fa r as they are available for unscheduled products, 
violate AoA Articles 10.1 and 8 because they make export subsidies available for unscheduled products.  The Appellate Body has held that for un scheduled products, it is inconsistent with AoA 
Article 3.3 to provide export subsidies listed in AoA Article 9.1, and that it is inconsistent with AoA 
Articles 10.1 and 8 to provide any other export subsidy. GSM 102, GSM 103 and SCGP provide 
export subsidies to unscheduled products, a nd thus violate AoA Article 10.1 and 8. 
 40. With respect to scheduled products, GSM 102, GSM 103 and SCGP as such also threaten to lead to circumvention of the US export subsidy reduction commitments.  The United States provides 
monetary allocations for export credit guarantees to  individual third countries either on a commodity 
specific basis or on a non-commodity specific basis.  This common feature of the three export credit guarantee programmes creates a threat that the Un ited States will exceed its quantitative export 
subsidy reduction commitment for scheduled products  in violation of AoA Articles 10.1 and 8. 
 41. In sum, the export credit guarantee  programmes GSM 102, GSM 103 and SCGP are 
inconsistent with AoA Articles 10.1 and 8.  As they  do not fully conform to AoA Part V, they do not 
enjoy peace clause protection under AoA Article 13(c)(ii).    42. Brazil has already established that GSM 102, GSM 103 and SCGP are export subsidies within the meaning of item (j) of the Illustrative List of Export Subsidies attached as Annex I to the SCM 
Agreement, and within the meaning of ASCM Artic le 3.1(a).  It follows that GSM 102, GSM 103 and 
SCGP are prohibited export subsidies within the meaning of ASCM Articles 3.1(a) and 3.2.   43. ETI Act Export Subsidies :  The third export subsidy provided by the United States to upland 
cotton consists of tax cuts under the FSC Repeal and Extraterritorial Income Act of 2000. This Act eliminates tax liabilities for exporters, inter alia, of upland cotton.  A WTO panel and the Appellate 
Body have previously found that the ETI Ac t violates AoA Articles 10.1 and 8 and ASCM 
Articles 3.1(a) and 3.2.  The tax breaks provide d for under the ETI Act constitute export subsidies 
within the meaning of AoA Article 10.1. The ETI Ac t threatens to circumvent the US export subsidy 
commitments by providing an export subsidy to upland cotton while the United States does not have any export subsidy reduction commitments for upland cotton in violation of AoA Articles 10.1 and 8.  
As the ETI Act subsidies do not fully conform to AoA Part V, there is  no peace clause exemption 
from actions under the SCM Agreement.  Consequently, the ETI Act also constitutes a prohibited 
export subsidy within the meaning of ASCM Article 3.1(a) and 3.2.    44. Step 2 Domestic  Payments :  Section 1207(a) of the 2002 FSRI Act mandates the payment of 
the Step 2 domestic payments. Step 2 domestic pa yments are subsidies within the meaning of the 
ASCM Article 1.1.  They involve grants because the US Government pays domestic users of US 
upland cotton the difference between higher priced US upland cotton and the average of the five lowest upland cotton price quotes for exports (A-Index) without receiving any consideration in return.  
These grants are direct transfers of funds and constitute a financial contribution by a Government within the meaning of ASCM Article 1.1(a)(1)(i).  They confer a “benefit” within the meaning of 
ASCM Article 1.1(b) because the domestic user  of US upland cotton receives the financial 
contribution on terms more favorable than those available in the market.  Step 2 domestic payments constitute “free money” for which domestic users of US upland cotton incur no corresponding obligations.  Finally, Step 2 domestic payments are contingent on the use of domestic over imported goods.  Domestic users of US cotton can only r eceive payments upon proof of opening a bale of 
domestic US upland cotton.  In sum, Section 1207(a) of the 2002 FSRI Act mandating Step 2 domestic  WT/DS267/R/Add.1 
 Page B-9 
 
 
 payments violates ASCM Articles 3.1(b) and 3.2 by requiring the provision of subsidies contingent 
upon the use of domestic over imported goods.  45. The Step 2 domestic payment programme also constitutes a viol ation of GATT Article III:4.  
Section 1207(a) requires the US Secretary of Agriculture to treat upland cotton of non-US source less 
favorable than like US upland cotton.  Only upland cotton that “is domestically produced baled upland 
cotton” is eligible for the Step 2 domestic payment programme.  Paying a subsidy to like domestic upland cotton while denying such payments to imported like cotton negatively affects the competitiveness of imported cotton by making it less attractive to US purchasers.  The Step 2 domestic payment programme therefore extends “less favor able treatment” to imported goods within the 
meaning of GATT Article III:4. 
 
Conclusion 
 
46. In Brazil’s further submission (scheduled for 4 September 2003 following the Panels 
expression of its views on AoA Article 13 on 1 September 2003) Brazil will present its arguments 
concerning its claims under ASCM Articles 5(c), 6.3(b), 6.3(c) and 6.3(d), as well as under GATT 
Article XVI.  WT/DS267/R/Add.1 
Page B-10  
 
 ANNEX B-2 
 
 
EXECUTIVE SUMMARY OF THE FIRST 
WRITTEN SUBMISSION OF THE UNITED STATES 
 
 
1. In this submission, the United States principally focuses on the issues involving the Peace 
Clause.  However, three sets of measures identified by Brazil – (1) export credit guarantee measures relating to eligible US agricultural commodities other than US upland cotton; (2) production flexibility contract payments and market loss assistance payments; and (3) cottonseed payments – were, 
respectively, not the subject of consultations, had e xpired before consultations  were requested, or had 
not yet been adopted at the time of the consulta tion and panel requests.  With respect to these 
measures, the United States requests that the Panel make preliminary rulings that they are not within 
the Panel’s terms of reference.  2. General Interpretation of the Peace Clause and “Exempt from Actions” :  As set out in 
more previous submissions, read in accordance with  the customary rules of interpretation of public 
international law, the key Peace Clause phrase “exempt  from actions” means “not exposed or subject 
to” a “legal process or suit” or the “taking of lega l steps to establish a claim or obtain a remedy”.  
Relevant context in DSU Article 3.7 and 4.5 and Subs idies Agreement Article 7 supports this reading.  
For example, contrary to Brazil’s suggestion that “action” only refers to “collective action” by the 
Dispute Settlement Body, DSU Article 4.5 uses the phrase “further” action.  Since no “action” will 
have been taken by the DSB “in the course of consu ltations,” the phrase “further action” suggests that 
requesting consultations is part of the action brought  by a complaining party.  Thus, these provisions 
suggest that “action” based on the relevant provisions woul d include all stages of a dispute, including 
the “bringing [of] a case”, consultations, and pane l proceedings and would support reading “exempt 
from actions” in Article 13 to mean “not subject to ” the “taking of legal steps to establish a claim”. 
 
3. Prior to this point in the process, DSU rules did not afford the United States any opportunity to 
prevent the dispute from proceeding through consul tations and panel establishment automatically, 
regardless of the US insistence that its measures co nform to the Peace Clause.  As a responding party 
cannot prevent panel establishment from occurring, it will inevitably be forced to argue to a panel that its procedures should be structured so that the pa rty’s challenged measures are not subject, from that 
point on, to actions based on provisions specified in  the Peace Clause.  Thus, the Panel’s organization 
of its procedures provided the first opportunity to arre st Brazil’s “taking of legal steps to establish a 
claim”.  4. The Peace Clause Is Not an Affirmative Defence :  The Peace Clause applies 
“[n]otwithstanding  the provisions of GATT 1994” and the Subsidies Agreement – that is, in spite of  
and  without regard to or prevention by  the subsidies obligations contained in those agreements.  
Article 21.1 of the Agriculture Agreement further clarifies that the obligations of Members under the Subsidies Agreement and GATT 1994 only apply “ subject to ” the provisions of the Agriculture 
Agreement, including the Peace Clause.  There is no n eed to determine if a measure is inconsistent 
with WTO subsidies disciplines before applying the Peace Clause as would be the case if the Peace 
Clause were an affirmative de fence to those obligations. 
 5. As in United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from 
India , in which the Appellate Body explained that a provision that was described as an “exception” 
was not an affirmative defence a nd in fact was “an integral part” of the arrangement under the 
Agreement on Textiles and Clothing  that “reflects an equally carefully drawn balance of rights and 
obligations of Members”, here, too, the Peace Clause is part and parcel of the balance of rights and  WT/DS267/R/Add.1 
 Page B-11 
 
 
 obligations with the subsidies disciplines of GATT 1994 and the Subsidies Agreement and explains 
which measures are subject to acti ons based on those disciplines. 
 6. Article 13(a)(i) establishes that green box measures are “non-actionable subsidies for purposes of countervailing duties”.  This obligation is not  contingent on whether a Member asserts an 
“affirmative defence” that a particular measure is “g reen box”;  that is, one Member is not free to 
impose a countervailing duty until another establishes a Peace Clause “affirmativ e defence”.  There is 
no textual basis to interpret the Peace Clause to be an affirmative defence under one provision (Article 13(b)(ii)) but  not another.  In fact, rather than a defence, the Peace Clause could be used on 
the offense  (as a cause of action) if, for example, a Member imposed a countervailing duty on a “green 
box” measure while the Peace Clause was in force. 
 7. Brazil has erroneously asserted that the Peace Cl ause “provides no positive obligations itself”.  
Brazil overlooks the text of, for example, Articl e 13(a)(ii) and (b)(ii), which incorporates positive 
obligations of Annex 2 and Article 6 by reference.   The Peace Clause also differs from the fifth 
sentence of footnote 59 to item (e) and under the second paragraph of item (k) of the Illustrative List, 
under which it appears that a measure otherwis e prohibited under Article 3 of the Subsidies 
Agreement would nonetheless be permitted given the existence of circumstances detailed in those provisions.  However, under the Pe ace Clause, conforming measures are not even exposed or subject 
to the taking of legal steps to establish a claim or obtain a remedy based on Peace Clause-specified 
provisions.  Further, Subsidies Agreement Articles 3, 5, and 6 recognize that measures conforming to 
the Peace Clause are not subject to those discipli nes by expressly excluding such measures from the 
scope of those obligations.  8. Brazil asserted in both its panel and consul tation requests that the Peace Clause does not 
exempt the challenged US measures from action.  Braz il implicitly recognized in these documents that 
it must surmount the Peace Clause hurdle to bring this action against US agricultural support 
measures.  Even were the United States to pr esent no arguments on the applicability of the Peace 
Clause, Article 13 would bar Brazil’s claims unless Brazil made a prima facie  case that the US 
measures breach the Peace Clause.  9. US Direct Payments Meet  and Conform to the Criteria in Article 13(a) :  Pursuant to 
Agriculture Agreement Article 13(a)(ii) domestic support measures that “conform fully to the 
provisions of Annex 2 to this Agreement” are “e xempt from actions based on Article XVI of GATT 
1994 and Part III of the Subsidies Agreement”.  Th e 2002 Act establishes several types of measures 
that qualify for green box protection, including one, direct payments, that is challenged by Brazil. 
 
10. Direct payments under the 2002 Act conform fu lly to the basic criteria in paragraph 1, 
Annex 2, as well as the five “policy-specific criter ia and conditions” in paragraph 6, Annex 2, for 
“decoupled income support”.  Consistent with pa ragraph 1, direct payments are provided by a 
publicly-funded government programme and do not provi de price support.  Cons istent with paragraph 
6, direct payments establish eligibility by reference to the clearly-defined criteria of factor use or production level in a defined and fixed base period.  Payments are not related to production or prices 
or the factors of production employed in any year after the base period, and no production is required 
in order to receive such payments.   11. In short, direct payments do not provide support for upland cotton because they are not linked 
to current cotton production.  These payments are made with respect to farm acreage that was devoted 
to agricultural production in the past, including pr evious upland cotton production.  Direct payments, 
however, are made regardless of whether cotton is currently produced on those acres or whether 
anything is produced at all.  Because all of the crit eria in paragraphs 1, 5, and 6 are met, direct 
payments conform to the requirements of Annex 2 and are “exempt from actions” based on Part III of 
the Subsidies Agreement and GATT 1994 Article XVI. 
 WT/DS267/R/Add.1 
Page B-12  
 
 12. Applicability of Agriculture Agreement Article 13(b)(ii):   Pursuant to Agriculture 
Agreement Article 13(b)(ii), “domestic support measu res that conform fully to the provisions of 
Article 6” are “exempt from actions” based on GATT 1994 Article XVI:1 and Subsidies Agreement Articles 5 and 6.  Brazil does not contest that US non-green box domestic support measures conform 
fully to the requirements of Article 6.  Thus, the only question is whether US non-green box domestic 
support measures do or do not “grant support to a specific commodity in excess of that decided during 
the 1992 marketing year.”  13. The phrase “grant support to a specific commodity” is not explicitly defined.  Read according to its ordinary meaning, this phrase means to “giv e” or “confer” formally a “subsidy” (“assistance, 
backing”) “specially . . . pertaining to a particular”  “agricultural crop”.   Read in the context of, inter 
alia, the definition of “Aggregate Measurement of Support” in Article 1(a), “support to a specific 
commodity” refers to support “provided for an agricultural product in favour of the producers of the basic agricultural product” or  “product-specific support”.  
14. The product-specific support granted by such Article 6 measures must be compared to “that 
decided during the 1992 marketing year”.  According to its ordinary meaning, this phrase would mean the product-specific support that was “determined” or “pronounced” during the 1992 marketing year.  With reference to support or subsidies, the term “decided” is not used elsewhere in the Agriculture Agreement nor in the Subsidies Agreement.  Vari ous provisions that define the overall domestic 
support in favour of agricultural producers that has been, is being, and may be provided by a Member 
use the phrase “support  provided ” in favour of an agricultural product or agricultural producers no 
fewer than 13 times.  Context thus suggests that the use of the term “decided”  in Article 13(b) was 
deliberate so as to make the availability of the Peace Clause not dependent upon the support – for example, as measured through budgetary outlays – actually “provided” during the 1992 marketing year.  This interpretation is further supported by Members’ decision not to use the term “Aggregate 
Measurement of Support” in this part of Article 13( b)(ii).  That is, Members did not choose to make 
the applicability of the Peace Clause contingent on comparison of a Member’s product-specific Aggregate Measurement of Support.  15. The Peace Clause thus exempts from certa in actions a Member’s non-green box domestic 
support measures that conform to that Member’s overall reduction commitments under Article 6, 
provided that such measures do not currently “give” or “confer” “product-specific support” in excess 
of that “determined” or “pronounced” during the 1992 marketing year.  The relevant test for the applicability of Article 13(b)(ii) is to compare th e product-specific support as it was decided in 1992 
versus the product-specific support that  existing measures currently grant. 
 
16. US Measures Conform to the Criteria in Article 13(b) and Are Exempt from Actions :  
US domestic support measures under the 2002 Act were  written to grant support for upland cotton 
within the 1992 marketing year level so that such measures would conform to the Peace Clause 
criteria.  In particular, the 2002 Act shifts s upport away from the product-specific support that 
prevailed in 1992 to reduce support linked to the production of upland cotton.  
17. The Product-Specific Support for Upland Co tton Decided During 1992 Was To Ensure 
Income of 72.9 Cents per Pound :  The product-specific support in  favour of upland cotton decided 
during the 1992 marketing year was to ensure a level of income ($0.729) for upland cotton farmers for each pound of upland cotton production.  That is, US domestic support measures set a rate of support, 
rather than deciding ex ante  a level of budgetary outlay or expenditures.  This support was granted by 
the 1990 Act through two programmes: marketing loans (including marketing loan gains and loan 
deficiency payments) and deficiency payments.  18. Through marketing loans, the United States in effect guaranteed that cotton producers would realize income equivalent to at least 52. 35 cents per pound of upland cotton produced.  The 
United States further ensured cotton farmers would realize income equivalent to 72.9 cents per pound  WT/DS267/R/Add.1 
 Page B-13 
 
 
 of upland cotton produced by making “deficiency pa yments”.  By the terms of the 1990 Act and all 
subsequent implementing regulations, the support “d ecided” (that is, “ determined” or “pronounced”) 
in favour of upland cotton was not expressed in terms of outlays or appropriations but rather as a rate: 
that is, through both marketing loans and deficien cy payments, producer income of 72.9 cents per 
pound of upland cotton.  Thus, budgetary outlays, wh ich reflect the difference between the rates set 
out in US legislation and regulations (which were  decided by the US Government) and market prices 
(which obviously were not), do not represent the product-specific support “decided” during the 1992 
marketing year.  19. US Domestic Support Measures Currently Gran t Product-Specific Support to Upland 
Cotton to Ensure Producer Income of 52 Cents per Pound :  Under the 2002 Act, product-specific 
support is again granted to upland cotton through the marketing loan programme and through user marketing (step 2) payments.  Despite a small adju stment in the user marketing (step 2) payment 
formula, US measures currently in effect grant product-specific support to upland cotton far lower than that decided in the 1992 marketing year.  Through the marketing loan programme, the US 
Government has in effect guaranteed that cotton producer s will realize income equivalent to at least 52 
cents ($0.52) per pound (the “2002 loan rate”) of upland cotton produced.  Marketing loans and loan 
deficiency payments are contingent on a farm’s actual production of upland cotton in the current 
marketing year.  20. Product-specific support decided during the 1992 marketing year for upland cotton was to 
ensure producer income of 72.9 cents per pound;  US domestic support measures currently grant 
product-specific support only at the rate of 52 cents per pound of production.  Even taking into account the minor differences in payment rates for user marketing payments, this comparison indicates that US measures do not grant product-specific s upport to upland cotton in excess of that decided 
during the 1992 marketing year; in fact, current US  measures grant product-specific support at a rate 
more than 20 cents per pound less than that decided during 1992. 
 21. US Payments That Brazil Has Mischaracterized As Providing Support to a Specific 
Commodity Do Not Form Part of the Peace Clause Comparison :  Direct payments, 
counter-cyclical payments, and crop insurance are not product-specific support for upland cotton and 
are therefore irrelevant to the 1992 to 2002 Peace Clause comparison.  Direct payments are green box 
support because they conform to the applicable general and policy-specific criteria under Annex 2 of 
the Agriculture Agreement.  As green box measures, direct payments are not part of the comparison of 
“product-specific” support under Article 13(b)(ii).  B ecause direct payments are based on quantities of 
acreage that historically produced certain commod ities, including upland cotton, and there is no 
requirement to produce upland cott on to receive these payments, however, direct payments are 
non-product-specific. 
 22. With respect to counter-cyclical payments, th e United States notes that these measures do not 
grant product-specific support to upland cotton.  Product-specific support is “ provided for an 
agricultural product” for the benefit of “the producers  of the basic agricultural product”.  The payment 
formula for counter-cyclical payments demonstrates that these payments are not “provided for an 
agricultural product” because it is not current production of upland cotton that qualifies a recipient to 
receive payment.  In addition, it is not “the producers of the basic agricultural product” – that is, current upland cotton growers – that are entitled to receive the counter-cyclical payments but rather 
persons (farmers and landown ers) on farm acres with past histories  of producing covered 
commodities, including upland cotton.  Because counte r-cyclical payments are not product-specific 
support for upland cotton, such payments are not pr operly part of the Peace Clause comparison under 
Article 13(b)(ii).  23. Neither does crop insurance grant product-spec ific support to upland cotton.  A variety of 
insurance plans are now subsidized and reinsure d by the United States.  The basic programme 
provisions for crop insurance are generic, not commod ity-specific.  For example, the US Government WT/DS267/R/Add.1 
Page B-14  
 
 provides an incentive to participate in the crop insurance programme by subsidizing the premium paid 
by the farmer.  This premium subsidy is availabl e to a broad array of commodities around the country 
and does not vary by commodity.  Thus, while the United States notifies crop insurance as “amber 
box” domestic support subject to US reduction commi tments, crop insurance is “non-product-specific 
support in favour of agricultural producers in general”. 
 
24. Conclusion: US Non-Green Box Domestic Suppo rt Measures Are Exempt from Brazil’s 
Subsidies Agreement and GATT 1994 Article XVI Action :  Brazil has asserted that US domestic 
support measures breach the Peace Clause by comparing US budgetary outlays for the 1992 marketing year to US budgetary outlays for marketing years 1999-2001 and its “reasonable” estimates of US 
outlays for the 2002 marketing year.  As noted above, Brazil’s interpretation of the Peace Clause and 
resulting analysis is fundamentally in error.  B ecause the level of income support granted to upland 
cotton producers is far lower now than the support decided in marketing year 1992, Brazil may not 
maintain this action and advance claims under GATT 1994 Article XVI:1 or Subsidies Agreement 
Articles 5 and 6 with respect to US non-green box domestic support measures – marketing loan 
programme payments, user marketing (step 2) ce rtificates, counter-cyclical payments, and crop 
insurance subsidies.   25. US Step 2 Payments Are Not an Export Subsidy for Upland Cotton :  User marketing (Step 
2) payments are made to users of upland cotton.  Under section 1207 of the 2002 Act, the Secretary of Agriculture is authorized to issue marketing certificates or cash payments to domestic users and 
exporters  of upland cotton for documented purchases by domestic  users and sales for export by 
exporters .  The programme is indifferent to whether reci pients of the benefit of this programme are 
parties that open bales for the processing of manufacturing raw cotton into cotton products in the United States or exporters.  Accordingly, the Un ited States reports the benefits conferred under the 
Step 2 programme as product-specific amber box domestic support. 
 
26. The Step 2 programme is not an export subs idy under Agriculture Agreement Article 9.1 and 
not an export subsidy in circumvention of the US obligation not to confer an export subsidy with 
respect to cotton, contrary to Article 10.1.  Artic le 1(e) of the Agriculture Agreement states that 
“‘export subsidies’ refers to subsidies continge nt upon export performance, including the export 
subsidies listed in Article 9 of this Agreement”.  Consequently, to constitute an “export subsidy” for 
any purposes of the Agreement, the subsidy must first be “contingent on export performance”.  The 
benefits of the Step 2 programme are not contingent on export performance.  
 27. A WTO dispute settlement panel has already determined that such facts do not involve an export subsidy for purposes of both Articles 9 and 10 of the Agriculture Agreement, because the 
subsidy is not “contingent on export performance”.  The panel in Canada - Measures Affecting the 
Importation of Milk and the Exportation of Dairy Products  concluded that where a subsidy was 
available in connection with the exported product but also to processors producing for the domestic 
market, “access to milk under such other classes is not ‘contingent on export performance.’  We therefore find that such other milk classes do not i nvolve an export subsidy under Article 9.1(a)”.  For 
precisely the same reasons, the panel also found that  “these other milk classes do not involve an export 
subsidy in the sense of Article 10.1”.  Similarly,  the Step 2 programme is not an export subsidy 
inconsistent with Articles 9 and 10 of because the su bsidy is not contingent on export performance and 
therefore is not an export subsidy.   28. Brazil Bears the Burden of Proof to Demons trate the Existence of an Export Subsidy for 
Upland Cotton :  Brazil as complainant bears the burden of  proof with respect to any export subsidy 
claim relating to upland cotton.  Brazil cites Agri culture Agreement Article 10.3 to assert that the 
United States bears this burden.  However, the burden-shift set forth in Article 10.3 is only applicable with respect to exports in excess of a reduction  commitment level.  As Brazil correctly points out, the 
United States does not have such a reduction commitment level with respect to upland cotton.  
Article 10.3 therefore does not apply with respect to  US cotton exports.  With respect to products for  WT/DS267/R/Add.1 
 Page B-15 
 
 
 which a Member has no scheduled export subsi dy reduction commitments, the burden of proof 
remains with the complainant.  29. US Step 2 Payments Are Not a Prohibited Subsidy Under Article 3 of the Subsidies 
Agreement :  With respect to domestic support, the negot iators of the Agriculture Agreement devised 
the novel concept of “Aggregate Measurement of Suppor t” (AMS), defined in Article 1(a).  As the 
definition provides, all annual domestic support provide d for an agricultural product, like cotton, in 
favour of the producers of that product that is not otherwise exempt under the “green box” (Annex 2) from reduction commitments, or as otherwise provide d in Articles 6.4 and 6.5 of the Agreement, is 
included in the AMS.  The definition further cont emplates that support provided during any one year 
is to be calculated in accordance w ith the provisions of Annex 3.  Pa ragraph 7 of Annex 3 requires that 
“measures directed at agricultural processors sha ll be included [in the AMS] to the extent such 
measures benefit the producers of the basic agricultural products”.   30. Accordingly, Step 2 user pa yments, directed at upland cott on processors and other users but 
intended to benefit US producers of upland cotton, are included in the annual AMS calculation of the 
United States.  As a result, such payments are s ubject to reduction commitments applicable to the 
United States.  Agriculture Agreement Article 6.3 provi des that “a Member shal l be considered to be 
in compliance with its domestic support reduction commitments in any year in which its domestic support in favour of agricultural producers expressed in terms of Current Total AMS does not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member’s 
Schedule”.  Where a particular programme exists in favour of agricultural producers within such 
Current Total AMS, the Agriculture Agreement is entirely agnostic as to the method of delivery of such support.  31. The United States is in compliance with its domestic support reduction commitments, of 
which support in the form of the Step 2 programme is  a constituent part, as provided in the Agriculture 
Agreement.  Articles 3.1(a) and 3.1(b) of the S ubsidies Agreement apply “except as provided in the 
Agreement on Agriculture”.  The conformity of th e Step 2 programmes with the terms, object and 
purpose of the Agriculture Agreement – and in particular the domestic support reduction commitments – constitute precisely the kind of exception contemplated in the introductory words of Article 3.  Inasmuch as Articles 3.1(a) and (b) do not apply to Step 2 payments, the Step 2 programme also 
cannot violate Subsidies Agreement Article 3.2. 
 32. US Step 2 Payments Are Not Inconsistent with GATT 1994 Article III:4 :  As 
contemplated by the terms of the Step 2 programme  itself, as well as Annex 3 of the Agriculture 
Agreement, the Step 2 programme provides benefits  in favour of US upland cotton producers.   As 
noted above, the Step 2 programme is in conformi ty with Agriculture Agreement Article 6.  In 
addition, Agriculture Agreement Article 3.1 provid es that the domestic support commitments in Part 
IV of each Member’s Schedule are made an inte gral part of GATT 1994.  The domestic support 
commitments of the United States are therefore an integral part of GATT 1994 itself, and Agriculture 
Agreement Article 21.1 expressly states that “the provisions of GATT 1994 . . . shall apply subject to 
the provisions of this Agreement”. 
 
33. Pursuant to Article 6.3 of the Agriculture Agre ement, “a Member shall be considered to be in 
compliance with its domestic support reduction comm itments in any year in which its domestic 
support in favour of agricultural producers expressed in terms of Current Total AMS does not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member’s 
Schedule”.  Annex 3, paragraph 7, specifically requir es that “[m]easures directed at processors shall be 
included” in the calculation of AMS to subject these measures to the domestic support reduction commitments established for the first time in th e Agriculture Agreement.  The Step 2 programme 
exists in favour of agricultural producers within such Current Total AMS, and the text of the Agriculture Agreement does not prohibit any particular form of delivery of such amber box domestic 
support. WT/DS267/R/Add.1 
Page B-16  
 
  
34. The Agriculture Agreement imposed for the fi rst time rigorous disciplines on agricultural 
support.  The domestic support reduction commitments of the United States constitute an integral part of GATT 1994.  A coherent reading of the Agricu lture Agreement with the GATT 1994 indicates that 
the Step 2 programme does not violate GATT 1994 Article III:4. 
 
35. The Commodity Credit Corporation Export  Credit Guarantee Programmes are Not 
Export Subsidies :  During the Uruguay Round, negotiators did not reach agreement on disciplines on 
all areas that had been the subject of negotiations , in several cases agreeing to continue negotiating 
after the close of the Round and the entry into force of the WTO Agreement.  The simple fact is that 
during the Uruguay Round WTO Members did not agree on disciplines to be applicable to export 
credits, export credit guarantees, and insurance pr ogrammes.  Unable to reach agreement on such 
disciplines within the Uruguay Round, Members opted to continue discussions in an appropriate forum, deferring the imposition of substantive disciplines until a consensus was achieved.  
 
36. Following the entry into force of the WTO Agreement, numerous WTO Members commenced 
negotiations under the auspices of the OECD to achieve  such internationally agreed disciplines.  When 
such negotiations failed to achieve an agreement,  negotiations on disciplines for export credits and 
export credit guarantees have subsequently con tinued both under the reform process contemplated 
under Article 20 of the Agriculture Agreement and th e mandate of the Doha Ministerial Declaration. 
 
37. The scope and detail of the current agricultur e negotiations as reflected in the Harbinson text 
demonstrate that the Members are currently engaged in active negotiations on disciplines for export 
credits and credit guarantees.  Among the areas under active discussion include disciplines on the relationship between premiums, term, and long-term  operating costs and losses.  These discussions 
would be unnecessary if existing disciplines applied to such programmes in agriculture.  The Panel 
should not pre-empt such negotiations. 
 38. The text of Article 10.2 of the Agriculture Ag reement reflects the deferral of disciplines on 
export credit guarantee programmes contemplated by WTO Members.  As simply reflected in the 
structure and text of the Agriculture Agreement,  Members came to no agreement with respect to 
substantive disciplines on export credit guarantee prog rammes.  Article 10.2 stands in stark contrast to 
Article 9.1.  Article 9.1 sets forth a list of six very  specific practices known to the drafters and deemed 
to constitute export subsidies under the Agriculture Agreement.  Significantly, the Illustrative List of Export Subsidies in the Subsidies Agreement exp licitly addresses export credit and credit guarantee 
practices in its item (j).  Conspicuously absent in Article 9.1 is any provision addressing such practices, even though US export credit guarantee progra mmes had been in existence for nearly fifteen 
years preceding the inception of obligations under the WTO. 
 39. To include US export credit guarantee programmes within the ambit of Article 10.1 or within the definition of export subsidy under Article 1(e) of the Agreement would render the work 
programme envisioned by Article 10.2 unnecessary.  Fu rther, to adhere to th e approach that Brazil 
advocates would allow for the utter irrelevance of Article 10.2.  Indeed, Brazil unabashedly makes not 
one reference to Article 10.2 in its initial submission. 
 40. CCC Export Credit Guarantees are Not Prohibited Export Subsidies Under the 
Subsidies Agreement :  Brazil has alleged that the CCC export credit guarantee programmes are 
prohibited subsidies under Article 3.1(a) of the S ubsidies Agreement.  The very first words of 
Article 3.1 of the Subsidies Agreement, however, are: “Except as provided in the Agreement on 
Agriculture.”  Article 10.2 of the Agriculture Agreement, as noted above, provides for the deferral of disciplines unless and until internationally agreed  disciplines are in fact achieved.  Brazil has 
conveniently ignored both Article 10.2 and the explic it introductory words of the Subsidies Agreement 
Article 3.1 in its first submission.  However, Br azil concedes that the e xport credit guarantees are 
“exempt from action under ASCM Article 3.1(a) if they fully conform to the provisions of [Agreement  WT/DS267/R/Add.1 
 Page B-17 
 
 
 on Agriculture] Part V”.  These programmes are in conf ormity with Article 10.2, which is within such 
Part V.  In addition, Article 21.1 explicitly provides that the Multilateral Trade Agreements in Annex 1A to the WTO Agreement, which include the Subsidies Agreement, shall apply subject  to the 
Agriculture Agreement.  
41. Brazil alleges that the export credit guarantee programmes constitute an export subsidy for 
purposes of the Subsidies Agreement because such programmes fall within  item (j) of the Illustrative 
List of Export Subsidies.  Brazil alleges the Un ited States provides export credit guarantees for cotton 
“at premium rates which are inadequate to cover the long-term operating costs and losses of the programmes” and that a ten-fiscal -year period “fulfils the criterion of being ‘long-term’ within the 
meaning of item (j)”.  Quite simply, with respect to cotton, for the last 10 fiscal years for which 
complete data is available, premiums paid exceed  claims paid.  As with any other insurance-type 
programme, moreover, a proper analysis of “losses” s hould involve the calculation of the net result of 
premiums collected, plus claims amounts repaid or rescheduled, minus claims paid.  Such calculation 
would properly reflect the net position of the programme.   
 
42. For the 10-year period from fiscal year 1993 through fiscal year 2002, premiums collected total $16,026,202 and losses incurred via clai ms total $4,768,096.  Consequently, even before  any 
post-default recoveries, premiums exceeded claims  paid.  Of claims incurred,  $1,015,365 were 
subsequently directly recovered, and an additional $8,175,570 have  been rescheduled.  Brazil argues 
that the United States “must at the very least recover their operating costs by virtue of fees or 
premiums collected”.  Without conceding that this is the applicable test by which the conformity of 
export credit guarantee programmes with WTO oblig ations should be assessed, nevertheless, the US 
programmes for cotton satisfy this Brazilian suggestion.   43. Brazil, like any complainant, bears the bur den of establishing that export credit programmes 
fall within the terms of item (j).  Brazil, the Unit ed States, and the Appellate Body would apparently 
agree, however, that a contrario , to the extent a WTO Member pr ovides, as the United States has 
already demonstrated with respect to cotton, export credit guarantees at premium rates which do cover 
long-term operating costs and losses of the programmes, then it is not an export subsidy within the 
meaning of item (j) and the Subsidies Agreement.  Premiums collected for US export credit guarantees 
in connection with cotton transactions over the last 10 fiscal years exceed long-term operating costs 
and losses.  Under the criteria of item (j) alone , these programmes do not constitute a prohibited export 
subsidy within the meaning of the Subsidies Agreem ent and are not prohibited under Article 3.1(a) nor 
inconsistent with Article 3.2.  44. Brazil Has Failed to Make a Prima Fa cie Case Regarding the FSC Repeal and 
Extraterritorial Income Exclusion Act of 2000 :  With respect to its claims concerning the FSC 
Repeal and Extraterritorial Income  Exclusion Act of 2000 (“ETI Act”), in its first submission Brazil 
has not presented any evidence regarding the ETI Act itself and does nothing more than “reiterate[] the 
claims brought by the European Communities under the [Agriculture Agreement] and the Subsidies 
Agreement in US – FSC (21.5) , and ask[] the Panel to apply the reasoning as developed by the panel 
and as modified by the Appellate Body in that case mutatis mutandis ”.  In so doing, Brazil has failed 
to make a prima facie  case with respect to the ETI Act.  Brazil’s approach would put the Panel in the 
position of having to violate its obligation under DSU Article 11 to “make an objective assessment of 
the matter  before it, including an objective assessment of the facts  of the case and the applicability of 
and conformity with  the relevant covered agreements”.  As a result of Brazil’s approach, the Panel is 
in no position to exercise its judgment to follow, or decline to follow, prior reports concerning the ETI 
Act, nor even in a position to make factual findi ngs concerning the Act.  In the absence of a prima 
facie  case by Brazil, the Panel should reject  Brazil’s claims concerning the ETI Act. 
 
 WT/DS267/R/Add.1 
Page B-18  
 
 ANNEX B-3 
 
THIRD-PARTY SUBMISSION BY ARGENTINA 
 
15 July 2003 
 
TABLE OF CONTENTS 
Page 
I. INTRODUCTION ............................................................................................................... .... 19 
II. WORLD COTTON MARKET SITUATION AND IMPACT OF THE US 
SUBSIDIES IN ARGENTINA ............................................................................................... 19 
II.1. WORLD  COTTON  MARKET  SITUATION ........................................................................... 19 
II.2. COTTON  SITUATION  IN THE  UNITED  STATES ................................................................ 20 
II.3. COTTON  SITUATION  IN ARGENTINA ............................................................................... 21 
(a) Impact of low international pr ices on Argentine production .................................................... 21 
(b) Impact of low international prices on employment ................................................................... 22 
(c) Impact of low international prices on income ........................................................................... 23  
(d) Impact of low international prices on the value and volume of Argentine exports ................... 23 
III. LOSS OF PROTECTION UNDER THE PEACE CLAUSE:  ARTICLE 13 OF 
THE AGREEMENT ON AGRICULTURE (AOA) ............................................................. 24 
PEACE CLAUSE DEFENCE SUBJ ECT TO CONDITIONS .............................................................. 25 
BURDEN OF PROOF WITH RESPECT TO THE CONDITIONS FOR THE PEACE  
CLAUSE DEFENCE ................................................................................................................ ............. 25 
 
III.1 LOSS  OF PEACE  CLAUSE  PROTECTION  IN RELATION  TO DOMESTIC  
SUPPORT  MEASURES:  ARTICLE  13 (B) (II) OF THE  AOA ................................................ 26 
 The programmes Production Flexibility Contract (PFC), Direct Payment (DP) and 
Counter-Cyclical Payment (CCP) are non-"green box" ........................................................... 27 
 Failure of the United States to comply with its notification obligations ................................... 28 THE US LEVELS OF DOMESTIC SUPPORT FO R COTTON EXCEED THE 1992 LEVEL .......... 28 
III.2 LOSS
 OF PEACE  CLAUSE  PROTECTION  IN RELATION  TO EXPORT  
SUBSIDIES:   ARTICLE  13(C)(II) OF THE  AOA ..................................................................... 30 
 Inconsistency with the provisions of Part V (Articles 8 to 11) of the AoA ................................ 31 
IV. INCONSISTENCY WITH ARTICLES 3.3, 8 AND 10.1 OF THE AOA AND 
ARTICLE 3 OF THE SCM AGREEMENT ......................................................................... 31 
ARTICLE 10.3 OF THE AoA ....................................................................................................... ........ 32 
THE INDIVIDUAL EXPORT SUBSIDY PROGRAMMES ................................................................ 32 
- Step 2 Expor t Programme ..................................................................................................... ....... 32 
- The programmes GSM 102, GSM 103 and SC GP: ..................................................................... 33 
- ETI ACT ..................................................................................................................... ................. 35 
V. CONCL USION ................................................................................................................. ....... 35  WT/DS267/R/Add.1 
 Page B-19 
 
 
  
I. INTRODUCTION 
 
1. Argentina thanks the Panel fo r this opportunity to present its views as a third party to these 
proceedings and will address Brazil's claims1 of inconsistency of the s ubsidy programmes provided by 
the United States to US producers, users and exporte rs of upland cotton, as well as legislation, 
regulations and statutory instruments and amendments thereto providing such subsidies. 
  In addition, Argentina will discuss the e xport credit guarantee programmes provided by the 
United States for exports of cotton and other comm odities that are also exported by Argentina. 
 
2. Given the little time available between the receipt on 11 July of the responding party 
submission of the United States and the date fixe d for this third-party submission, Argentina will 
comment on the US submission at the meeting of the Panel with the parties and third parties scheduled 
on 24 July.  
3. Firstly, Argentina proposes to argue the absence of US protection under Article 13(b)(ii) and 
(c)(ii) of the Agreement on Agricu lture (hereinafter "AoA"), since th e United States does not fulfil the 
legal requirements for protection against claims under Article XVI of the GATT 1994 and Articles 3, 5 and 6 of the Agreement on Subsidies and Countervailing Measures (hereinafter "SCM Agreement").  4. Secondly, Argentina will argue that the domestic support measures challenged by Brazil are 
inconsistent with Articles 5 and 6 of the SCM Agreement to the extent that they cause adverse effects 
to the interests of other Members, including Argentina.  It will also argue that the United States grants export subsidies that are prohibited under Arti cle 3(a) and (b) of the SCM Agreement. 
 5. Nevertheless, Argentina has ta ken note of the Panel's decision of  20 June to express its views, 
by 1 September next, on whether the measures at issue satisfy the conditions in Article 13 of the AoA 
and to differ its consideration of the claims under Article XVI of the GATT 1994 and Articles 3, 5 and 6 of the SCM Agreement as those provisions ar e referred to in Article 13 of the AoA. 
 6. Argentina will therefore address the inconsistenc y of the US subsidies with Articles 5 and 6 of 
the SCM Agreement in the submission of 22 September next, providing evidence that the US may not 
invoke protection under Article 13 of the AoA since it does not fulfil the conditions for protection 
under that provision.  7. Lastly, Argentina maintains that US cotton export subsidies are inconsistent with Articles 3.3, 8 and 10.1 of the AoA, since the Peace Clause cannot be used as a defence in respect of such claims. 
 
II. WORLD COTTON MARKET SITUATION AND IMPACT OF THE US SUBSIDIES 
IN ARGENTINA 
 
II.1. WORLD COTTON MARKET SITUATION 
 
8. According to data from the Statement of the 61
st Plenary Meeting of the International Cotton 
Advisory Committee (ICAC), held in Ca iro, Egypt, from 20 to 25 October 20022, world cotton 
                                                      
1 "Brazil´s First Submission to the Panel regard ing the 'Peace Clause' and Non-Peace Clause Related 
Claims", 24 June 2003. (Hereinafter "Brazil's Submission"). 
2 Representatives of 38 governments and eight international organizations took part in the meeting. 
MEMBER GOVERNMENTS:  Argentina, Australia, Belgiu m, Brazil, Burkina Faso, Cameroon, Chad, Chinese 
Taipei, Colombia, Côte d'Ivoire, Egypt, Finland, France,  Germany, Greece, India, Iran, Israel, Italy, Japan, 
Republic of Korea, Mali, Netherlands, Nigeria, Pakistan , Paraguay, Philippines, Poland, Russia, South Africa, WT/DS267/R/Add.1 
Page B-20  
 
 production reached a record 21.5 million tons in marketing year 2001/2002, exceeding global 
consumption by 1.3 millions tons.  9. Over the same period, world cotton exports increased by 10 per cent to an unprecedented 6.5 million tons, while international cotton prices fell to the lowest average level in 30 years of 
US$0.418 per pound (accordi ng to Cotlook Index A). 
 10. The value of world production declined by US$5 billion from the previous season, affecting the incomes of millions of growers, input suppliers  and service providers in unsubsidized countries. 
 
11. Since the mid-1990s, the world cotton economy has been marked by chronic price depression.  
Average international cotton prices , adjusted for inflation, are at  their lowest since the Great 
Depression of 1930, having remained below US$0.60 per pound for the last four consecutive years 
(1998/1999 to 2001/2002) against an average of US$0.725 per pound over the past 25 years.  
12. According to the ICAC, at 1 July 2003 the average international cotton price in marketing year 
2002/2003 was estimated at US$0.56 per pound, still we ll below the average of the last 30 years. 
Under such conditions, even the most efficient producers find themselves operating at a loss, unable to cover even their production costs.  ICAC projections suggest that prices will remain chronically depressed for the foreseeable future.  Forecasts point to a modest recovery in 2003/2004, but prices will stay within the US$0.50-0.60/lb range until 2015. 
 
II.2. COTTON SITUATION IN THE UNITED STATES  13. As a rule, when prices slump production unde rgoes a similar downturn.  However, while 
world cotton prices have fallen by 54 per cent since the mid-1990s, the United States has increased its 
output and exports. 
 14. Since 1998, US cotton production has experienced 42 per cent growth from 14 million metric tons to a record 20.3 million metric tons in 2001.  15. Likewise, at a time of dramatically declining international cotton prices the volume of US 
exports has expanded to unprecedented levels, from 946,000 tons in 1998 to 2,395,000 tons in 2002.
3 
 16. In addition, US cotton production costs are among the highest in the world.  According to a recent ICAC study
4, the cost of production in the United States was US$0.81 per pound of cotton in 
marketing year 1999,5 while US producers market prices fell from US$0.60 to US$0.30 per pound. 
 
17. The only possible explanation how the Unit ed States bridged the widening gap between 
production costs and market prices is subsidies, for without them many US producers would have been compelled to cease production.  18. Hence the factor underlying the world cotton market crisis is the US subsidies.  As Brazil 
points out at paragraph 2 of its Submission, it was the subsidies that enabled the United States to 
                                                                                                                                                                      
Spain, Sudan, Switzerland, Syria, Tanzania, Togo, Turk ey, Uganda, United Kingdom, United States, Uzbekistan 
and Zimbabwe. 
3 According to data from " Cultivating Poverty:  The Impact of U.S. Cotton Subsidies on Africa ", Oxfam 
Briefing Paper 30, 27 September 2002 (See Exhibit Bra-15) and ICAC Secretariat. 
4 "Cotton:  World Statistics". Bulletin of the International Cotton Advisory Committee, 
September 2002.  (Exhibit Bra-9). 
5 As stated by Brazil at paragraph 32 of its Submi ssion, the cost of productio n in Argentina averaged 
59 cents/lb of cotton, according to th e ICAC study (See Exhibit Bra-9).  WT/DS267/R/Add.1 
 Page B-21 
 
 
 increase production and exports while market prices  remained far below the cost of production over 
marketing years 1999 to 2002.  19. The total value of US cotton subsidies during this period – as stated at paragraph 3 of Brazil's Submission – amounted to almost US$13 billion and the average cotton subsidization rate was 95 per 
cent.
6 
 20. While there are a great many cotton producing countries, four of them (China, the United States, India and Pakistan, in descending orde r) alone account for two thirds of world cotton 
production.  Most of the cotton is used in the produci ng country itself.  The great exception to this rule 
is the United States, which exports over half of the cotton it produces
7 and is the world's leading 
exporter.  This is why the level of subsidization in the United States is so important as far as the world cotton market is concerned.  II.3. COTTON SITUATION IN ARGENTINA 
 
21. Argentina's cotton sector is a substantial source of employment and income for many of the country's provinces.  The Argentine cotton sector has been contracting since 1998, as a result of declining international prices.  In 2001/2002, cultivat ed area and production plummeted to historic low 
levels.  Cultivated area has shrunk by 76 per cent since 1998, with 174,000 hectares planted to cotton, 
and production has fallen by 63 per cent compared to 1998, with an estimated 73,000 tons of cotton 
fibre produced.
8 
 22. According to the Argentine Ministry of Agriculture, Livestock, Fisheries and Food, provisional estimates as at 13 June 2003 for marketing year 2002/2003 were 157,930 hectares of cultivated area and 60,000 tons of cotton produced. 
 
23. The decline is even more significant when considered in terms of a 10-year annual average, record prices in 1994/1995 (US$0.9275/lb Cotlook A Index) having led to record figures for both cultivated area and production (1,010,000 hectares and 437,000 tons of cotton fibre in 1995/1996).  24. The contraction of the cotton sector started in 1997/1998.  Since then, steadily falling prices 
and increased US government support have gradually driven raw cotton
9 producer prices down to their 
lowest level (US$192/ton) since 1991/1992, which in  turn has entailed constant reductions in 
cultivated area and production.  25. Although domestic consumption is dwindling, Argentine exports of cotton fibre set another 
historic low record of 18,366 tons in 2001/2002.  Data updated at 31 May 2003 show even worse 
results, since exports for marketing year 2002/2003 barely reached 2,000 metric tons. 
 (a) Impact of low international prices on Argentine production  26. Over the last three years, low international prices – because of the huge US subsidies – have 
impacted heavily on producers' decisions, with  only 309,287 cultivated hectares, representing a 
58 per cent reduction from a 10-year annual average (1989/1990 to 1998/1999).  This has led to sharp reductions in cotton fibre production.  Over th at same three-year period (1999/2000 to 2001/2002), 
production averaged 122,883 tons – a 62 per cent fall from the annual average of 327,360 tons 
                                                      
6 USDA Fact Sheet:  Upland Cotton (January 2003). (See Exhibit Bra-4). 
7 As indicated at paragraph 10 of Brazil's Submission, domestic cotton consumption in the United States 
is dwindling steadily. 
8 "Argentina:  Economic Injury to the Cotton Sector  as a Result of Low Prices", Working Group on 
Government Measures of the International Cotton Advisory Committee, 2002. 
9 Seed cotton; unginned. WT/DS267/R/Add.1 
Page B-22  
 
 between 1994/1995 and 1998/1999.  Worse still, production in 2001/2002 was estimated at 
69,810 tons and in 2002/2003 at 60,000 tons, against 163,000 tons in 2000/2001.  27. This collapse of the Argentine cotton sector is reflected in the high level of indebtedness of producers estimated at US$600 million and equivalent  to twice the size of agricultural GDP of 
Argentina's largest cotton producing province.  
 28. The table below shows the direct relationship between the area of cultivated and harvested cotton and fibre production in Argentina, and tre nds in world cotton prices according to Cotlook A 
Index. 
 
Season Cotton area 
(hectares) Fibre production  World price 
A Index 
 Cultivated Harvested (Metric tons) (US cents/lb) 
1995/96 1,010,000 969,400 437,000 85.60 
1996/97 955,600 887,140 338,000 78.55 
1997/98 1,133,500 877,900 311,000 72.20 
1998/99 751,000 639,700 200,000 58.90 
1999/00 345,950 332,100 134,000 52.80 
2000/01 407,980 384,850 165,000 57.20 
2001/02 173,930 170,000 73,000 41.80 
2002/03* 157,930 147,410 60,000 55.30 
* Estimate 
 
TRENDS IN ARGENTINE COTTON PRODUCTION
0200,000400,000600,000800,0001,000,0001,200,000
1990-
911991-
921992-
931993-
941994-
951995-
961996-
971997-
981998-
991999-
002000-
012001-
02
Marketing YearHectares
Series1
Series2
 
(b) Impact of low international prices on employment 
 
29. Total employment in raw cotton production in Argentina amounts to 93,470 workers;  this figure includes 32,060 cotton producers and is based on an average harvested area of 810,828 hectares.  The ginning sector employs 3,946 workers and the ma rketing and input supply chain represents 12,550 
additional jobs.  
30. Between 1999/2000 and 2001/2002, employment in the cotton sector decreased to an average 
of 70,400 workers, i.e. a reduction in employment of 64 per cent .  These figures were obtained from 
the official employment records of registered workers but they are probably underestimated.  
According to private estimates, there are 50,000 non -registered workers, which would increase labour 
loss to 102,000 jobs. 
 
31. Argentina's cotton production is concentrated  in 11 provinces and, according to a 1999 World 
Bank study, 56.6 per cent of the population in these provinces live under the poverty line and 18.2 per cent below the indigence line.  The same study shows that 36.1 per cent of Argentina's population live  WT/DS267/R/Add.1 
 Page B-23 
 
 
 under the poverty line and 8.6 per cent below the indi gence line, which reflects the higher level of 
poverty in the cotton producing provinces.10 
 (c) Impact of low international prices on income  
32. Between 1999/2000 and 2001/2002, average raw cotton production
11 was 652,872 tons lower 
than the 1994/1995 to 1998/1999 average.  Using an average price received by producers of US$358/ton
12 between 1994/1995 and 1998/1999, annual gross revenue has dropped by 
US$255 million over the past three years.  
(d) Impact of low international prices on the value and volume of Argentine exports 
 33. In marketing year 2002/2003, planted area shrank to a mere 157,930 hectares, its lowest level in the last 66 years, and production will not even succeed in meeting domestic demand.  Even in circumstances like these, it might have been possible to generate sufficient export supply had 
international prices not been artificially depressed. 
 34. It should be emphasized that in 1996 Argentin a exported 70 per cent of its production, ranking 
that year as the world's fourth largest exporter.  35. The table below shows the trends in Argentine cotton exports. 
 
TRENDS IN ARGENTINE COTTON EXPORTS 
 
Years Volume 
(tons) FOB value 
(US$ millions) Argentina's per cent share of 
world exports 
1995 243,474 432.8 4% 
1996 357,447 497.0 6% 
1997 214,904 332.3 3.6% 
1998 177,025 224.3 3.2% 
1999 180,897 177.9 3% 
2000 53,637 53.2 0.9% 
2001 89,262 72.8 1.5% 
2002 18,366 11.9 0.1% 
2003* 1,985  1.6 --
*(Estimate at 31 May 2003) 
 
                                                      
10 Id. 
11 Seed cotton; unginned. 
12 For a quality equal to a C-1/2 grade. WT/DS267/R/Add.1 
Page B-24  
 
 36. In chart form, Argentine cotton exports (tons) since 1995 show the following trends: 
050000100000150000200000250000300000350000400000
1995 1996 1997 1998 1999 2000 2001 2002 2003* 
 
37. This chart shows – as does the table below – a direct relationship between the decline in 
international cotton prices, which began in 1996/ 1997, along with the implementation of the 1996 US 
Farm Act, and the collapse of the Argentine cotton economy. 
 
Years Argentine cotton exports 
(FOB value in US$ millions)Cotlook A Index 
(US$/lb)
1996 497.0 0.7855 
1997 332.3 0.7220 
1998 224.3 0.5890 
1999 177.9 0.5280 
2000 53.2 0.5720 
2001 72.8 0.4180 
2002 11.9 0.5530 
2003* 1.6 --- 
 
38. The following chart clearly illustrates the direct relationship (except for the year 2000) between Argentine exports and international cotton prices.  
0100200300400500
1996
19971998
1999
2000
2001Argentine cotton exports (f.o.b. value in 
US$ millions)
00.20.40.60.8
1996
1997
1998
19992000
2001Cotlook A Index (US$/lb)
 
III. LOSS OF PROTECTION UNDER THE PEACE CLAUSE:  ARTICLE 13 OF THE 
AGREEMENT ON AGRICULTURE (AOA) 
 
39. As stated in paragraph 6 a bove, Argentina will address the inconsistency of the United States 
subsidies with Articles 5 and 6 of the SCM Agre ement in the 22 September submission.  On that 
occasion, Argentina will explain why the United St ates cannot seek the protection of Article 13 of the 
AoA because of non-compliance with the legal re quirements for protection under that provision.  WT/DS267/R/Add.1 
 Page B-25 
 
 
  
PEACE CLAUSE DEFENCE SUBJECT TO CONDITIONS  40. The "Peace Clause" – Article 13 of the Ao A – 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 Arti cle 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".13 (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)".
14 
 
 … 
  " … A different interpretation would imply giving the measures allegedly covered by the 
Peace Clause a character of absolute immunity , independent of whethe r 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".
15 
  …   " … 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 … ".
16 
 BURDEN OF PROOF WITH RESPECT TO TH E 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: 
                                                      
13 See Argentina's Third Party Initial Br ief of 10 June 2003, paragraph 3. 
14 Ibidem   paragraph 5. 
15 Ibidem , paragraph 6. 
16 Ibidem , paragraph 8. WT/DS267/R/Add.1 
Page B-26  
 
  
 - 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 w ith 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 c onform to the requirements of paragraph 5 
thereof, as reflected in each Member's Sche dule, 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 Arti cle 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 th e 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" dome stic 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, th e Oxfam Briefing Paper (" Cultivating Poverty :  The impact of USCotton 
Subsidies on Africa")
17 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 ". 
 
 …  
                                                      
17 See Exhibit Bra – 15.   WT/DS267/R/Add.1 
 Page B-27 
 
 
  "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 subsidie s is a breach of the "Peace 
Clause" in the WTO Agree ment on Agriculture …" 
 
 … 
  "The United States accounts for approximatel y 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 it s First Submission:  Deficiency Payments
18, Loan Deficiency 
Payments19, Production Flexibility Contract Payments20, Direct Payments21, Market Loss Assistance22, 
Counter-Cyclical Payments23, Marketing Loan Gains24, Crop Insurance Subsidies25, Step 2 Domestic 
Payments26, and Cottonseed Payments27. 
 51. It should be pointed out that in the cons ultations 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 1998
28. 
 52. In this connection, the United States confined itself to pointing out that various answers to the 
Argentine questions could be found in US domes tic support notifications in the process of being 
submitted to the Committee on Agriculture, without sp ecifying what these answers were or when these 
notifications would be made.  The programmes Production Flexibility Contract (P FC), 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 paragra ph 6 (b) of that Annex in as much as the amount of 
                                                      
18 Submission by Brazil, paragraphs 45 to 47. 
19 Ibidem , paragraphs 70 to 78 and Exhibits Bra – 28, Bra – 29 and Bra – 36. 
20 Ibidem , Sections 2.6.1 and 3.2.6. 
21 Ibidem , Sections 2.6.2 and 3.2.7. 
22 Ibidem , Section 2.6.3. 
23 Ibidem , Sections 2.6.4 and 3.2.8. 
24 Ibidem , Section 2.6.5. 
25 Ibidem , Section 2.6.6 
26 Ibidem , Section 2.6.8 
27 Ibidem , Section 2.6.10. 
28 It should be noted that after the consultations the United States notified the Committee on Agriculture 
of the amount of domestic support for the year 1999 (G/AG/N/USA/43; Exhibit Bra – 47). WT/DS267/R/Add.1 
Page B-28  
 
 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 1999
29 
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 th e obligation to inform Members is such that 
paragraph 7 of Annex V to the SCM Agreement ac tually 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 subsid ies 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 para graphs 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 itself
30: 
                                                      
29 G/AG/N/USA/43 (Exhibit Bra-47). 
30 See Exhibits Bra-6, Bra-76, Bra-4, Bra-57,  Bra-55, Bra-47, and footnotes 301 and 321.  WT/DS267/R/Add.1 
 Page B-29 
 
 
  
Domestic 
Support Marketing 
Year 1992 Marketing 
Year 1999 Marketing 
Year 2000 Marketing 
Year 2001 Marketing 
Year 2002* 
Loan Deficiency Payments 268 685 152 743 206
31 
Marketing 
Loan Gains 476 860 390 1.763 60232 
(Total 
Marketing Loan Payments) --- --- --- --- 952
33 
Deficiency 
Payments 1,017 --- --- --- --- 
Production 
Flexibility 
Contract Payments
34 --- 616 575 474 --- 
Direct 
Payments35 --- --- --- --- 523 
Step 2 
Payments 207 422 236 196 317 
Crop 
Insurance Payments 26.5 170 161 263 194 
Market Loss 
Assistance Payments --- 613 612 654 --- 
Counter-
Cyclical 
Payments36 --- --- --- --- 1,077 
Cottonseed 
Payments --- 79 185 --- 50 
TOTAL 1,994.5 3,445 2,311 4,093 3,113 
 * 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 Brazi l 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 Unit ed States therefore lacks a basis for its claim, 
                                                      
31 See Exhibit Bra-55. 
32 See Exhibit Bra-55. 
33 See footnote 338 of Brazil's Submission. 
34 According to paragraph 45 of Brazil's Submission , PFC payments replaced the Deficiency Payment 
Programme that had existed for years and had been renewed in the 1990 FACT Act. 
35 As indicated by Brazil in paragraph 49 of its Submission, direct payments began to be paid in 
marketing year 2002 with the passage of the new Farm Act in May 2002 (2002 FSRI Act) and will be paid until 
the end of marketing year 2007, in place of the Production Flexibility Contract payments. 
36 As indicated by Brazil in paragraph 63 of its Submission, the 2002 Farm Act (2002 FSRI Act) 
institutionalized the market loss assistance payments that the United States enacted in marketing years  
1998- 2001 with a new programme of counter-cyclical payments up to the end of marketing year 2007. WT/DS267/R/Add.1 
Page B-30  
 
 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, Ar ticle 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 provis ions 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 Clau se 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 sati sfies 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 cons iders to be inconsistent with WTO rules are: 
  I. the export subsidies for US (upland) cott on established in the United States legislation 
under the Step 2 Export Program
37; 
  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 Submission
38;  and 
 
 III. the cotton export subsidies granted under the FSC Repeal and Extraterritorial Income 
Act of 2000(ETI Act). 
 
                                                      
37 CFR 1427.103 to 1427.107. 
38 Submission by Brazil, sections 2.6.7, 4.1 and 4. 1.1 and 2.6.9.  WT/DS267/R/Add.1 
 Page B-31 
 
 
 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 Schedule
39.  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.40 
 71. In fact, Schedule XX of the United States, Part IV (Agricultural Products:  Commitments Limiting Subsidization), Section II (Export Subsid ies:  Budgetary Outlay and Quantity Reduction 
Commitments)
41, 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 subsid ies 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 paragra ph 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 Un ited States, Part IV (Agricultural Products:  
Commitments Limiting Subsidization), Section II (Export Subsidies:  Budgetary Outlay and Quantity 
Reduction Commitments)
42, does not specify cotton among the pr oducts subject to commitments . 
 
76. Consequently, as noted by Brazil in paragra ph 237 of its Submission, any export subsidy 
provided by the United States to its cotton industry wi ll be inconsistent with Articles 3.3 and 8 of the 
AoA.  In other words, as it has not specifie d 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:  
                                                      
39 Article 3.3 of the AoA reads as follows:  "…a Member shall not provide export subsidies listed in 
paragraph 1 of Article 9 in respect of the agricultural pr oducts or groups of products specified in Section II of 
Part IV of its Schedule in excess of the budgetary outlay and quantity commitment levels specified therein and 
shall not provide such subsidies in respect of any agricultural product not specified in that Section of its 
Schedule" . (Emphasis added). 
40 Article 8 of the AoA reads as follows: 
"Each Member undertakes not to provide export subsid ies otherwise than in conformity with this 
Agreement and with the commitments as  specified in that Member's Schedule" . 
41 See Exhibit Bra-83. 
42 See Exhibit Bra-83. WT/DS267/R/Add.1 
Page B-32  
 
 ARTICLE 10.3 OF THE AoA 
 77. Argentina wishes to point out that, in acco rdance with Article 10.3 of the AoA and the 
Appellate Body's interpretation in " Canada - Dairy Products:  Article 21.5 DSU (II)
43", 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 Braz il'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 bur den 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 para graphs 244 and 245 of its Submission, Argentina 
agrees that Section 1207(a) of the Farm Act of 2002 ( 2002 FSRI Act )
44 – 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 2003
45, 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 "46, 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 
                                                      
43 WT/DS103/AB/RW2, WT/DS113/AB/RW2, adopted17 January 2003. 
44 See Exhibit Bra-29.  
45 Submission by Brazil, Sections  4.1, 4.1.1, 4.1.2, 4.2 ff. 
46 Oxfam American Briefing Note, March 2003.  WT/DS267/R/Add.1 
 Page B-33 
 
 
 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 progr amme 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 establ ishes 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-law
47. 
 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 op erating 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 emphasi ze the impact and distorting effect on trade of 
these export credit guarantees.  89. The export credit guarantee programmes provi de 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 "
48 which on page 3 states: 
 
" … those favourable conditions include lower interest rates, a longer loan repayment 
period, a smaller down payment, less freque nt 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 thos e 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.
49 
 
                                                      
47 Submission by Brazil, Section 4.2.1.4.2. 
48 Oxfam America Briefing Note, March 2003. 
49 "An analysis of officially supported export credits in agriculture", OECD, 2000. WT/DS267/R/Add.1 
Page B-34  
 
 91. According to the " Summary of FY 2002 Export Credit Guarantee Programme Activity ", 
published on the Federal Agricultural Service (FAS) Website
50, the percent shares of export credit 
guarantee applications, by commodity, for fiscal year 2002 were as follows:  
Applications for export credit guarantees, by commodity, 
Fiscal year 2002, Percent share 
 
feed grains
27%
vegetable oils
4% wheat
21%rice
3%protein meals
11%oilseeds
22%cotton and cotton
products
7%
other 
5%
 
92. Thus, as the United States does not have e xport subsidy reduction commitments specified in 
its Schedule for cotton and other products such as soya, maize (corn) and oilseeds and given the 
existence of United States export subsidies for co tton and other products, the United States is in 
violation of Articles 3.3, 8 and 10.1 of the Agreement on Agriculture.  93. Finally, it should be noted that the GSM 102, GSM 103 and SCGP programmes can be granted both to products for which reduction commitments exist and to those for which no such 
commitments exist
51.  With the respect to the products for which there are reduction commitments, the 
amounts exported by the United States are well in excess of the levels of those commitments.52  
Accordingly, Argentina considers – as indicated by Brazil53- that the burden lies with the United States 
to prove that its excess exports did not benefi t from export subsidies, including export credit 
guarantees. 
 
94. Moreover, since the GSM 102, GSM 103 and SCGP programmes are intended to promote exports of cotton, confirmation of their export subsidy component would imply the presence of a 
subsidy prohibited within the meaning of Article 3.1 (a) of the SCM Agreement and a violation of 
Article 10.1 of the AoA –   
                                                      
50 "US EXPORT CREDITS:  Denials and Double Standards", Oxfam America Briefing Note, 
March 2003. 
51 See Exhibit Bra-84, pages 9, 12 and 17, and Exhibit Bra-73. 
52 Submission by Brazil, paragraphs 265 and 266. 
53 Submission by Brazil, paragraph 268.  WT/DS267/R/Add.1 
 Page B-35 
 
 
 - ETI ACT 
 95. With respect to the export subsidies granted to cotton under the ETI Act, which provides tax exemptions for US exporters who sell products outside the United States, Argentina refers to the fact 
that this Act was declared inconsistent with Article 3.1 (a) of the SCM Agreement and Articles 10.1 
and 8 of the AoA in the " United States - FSC
54" dispute. 
 
V. CONCLUSION 
 
96. For the above reasons Argentina considers th at both the domestic support measures and the 
export subsidies granted by the United States to its cotton sector and called into question in these 
proceedings do not qualify for the protection provided unde r Article 13, paragraphs (b) (ii) and (c) (ii) 
of the Agreement on Agriculture.  97. Furthermore, the export subsidies for cotton and other products provided for in the United 
States legislation in the form of export credit guarantees (GSM 102, GSM 103, and SCGP) are 
likewise not protected by Article 13 (c) (ii).  98. Argentina also maintains that the subsidies fo r cotton exports provided for in the United States 
legislation are inconsistent with Articles 3.3, 8 and 10.1 of the Agreement on Agriculture.  
                                                      
54 WT/DS108/AB/R adopted on 20 March 2000. WT/DS267/R/Add.1 
Page B-36  
 
 ANNEX B-4 
 
 
AUSTRALIA'S THIRD PARTY SUBMISSION 
  
TABLE OF CONTENTS 
I. INTRODUCTION ............................................................................................................... .... 38 
II. ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE ........................................... 38 
A. AA
 ARTICLE 13 IS IN THE NATURE OF AN AFFIRMATIVE DEFENCE AND THE UNITED 
STATES HAS THE BURDEN OF PROOF  ......................................................................................... 38 
B. T HE MEANING OF AA ARTICLE 13(B)(II) ................................................................................... 40 
(i) “Implementation period” ................................................................................................... ........ 40 
(ii) “Domestic support measures that conform fully to the provisions of [AA] Article 6” ............. 40 (iii) “Exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 
5 and 6 of the [SCM Agreement]” ............................................................................................ 41  
(iv) “Such measures” .......................................................................................................... ............. 41 
(v) “Grant support” ........................................................................................................... .............. 41 
(vi) “To a specific commodity”................................................................................................. ....... 41 
(vii) “That decided during the 1992 marketing year” ....................................................................... 42 (viii) Summary of the meaning of AA Article 13(b)(ii) ..................................................................... 42 
III. “PRODUCTION FLEXIBILITY CONTRACT PAYMENTS” AND “DIRECT 
PAYMENTS” MAY NOT BE CLAIMED AS “GREEN BOX” MEASURES UNDER ANNEX 2 TO THE AGREEM ENT ON AGRICULTURE ................................. 42 
A. T
HE RELEVANT REQUIREME NTS OF PARAGRAPHS 1 AND 6(B) OF AA ANNEX 2 ....................... 42 
(i) “No, or at most minimal, trade-distor ting effects or effects on production” ............................. 43 
(ii) “The amount of such payments in any given year shall not be related to, or based on, 
the type or volume of production (including livestock units) undertaken by the producer in any year afte r the base pe riod” ............................................................................... 43 
B. “P
RODUCTION FLEXIBILITY CONTRACT (PFC)  PAYMENTS ” COULD NOT BE CLAIMED 
AS “GREEN BOX ” PAYMENTS  ..................................................................................................... 44 
(i) PFC payments had more than a negligib le trade-distorting effect or effect on 
production, contrary to paragr aph 1 of AA Annex 2 ................................................................. 44 
(ii) PFC payments were related to the type of production undertaken by the producer, 
contrary to paragraph 6( b) of AA Annex 2 ............................................................................... 45 
C. “D IRECT PAYMENTS ” FOR UPLAND COTTON MAY NOT BE CLAIMED AS “GREEN BOX ” 
PAYMENTS  .............................................................................................................................. ... 45 
(i) Direct payments are likely to have more than a negligible trade-distorting effect or 
effect on production, contrary to paragraph 1 of AA Annex 2 ................................................. 45 
(ii) Direct payments are related to the type of production undertaken by the producer, 
contrary to paragraph 6(b) of Annex 2 of the Agreement on Agriculture ................................. 45  WT/DS267/R/Add.1 
 Page B-37 
 
 
 (iii) Direct payments are related to, or based on, the type or volume of production 
undertaken by the producer in a year after th e base period, contrary to paragraph 6(b) 
of Annex 2 of the Agreement on Agriculture ............................................................................ 46 
IV. “STEP 2” PAYMENTS ARE PROHIBITED SUBSIDIES CONTRARY TO 
ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND/OR 
ARTICLE 3 OF THE SCM AGREEMENT ......................................................................... 46 
A. “S TEP 2” EXPORT PAYMENTS ARE PROHIBITED EXPORT SUBSIDIES CONTRARY TO 
ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND ARTICLE 3.1( A) AND 
3.2 OF THE SCM  AGREEMENT  ................................................................................................... 47 
(i) “Step 2” export payments are subsidi es contingent upon export performance ......................... 47 
(ii) “Step 2” export payments are export subsidies contrary to Articles 3.3 and 8 of the 
Agreement on Agriculture ...................................................................................................... ... 48 
(iii) “Step 2” export payments are prohibited e xport subsidies contrary to SCM Article 3 ............. 48 
B. “S TEP 2” DOMESTIC PAYMENTS ARE LOCAL C ONTENT SUBSIDIES CONTRARY TO 
ARTICLE 3 OF THE SCM  AGREEMENT  ....................................................................................... 49 
C. T HE UNITED STATES CANNOT AVOID ITS OBLIGATIONS RELATING TO PROHIBITED 
SUBSIDIES BY DESIGNING A MEASURE UNDE R WHICH ENTITLEMENTS ARE OSTENSIBLY 
AVAILABLE IN MULTIPLE CIRCUMSTANCES  ............................................................................... 49 
V. CONCL USION ................................................................................................................. ....... 50 
 
 WT/DS267/R/Add.1 
Page B-38  
 
 I. INTRODUCTION 
 
1. Australia welcomes the opportunity to present its views in this proceeding on US subsidies 
for upland cotton.    
2. Australia notes that this dispute is the first to involve the interpretation and application of 
Article 13 of the Agreement on Agriculture  (AA), the so-called “peace clau se”.  As such, this dispute 
has particular systemic as well as commercial significance.    3. In this third party Submis sion, Australia addresses:   
 
I. the nature of AA Article 13 as an affirmat ive defence, and the meaning of Article 
13(b)(ii);   
 
II. whether “production flexibility contract payments” and their successor “direct 
payments” may be claimed as “green box” support within the meaning of AA 
Annex 2;   
 
III. whether s.1207(a) of the Farm Security a nd Rural Investment Act of 2002 (“the FSRI 
Act”) mandating payments to exporters of US cotton (“Step 2” export payments) is inconsistent with AA Articles 3.3 and 8 and thus  is also inconsistent with Article 3 of 
the Agreement on Subsidies and Countervailing Measures  (the SCM Agreement );  and  
 
IV. whether s.1207(a) of the FSRI Act mandating payments to domestic users of US 
cotton (“Step 2” domestic payments) is  inconsistent with Article 3 of the SCM 
Agreement .   
 
4. Because of the very limited time that has been available to cons ider the First Written 
Submission of the United States, Au stralia will address issues raised in that Submission in its oral 
statement before the Panel.    
II. ARTICLE 13 OF THE AG REEMENT ON AGRICULTURE 
 
A. AA ARTICLE 13 IS IN THE NATURE OF AN AFFIRMATIVE DEFENCE AND THE UNITED 
STATES HAS THE BURDEN OF PROOF 
 
5. Australia agrees with Brazil that AA Article 13 is  in the nature of an affirmative defence and 
that the United States has the burden of proof on the question of whether th e measures at issue fully 
conform with the applicable conditions of Article 13.    
6. Like Article XX of the General Agreement on Tariffs and Trade  (“GATT”), AA Article 13 
“does not establish any ‘positive obligations’ relevant to determining the proper scope of the obligations under [the specified provisions of GATT 1994 and the SCM Agreement] .  Instead, it sets 
out circumstances in which Members are entitled to ‘adopt or maintain’ measures that are inconsistent with the obligations imposed under other provisions of [the GATT 1994 and the SCM Agreement] ”.
1   
 
7. AA Article 13 does not of itself impose any obligation on a Member granting domestic support measures falling within Annex 2 or Article 6 or granting export subsidies falling within Part 
V of the Agreement on Agriculture .   
 
                                                      
1 United States – Tax Treatment for “Foreign Sales Corporations” , Recourse to Article 21.5 of the 
DSU by the European Communities, Report of the Appellate Body, WT/DS108/AB/RW, paragraph 127.    WT/DS267/R/Add.1 
 Page B-39 
 
 
 8. Instead, AA Article 13 sets out the circumstan ces in which Members will be immune, either 
wholly or partially, from the consequences of gr anting domestic support measures or export subsidies 
that otherwise constitute grounds for a claim of in fringement of the obligations contained in the 
provisions of GATT 1994 and the SCM Agreement  specified in that Article.  Thus, for example, under 
AA Article 13(b)(ii), “domestic support measures that conform fully to the provisions of Article 6 of 
[the Agreement on Agriculture]  … shall be:  … exempt from actions based on” the specified 
provisions of GATT 1994 and the SCM Agreement , “provided that such measures do not grant 
support to a specific commodity in excess of that decided during the 1992 marketing year”.    9. The nature of AA Article 13 as an affirmative defence is confirmed by an examination of the 
protection afforded by Article 13.   
 10. Under AA Article 13(a)(i), domestic support measures that conform fully to the provisions of AA Annex 2 “shall be non-actionable subsidies for purposes of countervailing duties”.  Under AA 
Article 13(b)(i), domestic support measures that conform fully to AA Article 6 shall be “exempt from 
the imposition of countervailing duties unless …”.  U nder AA Article 13(c)(i), export subsidies that 
conform fully to the provisions of AA Part V sh all be “subject to countervailing duties only upon a 
determination of …”.    11. Under the other provisions of AA Article 13,  domestic support measur es or export subsidies 
that conform fully with the prescribed conditions “shall be exempt from actions based on …” the 
specified provisions of GATT 1994 and the SCM Agreement .  If domestic support measures or export 
subsidies infringe the relevant provisions specified in Article 13, they are nevertheless “free or released from a duty or liability to which others are held”
2 in relation to a proceeding3 “found[ed], 
buil[t] or construct[ed] on”4 those provisions, as long as the measures meet the relevant conditions 
specified in Article 13.   
 
12. Thus, the protection afforded by AA Arti cle 13 becomes available only in circumstances 
where the domestic support measures or export subsidies at issue have been found:    
V. to be actionable subsidies, or to be othe rwise countervailable, under Article 13(a)(i), 
13(b)(i) or 13(c)(i);  or  
 
VI. in all other cases, to be inconsistent with  the relevant specified provisions of GATT 
1994 and/or the SCM Agreement ;   
 and if the applicable conditions for the availability of that protection as specified in Article 13 are 
met.   
 13. Further, had the negotiators of the Agreement on Agriculture  intended that AA Article 13 
should mean that a Member would not be liable to a legal process of dispute, it is reasonable to 
assume that they would have said so.  For exampl e, the negotiators could have provided that the 
specified provisions of GATT and the SCM Agreement  could not be “invoked”, as they did in 
footnote 35 to Article 10 of the SCM Agreement  in relation to non-actionable subsidy measures.   
 
                                                      
2 Black’s Law Dictionary , Seventh Edition, Bryan A Garner, Editor in Chief, West Group, St Paul, 
Minn., 1999, page 593.   
3 Black’s Law Dictionary , page 593, defines “action” as “1. The process of doing something; conduct 
of behaviour.  2. A thing done; act.  3. A civil or criminal judicial proceeding.”   
4 The New Shorter Oxford English Dictionary , Ed. Lesley Brown, Volume 1, Clarendon Press, Oxford, 
1993, page 187.   WT/DS267/R/Add.1 
Page B-40  
 
 14. The Appellate Body has previously clarified that “the burden of proof rests upon the party, 
whether complaining or defending, who asserts the affirmative of a particular claim or defence”
5, and 
that “[i]t is only reasonable that the burden of establishing [an affirmative defence]  should rest on the 
party asserting it”.6   
 
15. Thus, in order to qualify for the protection afforded by AA Article 13, the United States must 
prove that the measures at issue conform fu lly to the applicable provisions of the Agreement on 
Agriculture .  Further, in the case of the protection potentia lly afforded by Article 13(b)(ii), as well as 
by Article 13(b)(iii), the United States must prove that it has not granted, and does not grant, support to a specific commodity in excess of that decided during the 1992 marketing year.   
 
B. THE MEANING OF AA ARTICLE 13(B)(II)7 
 
16. In its First Written Submission, Brazil corre ctly highlights that there are a number of 
interpretative issues raised by the text of AA Article 13(b)(ii).8   
 
  (i) “Implementation period”  17. Under AA Article 1(f) and 1(i)  read together, the “implementat ion period” is, for the purposes 
of Article 13, defined as the nine-year period commencing in 1995 according to the calendar, financial 
or marketing year specified in the Schedule relating to that Member.   
   (ii) “Domestic support measures that conform fully to the provisions of [AA]  
Article 6” 
 
18. Australia supports Brazil’s interpretation that the chapeau of AA Article 13(b) includes all 
non-“green box” domestic support measures, includi ng product specific and non-product specific, de 
minimis  and production-limiting domestic support, as well as investment subsidies and 
“diversification” support in developing countries.
9   
 
                                                      
5 United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India , Report of 
the Appellate Body, WT/DS33/AB/R, page 14.   
6 United States – Woven Wool Shirts and Blouses , WT/DS33/AB/R, page 16.   
7 Article 13(b)(ii) of the Agreement on Agriculture  provides as follows:   
During the implementation period, notwithstanding the provisions of GATT 1994 and [the 
SCM  
Agreement] :   
…   
(b) 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:   
…   
(ii) exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 
and 6 of the [SCM Agreement] , provided that such measures do not grant support to a 
specific commodity in excess of that deci ded during the 1992 marketing year;  and  
… 
8 First Submission of Brazil, paragraph 127.   
9 First Submission of Brazil, paragraph 133.    WT/DS267/R/Add.1 
 Page B-41 
 
 
   (iii) “Exempt from actions based on para graph 1 of Article XVI of GATT 1994 or 
Articles 5 and 6 of the [SCM Agreement] ” 
 19. As noted in Section II.A above, if domestic support measures within the scope of the chapeau 
of AA Article 13(b) infringe the specified provisions , they are nevertheless “free or released from a 
duty or liability to which others are held”
10 in relation to a proceeding11 “found[ed], buil[t] or 
construct[ed] on”12 those provisions as long as the conditions specified in Article 13 are met.  Again, 
had the negotiators of the Agreement on Agriculture  intended that a Member would not be liable to a 
legal process of dispute, it is reasonable to assume that they woul d have said so, for example, by 
providing that the specified provisions may not be “invoked” as in footnote 35 to Article 10 of the 
SCM Agreement in relation to non-actionable subsidy measures.   
 20. Australia notes, however, that  only actions based on paragr aph 1 of GATT Article XVI and 
Articles 5 and 6 of the SCM Agreement are covere d under AA Article 13(b)(ii).  Thus, for example, 
any actions based on paragraph 3 of GATT Article XVI  or on SCM Article 3 would not benefit from 
the protection afforded by AA Article 13(b)(ii).  In Australia’s view, the limitation of protection under 
Article 13(b)(ii) to actions based on GATT Article XVI:1 and on SCM Articles 5 and 6 is consistent 
with the object and purpose of the Agreement on Agriculture  as expressed in the preamble to the 
Agreement, including to “[prevent] … distortions in  world agricultural markets” and “to [achieve] 
specific binding commitments in … export competition”.  The attainment of those objectives would be too easily subverted if commitments in regard to export subsidies could be circumvented through 
the provision of domestic support.   
   (iv) “Such measures”  21. In Australia’s view, the phr ase “such measures” in AA Article 13( b)(ii) refers to the universe 
of non-“green box” measures covered by the chapeau of Article 13(b), consistent with the ordinary 
meaning of “such” as “of the kind, degree, or  category previously specified or implied 
contextually”.
13   
   (v) “Grant support”  
22. In Australia’s view, having regard to the ordinary meaning of the words in their context and 
in light of the object and purpose of the Agreement on Agriculture , “support” means the actual 
support, other than legitimate “green box” support, provided to an agricultural product.  Thus, to “grant support” is to “agree to”, “promise”, “b estow”, “allow”, “give”, “confer” or “transfer”
14 non-
“green box” domestic support of the type referred to in the chapeau of AA Article 13(b), which 
calculation must include that portion of non-produc t specific support that benefits the specific 
commodity at issue.      (vi) “To a specific commodity”  23. Australia agrees with Brazil’s interpretation
15 that the ordinary meaning of this phrase, read in 
its context and in light of the object and purpose of the Agreement on Agriculture , is support granted 
                                                      
10 Black’s Law Dictionary , page 593.   
11 Black’s Law Dictionary , page 28, defines “action” as “1. The process of doing something; conduct of 
behaviour.  2. A thing done; act.  3. A civ il or criminal judicial proceeding.”   
12 The New Shorter Oxford English Dictionary , Volume 1, page 187.   
13 The New Shorter Oxford English Dictionary . Volume II, page 3129.   
14 The New Shorter Oxford English Dictionary . Volume I, page 1131.   
15 First Submission of Brazil, paragraph 136.   WT/DS267/R/Add.1 
Page B-42  
 
 to an individual agricultural commodity covered by AA Annex 1, such as upland cotton, whether 
through product specific, or non-product specific, support.      (vii) “That decided during the 1992 marketing year”  
24. In Australia’s view, this phrase, read in it s context and in light of the object and purpose of 
the Agreement on Agriculture , means the level of non-“green box” domestic support, including 
support provided through non-product specific non-“green box” domes tic support measures, 
“decided” by a Member in the course of the 1992 marketing year to be provided to the benefit of a specific agricultural commodity in the future.   
 
25. The use of the word “decided” in  this context was deliberate.   
 26. Australia notes that the other operative provision of the Agreement on Agriculture  in which 
the word “decided” is used is Article 13(b)(iii), which relates to non-violation nullification or 
impairment actions.  Australia notes too that Article  13(b)(iii) contains precisely the same language – 
“provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year” – as used in Article 13(b)(ii).  Thus, the meaning of the word “decided” in the context of Articl e 13(b)(ii) must be capable of having that same meaning in the 
context of non-violation nullification and impairment actions under Article 13(b)(iii).    
  (viii) Summary of the meaning of AA Article 13(b)(ii) 
 27. During the nine calendar, financial or ma rketing year period specified in a Member’s 
Schedule period commencing in 1995, all non-“green box” domestic support measures that conform fully to the provisions of AA Article 6 are immu ne from the consequences of infringing GATT 
Article XVI:1 or Part V of the SCM Agreement, provided that the level of support to an individual 
commodity does not exceed the level of support for th at commodity that was decided by the Member 
to be made available during the relevant 1992 marketing year.    
III. “PRODUCTION FLEXIBILITY CONTRACT PAYMENTS” AND “DIRECT 
PAYMENTS” MAY NOT BE CLAIMED AS “GREEN BOX” MEASURES UNDER 
ANNEX 2 TO THE AGREEMENT ON AGRICULTURE 
 
28. The United States has previously notified “Production Flexibility Contract (PFC) Payments”
16 
as AA Annex 2 “green box” measures.17  The United States has not made a domestic support 
notification since PFC payments were replaced by “Direct Payments” (DP)18 under the 2002 FSRI 
Act.  Like Brazil19, Australia considers that neither of these payments programs may be claimed as 
“green box” measures for the reasons outlined below.    
A. THE RELEVANT REQUIREMENTS OF PA RAGRAPHS 1 AND 6(B) OF AA ANNEX 2 
 
29. AA Annex 2.1 provides that “[d]omestic support measures for which exemption from 
reduction commitments is claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on production”.    
                                                      
16 “Production Flexibility Contract Payments” are descri bed at Section 2.6.1 of the First Submission of 
Brazil.   
17 See, for example, WTO document G/AG/N/USA/43 of  5 February 2003, page 8, Exhibit Bra-47.   
18 “Direct Payments” are described at Section 2. 6.2 of the First Submission of Brazil.   
19 First Submission of Brazil, Sections 3.2.6 and 3.2.7.    WT/DS267/R/Add.1 
 Page B-43 
 
 
 30. In addition, in relation to decoupled income  support, AA Annex 2.6(b) provides that “[t]he 
amount of such payments in any given year shall not be related to, or based on, the type or volume of 
production (including livestock units) undertaken by th e producer in any year after the base period”.   
   (i) “No, or at most minimal, trade-distorting effects or effects on production” 
 
31. In requiring that domestic support measures “shall meet the fundamental  requirement that 
they have no, or at most minimal, trade-distorting effects or effects on production”, AA Annex 2.1 imposes a stringent standard.  Anne x 2.1 requires that such measures must, as a primary or essential 
condition, not “bias” or “unnaturally alter”
20 trade or production.  Alternatively, Annex 2.1 requires 
that, at most, such measures must have “extremely small; of a minimum amount, quantity or degree; 
very slight, negligible”21 effects on trade or production.   
 32. In Australia’s view, this standard cannot be met if the domestic support measure at issue directly and specifically stimulates production and/ or trade of a particular commodity, or if that 
support measure directly retards or halts the transfer of economic resources to other forms of 
economic activity, other than as specifically provide d for under paragraphs 2-13 of AA Annex 2.  If a 
domestic support measure results in a level of produc tion and/or trade in a particular product or group 
of products higher than would otherwise be the case except as specifically provided for in Annex 2, 
the support measure cannot meet the standard established in Annex 2.1.  Thus, if the direct effect of a 
support measure is that farmers keep producing,  or keep producing a particular product, in 
circumstances that would be uneconomic but for th e support measure, that measure cannot meet the 
requirements of Annex 2.1.      (ii) “The amount of such payments in any given year shall not be related to, or based 
on, the type or volume of production (including livestock units) undertaken by 
the producer in any year after the base period” 
 33. Paragraph 6 of AA Annex 2 is headed “decoupl ed income support”.  Paragraph 6(a) provides 
that “[e]ligibility for [decoupled income support]  payments shall be determined by clearly defined 
criteria such as income, status as a producer or landow ner, factor use or production level in a defined 
and fixed base period”.  Thus, cons istent with the customary rules of interpretation codified at 
Article 31 of the Vienna Convention on the Law of Treaties , “after the base period” in paragraph 6(b) 
means after the base period defined and fixed pursuant to paragraph 6(a).   
 34. Accordingly, the meaning of paragraph 6(b) of AA Annex 2 is clear.  Once a base period has 
been defined and fixed pursuant to paragraph 6(a) , decoupled income support payments may not be 
“connected”
22 to or “found[ed], buil[t] or construct[ed] on”23 the type of production or the volume of 
production undertaken by a producer in a later period.    
                                                      
20 The New Shorter Oxford English Dictionary . Volume I, page 707.   
21 The New Shorter Oxford English Dictionary . Volume I, page 1781.   
22 The New Shorter Oxford English Dictionary . Volume II, page 2534.   
23 The New Shorter Oxford English Dictionary , Volume 1, page 187.   WT/DS267/R/Add.1 
Page B-44  
 
 B. “PRODUCTION FLEXIBILITY CONTRACT (PFC ) PAYMENTS” COULD NOT BE CLAIMED AS 
“GREEN BOX” PAYMENTS 
 
  (i) PFC payments had more than a neglig ible trade-distorting effect or effect on 
production, contrary to para graph 1 of AA Annex 2$ 
 35. Like Brazil, Australia considers that PFC pa yments directly stimulated, and stimulated by 
more than a negligible amount, US production of, and trade in, upland cotton and Australia endorses 
Brazil’s arguments in this respect.
24   
 36. Further, the value of PFC payments rates as a proportion of the marketing year average farm price received by US upland cotton growers can be  seen from data published by the United States 
Department of Agriculture (USDA) and included in Table 1 below.   
 
Table 1: The value of PFC payments as a percentage proportion of the marketing year average farm price received by US upland cotton growers  
Marketing or Crop Year Production flexibility 
contract (PFC) payment 
rates US¢/lb.25 Average farm price 
US¢/lb.26 PFC payment rates as a 
proportion of the 
marketing year average 
farm price % 
1996/97 8.882 69.3 12.82 
1997/98 7.625 65.2 11.69 
1998/99 8.173 60.2 13.58 
1999/2000 7.990 45.0 17.76 
2000/01 7.330 49.8 14.72 
2001/02 5.990 29.8 20.10 
 
37. In addition, data published by the USDA for this period show that PFC payments constituted 
26.37%, 36.5% and 22.90% of government payments by crop year for the 1999, 2000 and 2001 years 
respectively.27   
 38. PFC payments constituting such high proportions of the marketing year average farm prices and of domestic support measures must have a production and trade-distorting effect.   
 
39. But this view is further confirmed when the marketing year average farm prices as shown in 
Table 1 are considered against the fact that in 1997 the average of total economic costs for all US cotton farms was approximately 73 cents per pound and operating costs averaged 38 cents per pound
28.  In such circumstances, economically rational producers should have begun to transfer 
resources to other forms of economic activity.  This did not happen.  USDA data shows that the area 
planted to cotton in the United States over this period increased, from 13.1 million acres in 1998 to 
15.5 million acres in 2001.29  It is clear that many US producers of upland cotton could only have 
                                                      
24 First Submission of Brazil, Section 3.2.6.2.   
25  Figures extracted from Agricultural Outlook , USDA, May 2000 and May 2002, Table 19, available 
at http://www.ers.usda.gov/publica tions/agoutlook/may2000/ao271k.pdf  and 
http://www.ers.usda.gov/publicatio ns/agoutlook/May2002/ao291j.pdf  respectively.   
26 . Fact Sheet:  Upland Cotton:  Summary of 2002 Commodity Loan and Payment Program , USDA, 
January 2003, page 5, Exhibit Bra-4.   
27 Fact Sheet:  Upland Cotton , page 6, Exhibit Bra-4.   
28 Cotton:  Background and Issues for Farm Legislation , USDA, July 2001, page 6, Exhibit Bra-46.   
29 Fact Sheet:  Upland Cotton , page 4, Exhibit Bra-4.    WT/DS267/R/Add.1 
 Page B-45 
 
 
 remained viable over this period through subsidisation.  Further, US exports of upland cotton 
increased from 4.1 million bales in 1998 to 10.6 million bales in 2001.30   
 40. In Australia’s view, PFC payments during this period contributed directly to increased production and export levels and that they did so  contrary to the express requirement of AA 
Annex 2.1 that the domestic support measures at issu e not, or only negligibly, bias or unnaturally alter 
trade or production.      (ii) PFC payments were related to the type of production undertaken by the producer, 
contrary to paragra ph 6(b) of AA Annex 2 
 
41. By excluding fruits and vegetables (other than  lentils, mung beans, and dry peas) from the 
planting flexibility otherwise avai lable in respect of the contract acreage for which PFC payments 
could be made, s.118 of the Federal Agriculture Improvement and Reform Act of 1996 (the FAIR 
Act) related, or connected, PFC payments to the type of production undertaken by the producer in any 
year after the base period, contrary to the requirements of AA Annex 2.6(a).   
 
C. “DIRECT PAYMENTS” FOR UPLAND COTTON MAY NOT BE CLAIMED AS “GREEN BOX” 
PAYMENTS 
 
  (i) Direct payments are likely to have mo re than a negligible trade-distorting effect 
or effect on production, contrary  to paragraph 1 of AA Annex 2 
 42. Australia considers that direct payments for upland cotton are likely to stimulate, by more 
than a negligible amount, US production of, and trade in, upland cotton.  The 2002 FSRI Act has 
established a direct payment rate for upland cotton of 6.67 cents per pound for each of the 2002 through 2007 crop years.    43. In addition to the arguments put forward by Brazil
31, which Australia endorses, Australia 
considers that, so long as there is a reasonable pos sibility of continuing and significant longer-term 
volatility in the gross returns to producers (as measured by the marketing year average farm price), the assured availability of a direct payment for upland cotton at the rate of 6.67 cents per pound must be presumed to influence directly and specifically the decisions of growers to continue producing upland cotton, notwithstanding significant peaks and troughs in their income, rather than to transfer resources 
to other forms of economic activity.   
   (ii) Direct payments are related to th e type of production undertaken by the producer, 
contrary to paragraph 6(b) of Anne x 2 of the Agreement on Agriculture 
 44. Under s.1106(b) of the 2002 FSRI Act, fruits, vegetables (other than lentils, mung beans and 
dry peas) and wild rice are generally prohibite d from being planted on base acreage unless the 
commodity, if planted, is destroyed before harvest except that trees and other perennial plants are prohibited.  The implementing regulations make clea r that, where it is determined that a producer 
made a good faith effort to comply with the “planting flexibility” provisions of s.1106 of the FSRI Act but that that producer’s acreage report of fruits, vegetables or wild rice planted on a farm’s base 
acreage is inaccurate and exceeds the allowed tole rance levels, the producer “shall accept a reduction 
in the direct and counter-cyclical payments for the farm …”.
32   
 
                                                      
30 Fact Sheet:  Upland Cotton , page 5, Exhibit Bra-4.   
31 First Submission of Brazil, at Section 3.2.7.3.   
32 7 CFR 1412.602(a)(2), Exhibit Bra-35.   WT/DS267/R/Add.1 
Page B-46  
 
 45. Thus, direct payments are related, or conn ected, to the type of production undertaken by the 
producer, contrary to paragraph 6(a) of AA Annex 2.      (iii) Direct payments are related to, or  based on, the type or volume of production 
undertaken by the producer in a year after the base period, contrary to 
paragraph 6(b) of Annex 2 of the Agreement on Agriculture 
 46. Sections 1101 and 1102 of the 2002 FSRI Act allow producers to update their base acres and 
payment yields respectively for the purposes of rece iving direct payments.  As set out in Section 
III.A.ii above, only one base period is possible for th e purposes of paragraph 6 of AA Annex 2.  Once 
the base period has been defined and fixed, no furt her updating of either the type or volume of 
production is permissible if a support program is to  comply with the conditions of paragraph 6 of 
Annex 2.    47. Under the 2002 FSRI Act, direct payments replaced PFC payments.
33  Since the United States 
has claimed PFC payments as “green box” decoupled income support34, Australia considers that the 
United States has selected the base period that it used to determine base acres and payment yields 
under the 1996 FAIR Act as its defined and fixed b ase period for the purposes of paragraph 6 of AA 
Annex 2.    48. By providing for base acres and payment yields to be updated under the 2002 FSRI Act, the 
United States has related the amount of direct payments to, or based the amount of direct payments 
on, the type and volume of production undertaken by a producer in any year after the base period, 
contrary to paragraph 6( b) of AA Annex 2.   
 
IV. “STEP 2” PAYMENTS ARE PROHIBITED SUBSIDIES CONTRARY TO ARTICLES 
3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND/OR ARTICLE 3 OF 
THE SCM AGREEMENT 
 
49. Section 1207(a)(1) of the 2002 FSRI Act provides:  “… the Secretary shall issue marketing 
certificates or cash payments … to domestic users and exporters for documented purchases by domestic users and sales for export by exporters …”.  Section 136 of the 1996 FAIR Act provided 
similarly that “… the Secretary sh all issue marketing certificates or cash payments to domestic users 
and exporters …”.    50. The regulations to implement s. 1207(a)(1) of the FSRI Act provide:   
 
 Eligible upland cotton must not be:  …  (2) imported cotton …
35   
 
Payments … shall be made available to eligible domestic users and exporters who 
have entered into an Upland Cotton Domestic User/Export Agreement with CCC and who have complied with the terms and conditions in this subpart, the Upland Cotton Domestic User/Exporter Agreement and instructions issued by CCC.
36   
51. The standard Upland Cotton Domestic User/Export Agreement37 provides inter alia :   
 
                                                      
33 Fact Sheet:  Upland Cotton , Exhibit Bra-4.   
34 WTO document G/AG/N/USA/43, page 8, Exhibit Bra-47.   
35 7 CFR 1427.103(c), Exhibit Bra-37.   
36 7 CFR 1427.105(a), Exhibit Bra-37.   
37 Exhibit Bra-65.    WT/DS267/R/Add.1 
 Page B-47 
 
 
 Upland cotton eligible for payment is cotton consumed by the Domestic User in the 
United States … (Section B-2)  
Eligible upland cotton will be considered c onsumed by the Domestic User on the date 
the bagging and ties are removed from the bale in the normal opening area, immediately prior to use, … (Section B-3(b))  
Upland cotton eligible for payment is cotton which is shipped by an eligible Exporter 
… (Section C-2)   
Eligible upland cotton will be considered exported based on the on-board-vessel-date 
as shown on the bill of lading.  (Section C-3)   
52. A “Step 2” payment is unquestionably a subsidy within the meaning of the Agreement on 
Agriculture and the SCM Agreement .  A “Step 2” payment involves a direct transfer of economic 
resources (cash or the equivalent value in ownershi p of goods) to a domestic user or exporter of US 
upland cotton.    53. The Article 21.5 stage of United States – Tax Treatment fo r “Foreign Sales Corporations” 
(US – FSC (21.5))  involved provisions under which more favourable tax treatment was available in 
either of two, mutually exclusive, situations.  The availability of the favourable tax treatment was found to be a prohibited export subsidy in one of th ose situations notwithstanding that the favourable 
tax treatment was freely available in both situa tions, subject to the prescribed conditions for 
entitlement being met.  The Appellate Body said:    
In our view, it is … necessary,  under Article 3.1(a) of the SCM Agreement , to 
examine separately the conditions pertaining to the grant of the subsidy in the two 
different situations addressed by the meas ure.  We find it difficult to accept the 
United States’ arguments that such examination involves an ‘artificial bifurcation” of the measure.  The measure itself identifies th e two situations which must be different 
since the very same property cannot be produced both within and outside the United 
States.
38   
54. The availability of “Step 2” payments under s.1207(a)(1) is analogous to the situation 
examined in US – FSC (21.5) .  “Step 2” payments are available only to exporters (“Step 2” export 
payments) or to domestic users (“Step 2” domestic payments).  Section 1207(a)(1) “identifies the two situations which must be different since the very same property cannot be” exported or used within 
the United States.   
 
A. “STEP 2” EXPORT PAYMENTS ARE PROHI BITED EXPORT SUBSIDIES CONTRARY TO 
ARTICLES 3.3 AND 8 OF THE AGREEMENT ON AGRICULTURE AND ARTICLE 3.1(A) AND 
3.2 OF THE SCM AGREEMENT 
 
  (i) “Step 2” export payments are s ubsidies contingent upon export performance 
 
55. For “Step 2” export payments, the export contingency is expressly provided for in 
s.1207(a)(1), which provides “… the Secretary shall issue marketing certificates or cash payments … to exporters for … sales for export by exporters  …” and in the implementing regulations.   
 
                                                      
38 United States – Tax Treatment of “Foreign Sales Corporations” , Recourse to Article 21.5 of the 
DSU by the European Communities, WT/DS108/AB/RW, paragraph 115.   WT/DS267/R/Add.1 
Page B-48  
 
 56 “Step 2” export payments are only payable once US-produced upland cotton has been placed 
aboard a vessel:  they are “conditional” upon the cotton actually being exported.  Thus, “Step 2” 
export payments are contingent upon export performance.      (ii) “Step 2” export payments are export subsidies contrary to Articles 3.3 and 8 of 
the Agreement on Agriculture 
 57. “Step 2” export payments are a type of export subsidy expressly foreseen by AA Article 9.1(a) and subject to budgetary outlay and quantity reduction commitments thereunder.  They 
are a direct subsidy, including through payment-in-kind, to an industry, to producers of an agricultural 
product, or to a cooperative or other association of such producers, contingent on export performance.   
 58. The United States has not specified any reduction commitments in its Schedule for upland cotton.    
59. Consequently, by providing “Step 2” expor t payments under both the 1996 FAIR Act and the 
2002 FSI Act, the United States has provided export subsidies contrary to its obligations:    
VII. pursuant to AA Article 3.3 not to provide export subsidies in respect of any 
agricultural product not specified in Section II of Part IV of its Schedule;  and  
 
VIII. pursuant to its obligation pursuant to Ar ticle 8 not to provide export subsidies 
otherwise than in conformity with this Agreement and with the commitments as specified in its Schedule.   
 
  (iii) “Step 2” export payments are pr ohibited export subsidies contrary to SCM 
Article 3 
 60. Because “Step 2” export payments are expor t subsidies that do not conform fully to the 
provisions of Part V of the Agreement on Agriculture , Article 13(c)(ii) of that Agreement is not 
applicable and the payments are not protected from the operation of SCM Article 3.   
 
61. A “Step 2” export payment is a subsidy within the meaning of SCM Article 1.1(a)(1)(i) for the purposes of SCM Article 3.1:  it involves a dire ct transfer of economic resources to a domestic 
user or exporter of US upland cotton, and conf ers a benefit on the recipient by making US upland 
cotton commercially competitive.   
 
62. Further, a “Step 2” export payment is conti ngent upon export performance:  it is only payable 
once the upland cotton has been placed aboard a vesse l for export.  The Appellate Body has said:   
 
We see no reason, and none has been pointed out to us, to read the requirement of “contingent upon export performance” in the Agreement on Agriculture  differently 
from the same requirement imposed by the SCM Agreement .
39   
63. As a consequence, because “Step 2” expor t payments mandated by s.1207(a)(1) of the FSRI 
Act are export subsidies that are not being made “as provided in the Agreement on Agriculture ”, they 
are prohibited export subsidies pursuant to SCM Article 3.1(a), and the United States is acting contrary to its obligations under SCM Article 3.2 by granting or maintaining such subsidies pursuant 
to s.1207(a)(1) of the FSRI Act.  Consistent with the provisions of SCM Article 4.7, Australia 
                                                      
39 United States – Tax Treatment for “Foreign Sales Corporations” , Report of the Appellate Body, 
WT/DS108/AB/R, paragraph 141.    WT/DS267/R/Add.1 
 Page B-49 
 
 
 endorses Brazil’s request40 that the Panel recommend that the United States withdraw the “Step 2” 
export payments without delay.    
B. “STEP 2” DOMESTIC PAYMENTS ARE LOCAL CONTENT SUBSID IES CONTRARY TO 
ARTICLE 3 OF THE SCM AGREEMENT 
 
64. For “Step 2” domestic payments, the local c ontent requirement is expressly provided for in 
s.1207(a)(1), which provides “… the Secretary shall issue marketing certificates or cash payments … 
to domestic users … for documented purchases by domestic users …”  and in the implementing 
regulations, which provide that “eligible cotton must not be … imported cotton”.   
 65. “Step 2” domestic payments are only payable once US-produced upland cotton is consumed by a domestic user.  “Step 2” domestic payments  are contingent upon the use of domestic over 
imported goods.   
 66. Thus, s.1207(a)(1) of the FSRI Act mandates  the payment of subsidies which are prohibited 
pursuant to SCM Article 3.1(b), and the United States  is acting contrary to its obligations under SCM 
Article 3.2 by granting or maintaining such subsidies.   Consistent with the provisions of SCM Article 
4.7, Australia endorses Brazil’s request
41 that the Panel recommend that the United States withdraw 
the “Step 2” domestic payments without delay.    
C. THE UNITED STATES CANNOT AVOID IT S OBLIGATIONS RELATING TO PROHIBITED 
SUBSIDIES BY DESIGNING A MEASURE UNDER WHICH ENTITLEMENTS ARE 
OSTENSIBLY AVAILABLE IN MULTIPLE CIRCUMSTANCES 
 
67. In Australia’s view, the United States cannot avoid its obligations relating to prohibited 
subsidies under the Agreement on Agriculture  and the SCM Agreement  by designing a measure under 
which entitlements are ostensibly available in multiple circumstances.  As the Appellate Body concluded in US – FSC (21.5) :   
 
Our conclusion that the ETI measure grants s ubsidies that are export contingent in the 
first set of circumstan ces is not affected by the fact  that the subsidy can also be 
obtained in the second set of circumstances.  The fact that the subsidies granted in the 
second set of circumstances might  not be export contingent does not dissolve the 
export contingency arising in the first set of circumstances.
42   
68. Moreover, in the circumstances of the present case, it would be a manifestly inequitable 
outcome if a WTO Member was able to avoid its obl igations relating to prohibited subsidies under the 
Agreement on Agriculture  and the SCM Agreement  on the basis that there is a second set of 
circumstances in which a subsidy can be paid, when the second set of circumstances is itself a prohibited subsidy.    69. Australia considers that, through the “Step 2” payments mandated by s.1207(a)(1) of the FSRI 
Act, the United States is paying:  (1) export subs idies contrary to its obligations pursuant to AA 
Articles 3.3 and 8 and SCM Article 3.1(a) and 3.2;  and (2) local content s ubsidies contrary to its 
obligations pursuant to SCM Article 3.1(b) and 3.2.    
                                                      
40 First Submission of Brazil, paragraph 251.   
41 First Submission of Brazil, paragraph 341.   
42 United States – Tax Treatment for “Foreign Sales Corporations” , Recourse to Article 21.5 of the 
DSU by the European Communities, Report of the Appellate Body, WT/DS108/AB/RW, paragraph 119 WT/DS267/R/Add.1 
Page B-50  
 
 V. CONCLUSION 
 
70. This dispute raises fundamental issues concerning the object and purpose of the Agreement on 
Agriculture , and the balance of rights and obligations accepted by all Members under the Marrakesh 
Agreement Establishing the World Trade Organization .  The outcome of this dispute will determine 
whether, in fact, Members accepted any meaningful obligations in relation to domestic support 
measures pursuant to the Agreement on Agriculture .   
 71. In Australia’s view, Brazil has provided prima facie  evidence that the United States has not 
acted consistently with its obligations in relati on to domestic support meas ures and export subsidies 
provided to upland cotton under the Agreement on Agriculture .  Further, Australia considers that the 
“Step 2” payments for domestic users and exporters  of upland cotton are clearly subsidies prohibited 
by the SCM Agreement , and endorses Brazil’s request that these be withdrawn without delay.   
  WT/DS267/R/Add.1 
 Page B-51 
 
 
 ANNEX B-5 
 
 
THIRD PARTY SUBMISSION OF BENIN 
 
15 July 2003 
 
TABLE OF CONTENTS 
 
 
 
I. INTRODUCTION ............................................................................................................. 5 1 
 II. BENIN AND US COTTON SUBSIDIES ........................................................................ 52  
III. WTO LEGAL ISSUES ..................................................................................................... 54 
 IV.  CONCLUSIONS .............................................................................................................. .. 57 
  I. INTRODUCTION 
 
1. The issue in this dispute is of critical importance for Benin, West Africa, and many developing countries:  whether WTO Members must respect agreed disciplines for the provision of agricultural subsidies.  
2. The right to grant agricultural subsidies is by no means absolute.  During the Uruguay 
Round, the drafters of the Agreement on Agriculture  and the SCM Agreement established a number 
of preconditions for the provision of WTO-consiste nt subsidies.  These preconditions, including those 
embodied in Article 13 of the Agreement on Agriculture - the so-called “peace clause”  - were part of 
the overall balance of rights and obligations accepted by the United States and other participants at the conclusion of the Round.   
 
3. Benin, upon its accession to the WTO in 1996, accepted the Uruguay Round package.  In doing so, it expected that the subsidies provided by  its trading partners, including the United States, 
would remain within these agreed parameters.   
4. However, contrary to its WTO obligations, th e United States has provided huge subsidies for 
the production, use and export of US cotton.  Th ese WTO-inconsistent subsidies have been highly 
damaging to Benin.  5. Benin supports the positions advanced by Brazil in this dispute, particularly those set out in Brazil’s first submission of June 24.  Benin welcomes the opportunity to provide its views to the 
Panel, divided into two headings: 
  (a) Benin and US cotton subsidies, which pr ovides appropriate additional context to the 
issues facing the Panel;  and 
 
 (b) WTO legal issues. 
 WT/DS267/R/Add.1 
Page B-52  
 
  
II. BENIN AND US COTTON SUBSIDIES  
6. Benin is a least-developed country, with a GNP  per capita of US $380.  Of the 175 countries 
listed in the 2003 Human Development Index of the United Nations Development Programme, Benin 
is ranked 159
th.1   
 7. Cotton plays a crucial role in the development of  Benin.  It is the most important cash crop in 
the national economy.  Cotton accounts for 90 per cen t of agricultural exports, and has provided 
around 75 per cent of the country’s export earnings over the past four years.  Benin is the 12
th largest 
exporter of cotton in the world.   
 8. Cotton generates 25 per cent of the country’s revenues.  A third of all households in Benin 
depend on the cultivation of cotton, and a fifth of wage-earning workers are employed in the cotton sector.  Overall, about a million people in Benin – out of a population of six  million – are dependant  
on cotton, or cotton-related activities.   
 9. The cotton sector in Benin, which is mainly  in the rural regions, h as suffered considerable 
hardship.  As the International Monetary Fund noted in a report earlier this year, “poverty is prevalent 
in cotton-producing areas”.
2  Cotton growers are concentrated in the north of the country, a more arid 
region where the potential for any agricultural dive rsification is lower, and where opportunities for 
non-farm employment are scare.3   
 
10. Despite these problems of persistent poverty, the cotton sector in Benin and the region 
remains highly competitive by world standards.  The cost of producing cotton in West Africa is 
50 per cent lower than comparab le costs in the United States.4 
 
11. As recent report noted:  “West Africa is one of the world’s most e fficient cotton producing 
regions.  The IMF estimates that the sector can ope rate profitably at world price levels of around 
50 cents/lb.  Few producers in the US could comp ete at this price.  Indeed, the USDA estimates 
average production costs at 75 cents/lb.”5   
 12. Moreover, the sector has also undergone major structural reforms in recent years to increase 
efficiency.  The IMF reported that:  “Benin ha s moved away from the integrated monopoly that 
characterized the organization of  cotton production and marketi ng of seed cotton in western and 
central Africa.  Benin’s reform process is  among the most advanced in the region.”
6   
 13. Unfortunately, the benefits of such reforms have been completely negated by massive US 
subsidies.  As noted by Brazil in its First Su bmission, total upland cotton subsidies amounted to 
                                                      
1 Human Developme nt Report 2003 , United Nations Development Programme, 
http://www.undp.org/hdr2003. 
 2 According to the IMF, “The cotton zone in central  Benin (the Zou and Borgou) presents one of the 
highest incidences of poverty, while the deepest poverty (as measured by the poverty gap index) can be found 
in the north (cotton-producing area in northern Borgou).  International Monetary Fund, Country Report No. 
03/120.  Benin:  Fourth Review Under the Poverty Reduction and Growth Facility – Staff Report .  April 2003.  
Page 28. 
3 Impact of Global Cotton Markets on Rural Poverty in Benin .  Nicholas Minot and Lisa Daniels.  
International Food Policy Research Institute, Wa shington, D.C.  November 2002.  Page 19. 
4   See Louis Goreux, "Préjudices causés par les subventions aux filières cotonnières de l'AOC."  
March 2003.  Cited in TN/AG/GEN/4, 16 May 2003.  
 5 Northern Agricultural Policies and World Po verty:  Will the Doha ‘Development Round’ Make a 
Difference?  Kevin Watkins, Head of Research, Oxfam Great Britain.  Paper presented to the Annual World 
Bank Conference of Development Economics.  15-16 May, 2003.  Page 65.  
6 IMF Country Report, Op. Cit. , page 23  WT/DS267/R/Add.1 
 Page B-53 
 
 
 US$12.9 billion during the 1999-2002 marketing years.7  The International Cotton Advisory Cotton 
estimates that US subsidies are equivalent to 24 cents per pound of cotton produced.8 
 14. Subsidies of this magnitude have sharply increased supplies on the international market, 
thereby producing a collapse in global cotton prices.  From January, 2001 to May, 2002, world cotton 
prices fell by nearly 40 per cent, from 64 cents to about 39 cents per pound, the lowest level since the 
1930s.  Although prices have improved since last year, the world market for cotton remains characterized by oversupply as a result of US subsidie s.  This has extremely serious consequences for 
Benin and other West African countries.   
15. Benin is highly vulnerable to changes in the world price of this cash crop.  The International 
Food Policy Research Institute has estimated that a 40 per cent reduction in farm-level prices of 
cotton results in an increase in rural poverty in Benin of 8 per cent in the short term, and 6-7 per cent in the long term.  An increase of 8 per cent is equivalent to pushing an additional 334,000 people 
below the poverty line.
9  This, in turn, has produced a deterioration in the social conditions of many 
rural communities, including conditions pertaining to housing, schooling, sanitation, nutrition and 
other basic needs.  16. The overwhelming magnitude of US cotton subsidies, and the impossibility of Benin 
competing with them, are well illustrated in the table below.
10  As the table indicates, the subsidies 
paid by the United States to 25,000 US cotton farmers exceeds the gross national income of Benin.  
These subsidies also exceed the gross national inco me of Burkina Faso, the Central African Republic, 
Chad, Mali and Togo. 
                                                      
7 First Submission of Brazil, paragraph 3. 
8 Minot and Daniels, op. cit , page 1. 
9 Minot and Daniels, op cit ., page 50. 
10 This table is from Cultivating Poverty:  The Impact of US Cotton Subsidies on Africa .  Oxfam 
Briefing Paper 30.  27 September 2002.  Brazil has filed the full Oxfam report as exhibit Bra–15. WT/DS267/R/Add.1 
Page B-54  
 
  
 
17. Thus, when cotton from Benin enters world ma rkets, it must compete against such massively 
subsidized US cotton.    18. Oxfam has estimated that US subsidies have caused Benin to lose US $33 million in foreign 
exchange earnings, equivalent to 9 pe r cent of the country’s export earnings.
11 
 
19. Indeed, the shock of such subsidies, and thei r attendant effect on prices, threatens the very 
existence of the cotton sector in Benin.  It has crea ted a genuine economic crisis in the sector, and it 
is possible that the cotton sector in Benin could simply disappear during the 2003/04 marketing year.  This would have catastrophic effects both for the national economy, and for the social cohesion of the 
country in regions where cotton production predominates.  This also poses a significant threat to 
Benin’s efforts at poverty alleviation in economically precarious rural areas.  20. With these preliminary comments as additional context, Benin now comments briefly on some of the legal issues raised in Brazil’s submission. 
 
III. WTO LEGAL ISSUES 
 
21. Benin agrees with Brazil that the United States cannot successfully invoke the peace clause 
to bar the actionable subsidy claims that ha ve been advanced in this dispute.   
 
                                                      
11 Ibid., page 17.  WT/DS267/R/Add.1 
 Page B-55 
 
 
 22. The peace clause is an affirmative defence.  The United States, not Brazil, must bear of 
burden of demonstrating that US domestic support and export subsidies comply with the 
requirements of Article 13.  23. Affirmative defences, as the Appellate Body made clear in United States – Wool Shirts and 
Blouses, are “limited exceptions from obligations un der certain other provisions”, not “positive rules 
establishing obligations in themselves”.  In the view of the Appellate Body, “[i]t is only reasonable that the burden of establishing such a defence should rest on the party asserting it”.  24. The language in Article 13 shows the clear intent of the drafters that the Member seeking to 
invoke the peace clause must bear the burden of demonstrating full compliance with all of the 
preconditions set out in this provision.  25. In addition to the arguments advanced by Brazil, Benin would note that the use of the proviso “provided that” in Article 13(b)(ii) and (iii) also show s the intent of the drafters to shift the burden to 
the Member seeking to invoke this exception.  In both subsections, the exemption from actions has 
been qualified by the addition of this proviso:  (b) 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 pa ragraph 2 of Article 6, shall be: 
  (ii) exempt from actions based on para graph 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;  and 
  (iii) exempt from actions based on non-violation nullification or impairment of the 
benefits of tariff concessions accruing to  another Member under Article II of GATT 
1994, in the sense of paragraph 1(b) of Article XXIII of GATT 1994, provided that 
such measures do not grant support to a specific commodity in excess of that decided 
during the 1992 marketing year…”  [emphasis added] 
 26. A similar proviso can be found in GATT Arti cle XVIII:11, dealing with the elimination of 
restrictions imposed for balance of payments purposes:   
“[T] he contracting party concerned… sh all progressively relax any restrictions 
applied under this Section as conditions impr ove, maintaining them only to the extent 
necessary under the terms of paragraph 9 of this Article and shall eliminate them when conditions no longer justify such maintenance;  Provided  that no contracting 
party shall be required to withdraw or modify restrictions on the ground that a 
change in its development policy would render unnecessary the restrictions which it 
is applying under this Section.”  [emphasis added] 
27. In construing GATT Article XVIII:11, th e Appellate Body ma de clear in the Quantitative 
Restrictions  case that the burden of proof lay clearly on the responding party – in that case, India – 
seeking to invoke the proviso:  
“The proviso precludes a Member, which is challenging the consistency of balance-
of payments restrictions, from arguing that  such restrictions would be unnecessary if 
the developing country Member maintaining them were to change its development policy. In effect, the proviso places an obligation on Members not to require a developing country Member imposing balance-of  payments restrictions to change its 
development policy…. WT/DS267/R/Add.1 
Page B-56  
 
 [W]e do not exclude the possibility that a si tuation might arise in which an assertion 
regarding development policy does involve a burden of proof issue. Assuming that the complaining party has su ccessfully established a prima facie case of 
inconsistency with Article XVIII:11 and the Ad Note, the responding party may, in its defence, either rebut the evidence a dduced in support of the inconsistency or 
invoke the proviso. In the latter case, it  would have to demonstrate that the 
complaining party violated its obligation not to require the responding party to 
change its development policy. This is an assertion with respect to which the 
responding party must bear the burden of pr oof. We, therefore, agree with the Panel 
that the burden of proof with respect to the proviso is on India.”12 
 
28. Although the use of the proviso “provided that” is not determinative, it does provide strong textual support for the proposition that the drafters of Article 13 of the Agreement on Agriculture , like 
the drafters of GATT Article XVIII:11, intended the burden of proof to shift to the party seeking to 
invoke the proviso. 
 
29. Indeed, the situation in the Cotton dispute is very similar to that examined by the Appellate Body in the Quantitative Restrictions  case.  The United States is seeking to invoke the “provided 
that” proviso set out in Article 13.  This is, as th e Appellate Body reasoned, “an assertion with respect 
to which the responding party must bear the burden of proof”.  Therefore, as with India in Quantitative Restrictions , the burden of proof with respect to the proviso is on the United States.  
 
30. Article 13, construed as a whole, also supports the position that if the United States seeks entry into the “safe harbour”, it bears the burden of demonstrating that it has met the preconditions necessary to justify entry.    
31. For example, the chapeau to paragraphs (a),  (b) and (c) all provide that the measures or 
subsidies “must conform fully” with the applicable disciplines.  Domestic support measures or export 
subsidies that do not “conform fully” to the specif ied provisions cannot benefit from the peace clause.  
Since the United States claims that it “conforms fully” to the relevant provisions of the Agreement on 
Agriculture , the SCM Agreement, and the GATT 1994, and it is up to the United States to provide 
sufficient evidence in support of this defence. 
 
32. Thus, as argued above, the burden falls on the United States if it wishes successfully to invoke the affirmative defence of Article 13.    33. However, even if the burden rested on Brazil – which it does not – Brazil has amply 
demonstrated in its First Submission that the United States is providing domestic support and export 
subsidies far in excess of  WTO commitments.  34. For example, as Brazil demonstrated in its  submission, US non-“green box” domestic support 
to upland cotton in the 1992 marketing year was $1,994.4 million.  By 2001, US non-“green box” domestic support increased to $4,093 million.  Thus, the defence that may have been conditionally 
available to the United States – had it “conformed fully” to the requirements of Article 13 – is 
unavailable.    35. Brazil presents compelling evidence on the WTO-inconsistency of all of the impugned US measures, encompassing both domestic support paym ents and export payments.  Benin agrees with 
Brazil that the US measures violate the Agreement on Agriculture , the SCM Agreement, and the 
GATT 1994. 
 
                                                      
12 Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile an 
Industrial Products , WT/DS90/AB/R, paragraph 134 and 136.  WT/DS267/R/Add.1 
 Page B-57 
 
 
 36. The United States, in its submission of July 11, has done nothing to rebut the presumption of 
WTO-inconsistency established by Brazil. 
 
IV. CONCLUSIONS 
 
37. As noted above, US cotton s ubsidies exceed the Gross National Income of Benin.  Benin has 
few options available to it to respond to subsidies of such magnitude.  The resulting impact on the economy of the country has been devastating.    
38. Benin is not seeking an y special and differential treatment in this dispute.  It simply asks the 
Panel to ensure that the relevant provisions of  the WTO Agreements, including Article 13 of the 
Agreement on Agriculture , are interpreted and applied as negotiated.  The United States must respect 
the disciplines that it, and other WTO Members, agreed to at the end of the Uruguay Round.  39. Benin is grateful for the opportunity to present its views to the Panel in this extremely 
important dispute.  Benin notes that further subm issions are intended, and reserves the right to 
provide additional views to the Panel (including in response to the US First Written Submission of 11 
July) as necessary and appropriate, at a later stage.  
 
 WT/DS267/R/Add.1 
Page B-58  
 
 ANNEX B-6 
 
 
THIRD PARTY SUBMISSION OF CANADA 
 
15 July 2003 
 
TABLE OF CONTENTS 
I. INTRODUCTION ............................................................................................................... .... 59 
II. CLAIMS REGARDING US DOMESTIC AGRICULTURAL SUPPORT 
MEASURES ...................................................................................................................... ....... 59 
A. PFC  PAYMENTS AND DIRECT PAYMENTS DO NOT QUALIFY AS EXEMPT DECOUPLED 
INCOME SUPPORT UNDER THE AGRICULTURE AGREEMENT  ...................................................... 59 
1. Decoupled income support under Anne x 2 of the Agriculture Agreement is 
exempt from action under the SCM Agreement and GATT 1994 ...................................... 60 
2. Decoupled income support must not be linked to the type of commodity 
produced in any year a fter the base pe riod .......................................................................... 61 
3. PFC payments and direct payments  do not conform to Annex 2 of the 
Agriculture Agreement because the amount of these payments is linked to the 
type of commodity produced after the base period .............................................................. 62 
III. CLAIMS REGARDING US  EXPORT CREDIT GUARANTEE 
PROGRAMMES .................................................................................................................... . 64 
A. E XPORT CREDIT GUARANTEES MAY PROVIDE “EXPORT SUBSIDIES ” UNDER THE 
AGRICULTURE AGREEMENT  ...................................................................................................... 65 
B. US  EXPORT CREDIT GUARANTEES MAY GRANT EXPORT SUBSIDIES UNDER 
ARTICLE  1(E) OF THE AGRICULTURE AGREEMENT AND ARTICLE 3.1( A) OF THE  
 SCM  AGREEMENT  ..................................................................................................................... 66 
IV. CONCLUSION ................................................................................................................ ........ 70 
  WT/DS267/R/Add.1 
 Page B-59 
 
 
 I. INTRODUCTION 
 
1. Canada has a systemic interest in th e correct interpretation of Annex 2 of the Agreement on 
Agriculture (Agriculture Agreement ), as well as the export subsidy provisions of both the Agriculture 
Agreement  and the Agreement on Subsidies and Countervailing Measures  (SCM Agreement ).  
 
2. In its first written submission, Brazil makes a number of claims.  Canada’s comments relate 
to the claims of Brazil in respect of the following:  
IX. Whether US production flexibility contract  payments (PFC payments) made under 
the Federal Agriculture Improvement and Reform Act of 1996 and US direct 
payments made under the US Farm Security  and Rural Investment Act of 2002 (2002 
FSRI Act) satisfy the policy-specific criteria for decoupled income support in Annex 2, paragraph 6(b) of the Agriculture Agreement ; and 
 
X. Whether US GSM-102, GSM-103, and the SC G export credit guarantee programmes 
provide export subsidies in violation of Articles 8 and 10.1 of the Agriculture 
Agreement . 
 
II. CLAIMS REGARDING US DOMESTIC AGRICULTURAL SUPPORT MEASURES 
 
3. Among the claims brought by Brazil against the United States in this dispute are those 
concerning the conformity of US domestic subsidies with US obligations under Part III of the SCM 
Agreement  and Article XVI of the General Agreement on Tariffs and Trade 1994  (GATT 1994 ).  
 4. On 20 June 2003, the Panel preliminarily ru led that it would defer consideration of Brazil’s 
claims under Part III of the SCM Agreement  and Article XVI of GATT 1994  until after it had 
expressed views on whether the US measures satisfy the conditions of Article 13 of the Agriculture 
Agreement  (the so-called “Peace Clause”).  Accordingl y, Brazil argues in its first written submission 
that PFC payments and direct payments (US measur es involving direct payments to US agricultural 
producers) are not exempt from action under the Peace Clause because they do not conform fully to the criteria in Annex 2 of the Agriculture Agreement .
1  The United States argues in response that PFC 
payments are not within the Panel’s terms of reference because they were no longer in effect at the 
time of the consultation or panel requests.2  Regarding direct payments, the United States argues that 
these measures are exempt from action because they  conform fully to the pr ovisions of Annex 2 and 
are therefore covered by Article 13(a)(ii) of the Agriculture Agreement .3   
 
5. Canada provides views in this submission on the conformity of PFC payments and direct 
payments with criteria in Annex 2 of the Agriculture Agreement . 
 
A. PFC PAYMENTS AND DIRECT PAYMENTS  DO NOT QUALIFY AS EXEMPT DECOUPLED 
INCOME SUPPORT UNDER THE AGRICULTURE AGREEMENT 
 
6. It is Canada’s view that PFC payments and direct payments do not fully conform to the provisions of paragraph 6(b) of Annex 2 of the Agriculture Agreement  for the reasons set out below. 
 
                                                      
1 First Written Submission of Brazil, 24 June 2003 , at paras. 153 and 173 [hereinafter Brazil First 
Written Submission]. 
2 First Written Submission of the United States, 11 Ju ly 2003, at paras. 190 and 207-211 [hereinafter 
“US First Written Submission”]. 
3 US First Written Submission, paras. 64-68. WT/DS267/R/Add.1 
Page B-60  
 
 1. Decoupled income support under Annex 2 of the Agriculture Agreement  is exempt from 
action under the SCM Agreement  and GATT 1994 
 
7. Annex 2 of the Agriculture Agreement  is relevant to actionable subsidy cases under the SCM 
Agreement  and GATT 1994  because the Agriculture Agreement  provides for certain  conditional 
exemptions.  In this section, Canada sets out the relationship between these three agreements in this 
respect.    8. Action under Part III of the SCM Agreement  and Article XVI of GATT 1994  depends on a 
determination of the existence of a “subsidy”.
4  Article 1.1 of the SCM Agreement sets out the 
definition of a subsidy:   
 
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if: 
 
 (a)(1) there is a financial contribution by a government or any public body within the 
territory of a Member… 
 
or 
  (a)(2) here is any form of income or price support in the sense of Article XVI of GATT 
1994; 
 
and 
  (b) a benefit is thereby conferred.  
9. Article 1.2 provides that a s ubsidy is actionable under Part III of the Agreement if it is 
“specific” in accordan ce with the provisions of Article 2. 
 10. Article 5 begins Part III of the SCM Agreement  on actionable subsidies by providing that 
“[n]o Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of 
Article 1, adverse effects to the interests of ot her Members...”.  Articles 5 and 6 describe “adverse 
effects” and set out the basis for determining whethe r they exist.  Article 7 sets out the available 
remedies where adverse effects do exist.  All of  these provisions are subject to Article 13 of the 
Agriculture Agreement .
5 
 11. Article 13 of the Agriculture Agreement  conditionally exempts domestic support measures 
from actionable subsidy complaints.  It provides in relevant part: 
 
                                                      
4 See United States – Tax Treatment for “Foreign Sales Corporations” , Report of the Appellate Body, 
WT/DS108/AB/R, adopted March 20, 2000 at para. 93 [hereinafter US FSC  AB Report]:  
  Article 1.1 sets forth the general definition of the te rm “subsidy” which applies “for the purpose of this 
Agreement”.  This definition, therefore, applies wherever the word “subsidy” occurs throughout the 
SCM Agreement  and conditions the application of the provisions of that Agreement regarding 
prohibited  subsidies in Part II, actionable  subsidies in Part III, non-actionable  subsidies in Part IV and 
countervailing measures in Part V [emphasis in original]. 
5 Article 5 ends with:  “This Article does not apply to subsidies maintained on agricultural products as 
provided in Article 13 of the Agreement on Agriculture”.  Article 6.9 contains identical language.  Article 7.1 
begins:  “Except as provided in Article 13 of the Agreement on Agriculture, …”. 
 
 Regarding action under Article XVI of GATT 1994 , in addition to the provisions in Article 13 of the 
Agriculture Agreement , Article 21.1 states:  “The provisions of GATT 1994… shall apply subject to 
the provisions of this Agreement.”  WT/DS267/R/Add.1 
 Page B-61 
 
 
 During the implementation period, notwithstanding the provisions of GATT 1994  and 
the SCM Agreement on Subsidies and Counter vailing Measures (referred to in this 
Article as the “Subsidies Agreement”):   
 (a) domestic support measures that conform fully to the provisions of Annex 2 to this 
Agreement shall be:   
 … 
  (ii) exempt from actions based on Article XVI of GATT 1994  and Part III of the 
Subsidies Agreement; 
 … 
 
 (b) 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 Sc hedule, as well as domestic support within 
de minimis  levels and in conformity with para graph 2 of Article 6, shall be:   
 … 
  (ii) exempt from actions based on para graph 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… 
 
12. Accordingly, domestic subsidies are exempt fr om application of the pr ovisions in Part III of 
the Subsidies Agreement  and of Article XVI of GATT 1994  if they conform to Annex 2 of the 
Agriculture Agreement .  Domestic subsidies that do not conform to Annex 2 are exempt if such 
measures do not grant support to a specific commodity in excess of that decided during the 1992 
marketing year. 
 
2. Decoupled income support must not be link ed to the type of commodity produced in 
any year after the base period 
 
13. To determine whether a measure is exempt under Article 13(a) of the Agriculture Agreement , 
it must be assessed under the criteria of Annex 2.  Ca nada sets out the relevant  Annex 2 provisions.   
 14. Annex 2 is the basis for the conditional exempt ion of domestic subsidies, under Article 13(a) 
of the Agriculture Agreement , from the application of Part III of the SCM Agreement  and Article XVI 
of GATT 1994 .  Annex 2 also conditionally (and princi pally) exempts domestic support measures 
from reduction commitments pursuant to exceptions under Articles 3.2, 6 and 7 of the Agreement.  
Paragraph 1 of Annex 2 reads as follows:   1. Domestic support measures for which ex emption from the reduction commitments is 
claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on production.  Acco rdingly, all measures for which exemption is 
claimed shall conform to the following basic criteria:   
  (a) the support in question shall be provided through a publicly-funded government 
programme (including government revenue  foregone) not involving transfers from 
consumers;  and,   
 
 (b) the support in question shall not have the effect of providing price support to 
producers;   
  plus policy-specific criteria and conditions as set out below. WT/DS267/R/Add.1 
Page B-62  
 
  
15. The policy-specific criteria are for each of  the following measures:   general services 
(paragraph 2);  public stockholding (paragraph 3);  domestic food aid (paragraph 4);  and direct payments to producers (paragraphs 5-13).  
16. Paragraph 5 of Annex 2 provides that direct payments to producers are exempt only if they 
meet the basic criteria in paragraph 1 of Annex 2 and the “specific criteria applying to individual 
types of direct payment as set out in paragraphs 6 through 13…”.  Paragraph 5 further specifies that, 
to be exempt, any measure that does not constitute a type of direct payment covered by paragraphs 6-
13 must conform to the criteria in paragraph 6(b) through (e) as well as the basic criteria listed in 
paragraph 1.   
 17. Paragraph 6 of Annex 2 reads:   6. Decoupled income support 
 
 (a) Eligibility for such payments shall be dete rmined by clearly-defin ed criteria such as 
income, status as a producer or landowner, factor use or production level in a defined and fixed base period.   
  (b) The amount of such payments in any given year shall not be related to, or based on, 
the type or volume of production (inclu ding livestock units) undertaken by the 
producer in any year after the base period.   
  (c) The amount of such payments in any given year shall not be related to, or based on, 
the prices, domestic or international, applying to any production undertaken in any 
year after the base period.   
  (d) The amount of such payments in any given year shall not be related to, or based on, 
the factors of production employed in any year after the base period.   
  (e) No production shall be required in order to receive such payments.   
 
18. For direct payments to qualify as decoupled in come support, paragraph 6(b) requires that the 
amount of the payments not be “related to, or based on, the type… of production… undertaken by the producer in any year after the base period.”  The ordinary meaning of “production” is “something 
which is produced by an action, process, etc.; a product”.
6  Nothing in the context or in the object and 
purpose of this subparagraph, of Annex 2, or of the Agriculture Agreement as a whole detracts from 
this ordinary meaning.  Accordingly, under paragraph 6(b), the amount of the payment must not be linked to the kind of product that is produced.  
3. PFC payments and direct payments do not conform to Annex 2 of the Agriculture 
Agreement  because the amount of these payments is linked to the type of commodity 
produced after the base period 
 
19. Based on the evidence and arguments presented in  the submissions of th e disputing parties at 
this stage of the proceedings, it is Canada’s asse ssment that the amount of PFC payments and direct 
payments are based on the type of commodity pro duced after the base period.  Were the Panel to 
accept the evidence submitted by  Brazil, it would fi nd that  PFC payments and direct payments are 
inconsistent with paragraph 6(b) of Annex 2 of the Agriculture Agreement .   
 
                                                      
6 The New Shorter Oxford English Dictionary , p. 2367 [Exhibit CDA-1.].  WT/DS267/R/Add.1 
 Page B-63 
 
 
 20. Brazil asserts that under US law implementing PFC payments, the amount of such payments 
“could fluctuate from 100 percent of the PFC payments if [a producer] did not grow any fruits and vegetables, to zero percent in case such prohibite d products are grown” or “[to] a reduced and pro-
rated decrease based on acreage and/ or value of the fruit or vege table crop grown on PFC contract 
acres.”
7  According to Brazil, US implementing law al so provides that “PFC payments are reduced 
for each acre of wild rice that is produced.” 8  Regarding direct payments, Brazil argues that under 
US implementing law, current fruit, vegetable, or wild rice production affects the amount of the 
direct payment in the same manner as such production affects the amount of the PFC payment. 
9 
21. The United States describes direct payments  under the 2002 FSRI Act as direct payments “to 
persons (farmers and landowners) with farm acres that formerly produced any of a series of 
commodities during the base period.”10  The United States claims that these payments constitute 
“decoupled income support” under Annex 2 of the Agriculture Agreement because they:  (1) are 
provided through a publicly-funded government programme not involving transfers from consumers; (2) do not have the effect of providing price support to producers; and (3) conform to the five policy-
specific criteria and conditi ons set out in paragraph 6.
11  The United States claims in particular that 
the direct payments are “decoupled from production” because the amount of the payments is not based on the type of production undertaken after the base period, in conformity with paragraph 6(b).  
In this respect, the United States argues:   
Not only is there no requirement that a direct payment recipient engage in any 
particular type or volume of production, a recipient need not engage in any current 
agricultural production in order to receive the direct payment.
12 [emphasis in 
original] 
22. The United States does not describe or assess PFC payments, given its request for a 
preliminary ruling by the Panel that such paym ents are not within its terms of reference.13    
 
23. Canada’s assessment of the facts and arguments presented so far in this case is that the United States has incorrectly classified PFC payments as decoupled income support,
14 and that US 
direct payments do not qualify as such support.15  Nowhere in its submission does the United States 
address the evidence of implementing legislation a nd regulations re garding either measure.  Its 
argument that direct payment recipients are not require d to engage in any particular type or volume of 
production (or any current agricultural production at al l) to receive direct payments fails to address 
the evidence indicating that the amount of the payment may change based on whether base acreage is used for current production of fruits, vegetables, or wild rice.  For both measures, the evidence indicates that the amount of the payment is based on the type of production: payments are full, nil, or some amount in between where base acres are used for current fruit, vegetable or wild rice 
production. 
 
                                                      
7 Brazil First Written Submission, para. 160. 
8 Ibid., para. 161. 
9 Brazil First Written Submission, para 174. 
10 US First Written Submission, para. 57. 
11 Ibid., paras. 64-68. 
12 Ibid., para. 67. 
13 Ibid., para. 211. 
14 Brazil First Written Submission, para. 153. 
15 Ibid., paras. 175 and 198. WT/DS267/R/Add.1 
Page B-64  
 
 III. CLAIMS REGARDING US EXPO RT CREDIT GUARANTEE PROGRAMMES 
 
24. Brazil asserts that the US GSM-102, GSM-103, and SCG progr ammes provide export 
subsidies with respect to upland cotton and other agricultural commodities in violation of Articles 8 and 10.1 of the Agriculture Agreement .
16  According to Brazil, the United States violates Articles 8 
and 10.1 of the Agriculture Agreement because these programmes: 
 
XI. provide export subsidies under item (j) of th e Illustrative List of Export Subsidies in 
Annex I of the SCM Agreement;17 and  
 
XII. provide “subsidies” that are “contingent  upon export performance” under Articles 1.1 
and 3.1(a) of that Agreement.18   
 25. As a result, Brazil argues, these measures do no t fully conform to the pr ovisions of Part V of 
the Agriculture Agreement  and the Peace Clause, therefore, do es not exempt them from actions based 
on Article 3 of the SCM Agreement .
19  Brazil also argues that these programmes provide prohibited 
export subsidies within the meaning of Article 3.1(a) of the SCM Agreement  and requests the Panel to 
recommend to the DSB that the measures be withdrawn without delay under Article 4.7.20 
 26. The United States argues in response that it s export credit guarantee programmes are not 
export subsidies subject to Article 10.1 of the Agriculture Agreement because Article 10.2 permits 
export credit guarantee practices “to continue, unaff ected by export subsidy disciplines otherwise 
negotiated and reflected in the text of the Agreement”.
21  The United States asserts that these 
programmes do not provide pr ohibited export subsidies under Article 3.1(a) of the SCM Agreement  
because export credit guarantees are carved out from export subsidy commitments by virtue of Article 10.2 of the Agriculture Agreement  and any application of Article 3 of the SCM Agreement  is 
subject to the provisions of the Agriculture Agreement .
22  Finally, according to the United States, its 
measures do not satisfy the standard in item (j) of Annex I of the SCM Agreement  and are not, for that 
reason alone, export subsidies under Article 3.1(a).23 
 27. The United States also requests the Panel to rule preliminarily that Brazil’s arguments in 
connection with all commodities other than upla nd cotton are not properly before the Panel, and 
limits its arguments to upland cotton accordingly.
24   
 28. In this submission, Canada limits its vi ews to whether the Unit ed States has violated 
Articles 8 and 10.1 of the Agriculture Agreement by providing export subsidies in the form of export 
credit guarantees resulting in the circumvention of US export subsidy commitments with respect to 
upland cotton.  Canada notes that this aspect of Brazil’s claim is both inde pendent and determinative 
of the applicability in this dispute of the Peace Clause under Article 13(c)(ii) of the Agriculture 
Agreement .  That is, a violation of Artic les 8 and 10.1 in this case would itself form the basis for both 
a recommendation by the DSB to the United States to bring its measures into conformity and would 
also form the basis for continued action by Brazil under Article 3 of the SCM Agreement. 
 
                                                      
16 Ibid., para. 304. 
17 Ibid., paras. 272-286. 
18 Ibid., paras. 287-294. 
19 Ibid., para. 306. 
20 Ibid., para. 306. 
21 US First Written Submission, para. 160. 
22 Ibid., para. 167. 
23 Ibid., paras. 171 to 183. 
24 US First Written Submission, paras. 171 and 218.  WT/DS267/R/Add.1 
 Page B-65 
 
 
 A. EXPORT CREDIT GUARANTEES MAY PROVI DE “EXPORT SUBSIDIES” UNDER THE 
AGRICULTURE AGREEMENT 
 
29. Under the SCM Agreement , export subsidies are prohibited.  Under the Agriculture 
Agreement , certain export subsidies are allowed up to cer tain limits.  The export subsidy disciplines 
of the SCM Agreement  apply subject to the export subsidy disciplines of the Agriculture Agreement .25  
The Appellate Body confirmed in its first Canada - Dairy  implementation report that “the WTO-
consistency of an export subsidy for agricultural pr oducts has to be examined, in the first place, under 
the Agreement on Agriculture .”26 Canada sets out the relevant provi sions of both Agreements in this 
section.  30. Article 1(e) of the Agriculture Agreement  defines “export subsidies” as “subsidies contingent 
upon export performance, including the export subsidies listed in Article 9 of this Agreement”.  Article 3.3 sets out the obligation of Members not to provide export subsidies listed in Article 9 in 
excess of scheduled commitment levels: 
 
Subject to the provisions of paragraphs 2(b)  and 4 of Article 9, a Member shall not 
provide export subsidies listed in paragr aph 1 of Article 9 in respect of the 
agricultural products or groups of products sp ecified in Section II of Part IV of its 
Schedule in excess of the budgetary outlay and quantity commitment levels specified 
therein and shall not provide such subsidies in respect of any agricultural product not 
specified in that Section of its Schedule. 
31. Article 8 of the Agriculture Agreement  confirms the fundamental obligations of Members 
with respect to the provision of export subsidies:  
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. 
32. Article 9 of the Agriculture Agreement  lists and describes certain export subsidies that are 
subject to reduction commitments.  All other export subsidies fall within the scope of Article 10.1, 
which reads: 
 
Export subsidies not listed in paragraph 1 of Article 9 shall not be applied in a 
manner which results in, or which threaten s to lead to, circumvention of export 
subsidy commitments; nor shall non-commerci al transactions be used to circumvent 
such commitments. 
33. The Agriculture Agreement  does not define the term “subsidy” in the definition of “export 
subsidy” in Article 1(e) of the Agreement.  Th e Appellate Body drew upon the definition of a 
“subsidy” in Article 1.1 of the SCM Agreement  as context to the term “subsidy” in Article 1(e) of the 
Agriculture Agreement  in both its original Canada – Dairy  report and its original and implementation 
                                                      
25 See Article 3.1 of the SCM Agreement  and Articles 13(c)(ii) and 21.1 of the Agriculture Agreement .    
26 Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products: 
Recourse to Article 21.5 of the DSU by New Zealand and the United States , Report of the Appellate Body, 
WT/DS103/AB/RW, WT/DS113/AB/RW, adop ted 18 December 2001, paras. 123-124. WT/DS267/R/Add.1 
Page B-66  
 
 reports in US - FSC .
27  The Appellate Body also held in US - FSC  that the “contingent upon export 
performance” requirements in the Agriculture Agreement  and the SCM Agreement  are the same.28 
 34. Article 1.1 of the SCM Agreement  sets out the definition of a subsidy, which reads in relevant 
part:   
 
 1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if: 
 
  (a)(1)  there is a financial contribution by a government or any public body 
within  the territory of a Member…, i.e. where: 
 
    (i)  a government practice involves… potential direct transfers of funds 
or liabilities (e.g. loan guarantees); … 
 
and 
 
  (b)  a benefit is thereby conferred.  35. Article 3.1(a) of the SCM Agreement  describes export subsidies as follows: 
  3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within 
the meaning of Article 1, shall be prohibited:   
   (a) subsidies contingent, in law or in fact, whether solely or as one of several 
other conditions, upon export performance, including those illustrated in Annex I… 
 
36. Annex I of the SCM Agreement  includes in particular item (j), which reads: 
 
The provision by governments (or special institutions controlled by governments) of export credit guarantee or insurance pr ogrammes, of insurance or guarantee 
programmes against increases in the cost of exported products or of exchange risk 
programmes, at premium rates which are inad equate to cover the long-term operating 
costs and losses of the programmes. 
37. Canada provides views only on key elements of Articles 1 and 3.1(a) of the SCM Agreement  
that are applicable to a determination of whether the US programmes provide “export subsidies” under Article 1(e) of the Agriculture Agreement.  If they do, then they are subject to US obligations 
under Articles 8 and 10.1 of the Agriculture Agreement . 
 
B. US EXPORT CREDIT GUARANTEES M AY GRANT EXPORT SUBSIDIES UNDER 
ARTICLE 1(E) OF THE AGRICULTURE AGREEMENT  AND ARTICLE 3.1(A) OF THE SCM 
AGREEMENT 
 
38. Based on the evidence and arguments presented by  the disputing parties at this stage in the 
proceedings, it is Canada’s assessment that US export credit guarantee programmes may provide 
“subsidies contingent upon export perf ormance” under Article 1(e) of the Agriculture Agreement  that 
                                                      
27 See Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products , 
Report of the Appellate Body, WT/DS103/AB/R, WT /DS113/R, adopted 27 October 1999, para. 87; US – FSC 
AB Report, paras. 136-137; United States – Tax Treatment for “Foreign Sales Corporations: Recourse to 
Article 21.5 of the DSU by the European Communities , Report of the Appellate Body, WT/DS108/AB/RW, 
adopted 29 January 2002, para. 194 [hereinafter US – FSC  Article 21.5 AB Report]. 
28 US – FSC AB Report, paras. 141-142; US – FSC Article 21.5 AB Report, para. 192.  WT/DS267/R/Add.1 
 Page B-67 
 
 
 are “not listed in paragraph 1 of Article 9”, pursuan t to Article 10.1.  Because the United States has 
no export subsidy reduction commitments for upland co tton, it may have violated Article 10.1 by 
applying such subsidies in a manner that results in circumvention of its export subsidy commitments.  
The United States may have also therefore violated Article 8 by providing export subsidies “otherwise than in conformity with this Agreement”. 
 
39. Evidence submitted by Brazil indicates that the United Stat es has exceeded its quantitative 
export subsidy reduction commitment level for va rious agricultural commodities, including upland 
cotton.
29  Accordingly, were the Panel to accept such  evidence, the United States would bear the 
burden of establishing that no export subsidies have been granted in respect of the quantity of exports 
in question pursuant to Article 10.3 of the Agriculture Agreement .30 
 40. The United States cannot deny that US export credit guarantees involve a “financial contribution” in the form of a “potential direct transfer of funds” under Article 1.1(a)(1)(i) of the SCM Agreement .  Export credit guarantees are loan guarante es.  Nor can the United States deny that 
the export guarantees are contingent  upon export performance under Article 3.1(a) of the Agreement.  
Canada therefore addresses only the “benefit” re quirement of the subs idy definition under 
Article 1.1(b) of the SCM Agreement .  
 41. The determination of a “benefit” in transactions involving agricultural commodities is necessarily factual.  However, any assessment of the facts in this dispute must be undertaken within 
an appropriate legal framework.  The applicab le framework in this dispute is based on well-
established WTO case law.   42. In Canada – Aircraft , the panel found that: 
 
… a financial contribution will only confer a "benefit", i.e., an advantage, if it is 
provided on terms that are more advantage ous than those that would have been 
available to the recipient on the market.
31 
43. The Appellate Body upheld this finding: 
 
We ... believe that the word “benefit”, as used in Article 1.1(b), implies some kind of 
comparison.  This must be so, for there can be no “benefit” to the recipient unless the 
“financial contribution” makes the recipient “better off” than it would otherwise have been, absent that contribution.  In our vi ew, the marketplace provides an appropriate 
basis for comparison in determining whet her a “benefit” has been “conferred”, 
because the trade-distorting potential of a “financial contribution” can be identified 
by determining whether the recipient has re ceived a “financial contribution” on terms 
more favourable than those available to the recipient in the market.
32 
44. Based on this reasoning, the question is whethe r there is a difference between the amount that 
the firm receiving the guarantee pays on credit  guaranteed under the US programmes and the amount 
that the firm would pay on a comparable commercial  loan absent that guarantee.  The benefit is the 
                                                      
29 Brazil First Written Submission, paras. 265-266. 
30 See Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products: 
Second Recourse to Article 21.5 of the DSU by New Zealand and the United States , Report of the Appellate 
Body, WT/DS103/AB/RW2, WT/DS113/AB/RW 2, adopted 17 January 2003, para. 73. 
31 Canada – Measures Affecting the Export of Civilian Aircraft , Report of the Panel, WT/DS70/R, 
adopted 20 August 1999, para. 9.112. 
32 Canada – Measures Affecting the Export of Civilian Aircraft , Report of the Appellate Body, 
WT/DS70/AB/R, adopted August 20, 1999 at para. 157. WT/DS267/R/Add.1 
Page B-68  
 
 difference between these two amounts adjusted for any differences in fees.  The useful context 
provided by Article 14(c) of the SCM Agreement  supports such a standard.  Article 14(c) reads: 
 
[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[.] 
45. The panel in Canada - Aircraft II  established a similar standard in respect of equity 
guarantees provided through a Canadian provincia l government financing institution called 
Investissement Québec  (IQ).
33  The panel reasoned as follows: 
 
Consistent with the findings of the panel and Appellate Body in Canada – Aircraft , 
we consider that IQ equity guarantees will confer a “b enefit” to the extent that they 
are made available to Bombardier customers on terms more favourable than those on 
which such Bombardier customers could obt ain comparable equity guarantees in the 
market.  We note that the parties appear to agree that this standard can be applied by 
reviewing the fees, if any, charged by IQ for providing its equity guarantees.   We 
agree that the “benefit” sta ndard could be applied to IQ equity guarantees in this 
manner.  Thus, to the extent that IQ’s fees are more favourable than fees that would 
be charged by guarantors w ith Québec’s credit rating in  the market for comparable 
transactions, IQ’s equity guarantees may be deemed to confer a “benefit”.34 
 
46. The panel went on to find that:  
… a “benefit” could arise if there is a diff erence between the cost of equity with and 
without an IQ equity guarantee, to the extent that such difference is not covered by 
the fees charged by IQ for providing the equity guarantee.  In our opinion, it is safe 
to assume that such cost diffe rence would not be covered by IQ’s fees if it is 
established that IQ’s fees are not market-based.
35 
47. Regarding IQ loan guarantees, th e panel applied the same reasoning: 
 
In considering precisely what Brazil must show in order to demonstrate the existence 
of a “benefit”, we note the findings of the panel and Appellate Body in Canada – 
Aircraft .  We therefore consider that IQ loan guarantees will confer a “benefit” to the 
extent that they are made available to Bombardier customers on terms more 
favourable that those on which such Bombardier customers could obtain comparable 
loan guarantees in the market.  In applying this standard, we are guided by Article 14(c) of the SCM Agreement, which provides contextual guidance for interpreting the term “benefit” in the co ntext of loan guarantees.  
(…) 
 
In our view, and taking into account the contextual guidance afforded by 
Article 14(c), we consider that an IQ loan guarantee will confer a “benefit” when 
                                                      
33  Canada – Export Credits and Loan Guarantees for Regional Aircraft , Report of the Panel, 
WT/DS222/R, adopted 19 February 2002, para. 7.397 [hereinafter Canada – Export Credits , Panel Report]. 
34  Canada – Export Credits, Panel Report, para. 7.344. 
35  Canada – Export Credits, Panel Report, para. 7.345.  WT/DS267/R/Add.1 
 Page B-69 
 
 
 “there is a difference between the amount that the firm receiving the guarantee pays 
on a loan guaranteed by [ IQ] and the amount that the firm would pay on a 
comparable commercial loan absent the [ IQ] guarantee.  In this case the benefit shall 
be the difference between these two amounts adjusted for any differences in fees”.  In other words, there will be a “benefit ” when the cost-saving for a Bombardier 
customer for securing a loan with an IQ loan guarantee is not offset by IQ’s fees.  In 
our opinion, it is safe to assume that this will be the case if it is established that IQ’s 
fees are not market-based.
36 
48. The same standard applies in the current dispute. 
 
49. The United States avoids addressing the standard  under Article 1.1(b) and argues simply that 
its export credit guarantee programmes “do not run afoul of the criteria of item (j)” of Annex I of the 
SCM Agreement  and that, therefore, “…they are not a pr ohibited export subsidy under Article 3.1(a) 
of the Subsidies Agreement.”37  The United States asks the panel to interpret item (j) a contrario, 
meaning that if its measures meet the description of the programmes in the provisions but do not meet 
the standard for being considered a subsidy per se,  the measures must be deemed not to confer export 
subsidies.  However, item (j) does not create a “safe haven” for export credit guarantees where 
“premium rates… are [adequate] to cover the long-term operating costs and losses of the 
[programme].”  To the contrary, item (j) “sets out the circumstances in wh ich the grant of loan 
guarantees is per se  deemed to be an export subsidy.”38  It simply “illustrates” deemed export subsidy 
practices.  Nothing in the cont ext or object and purpose of the SCM Agreement  supports the US 
interpretation.  
 50. The issue of whether the premium rates under the US programmes are adequate under item (j) of Annex I of the SCM Agreement  is necessarily factual.  However, even if the US 
programmes charge adequate fees under the item (j ) standard, the United States must nevertheless 
demonstrate that no export subsidies have been gr anted in respect of the quantity of exports in 
question in accordance with Articles 10.1 and 10.3 of the Agriculture Agreement .  In other words, it 
must demonstrate the absence of subsidization on a transaction-by-transaction basis under Articles 1 and 3.1(a) of the SCM Agreement . 
 51. The United States also argues at  length that Article 10.2 of the Agriculture Agreement  
exempts export credit practices from subsidy disciplines under the Agreement.  This argument is 
untenable.   52. Article 10.2 of the Agreement on Agriculture reads:  
Members undertake to work toward the development of internationally agreed 
disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export 
credits, export credit guarantees or insu rance programmes only in conformity 
therewith. 
53. Article 10.2 refers to “disciplines to govern the provision of export credits, export credit 
guarantees or insurance programmes” and not to “disciplines to govern the provision of export 
subsidies in the form of  export credits, export credit guarant ees or insurance programmes”.  This 
provision sets out an intention on the part of Members to undertake further work regarding these measures – the simple fact of agreeing to do so, however, does not amount to a permission to use 
those measures to confer export subsidies without consequence and without limit.  The US 
                                                      
36 Canada – Export Credits , Panel Report, paras. 7.397 and 7.398. 
37 US First Written Submission, para. 183. 
38 Canada – Export Credits , Panel Report, para. 7.395. WT/DS267/R/Add.1 
Page B-70  
 
 interpretation of Article 10.2 ignores the important co ntext provided by Article 10.1.  It also directly 
contradicts the stated object and purpose of Article 10 as a whole:  “Prevention of Circumvention of 
Export Subsidy Commitments”.
39 
 54. Article 10.2 of the Agriculture Agreement  does not exempt the United States from its 
obligation to demonstrate, under Article 10.3, that no export subsidies have been granted in respect of 
the quantity of exports in question in this dispute contrary to Article 10.1.  For the United States to meet the requirements of Article 10.3, it must demonstrate the absence of subsidization as understood under Article 1(e) of the Agriculture Agreement .  Indeed, the United States does not address Articles 
1(e) or 10.1, or any prior panel and Appellate Body findings thereon. 
 
IV. CONCLUSION  
 
55. At this stage of the proceedings, it is Cana da’s view that if the panel accepts the evidence 
presented by Brazil in its first written submissi on, it would find that PFC  payments and direct 
payments do not satisfy the policy-specific criteria in paragraph 6(b) of Annex 2 of the Agriculture 
Agreement .  Contrary to those requirements, the amount of these payments would be found to vary 
based on current production of certain fruit, vegetables and wild rice. 
 56. Regarding the US export credit guarantee progr ammes, in Canada’s view, were the Panel to 
find that these programs provide export subsidies within the meaning of Article 1(e) of the 
Agriculture Agreement , then it would also find that the United States has violated Articles 8 and 10.1 
at the very least in respect of exports of upland cotton.   
                                                      
39 See also “Export Credits and Related Facilitie s”, Background Paper by the Secretariat, 
G/AG/NG/S/13, 26 June 2000 [Exhibit CDA-2.] at para. 44:  
 
 [A]s matters currently stand the only rules and disciplines on agricultural export credits are those of 
the Agreement on Agriculture but only to the extent that such measures constitute export subsidies for 
the purposes of the Agreement on Agriculture.  Where exports of an agricultural product are considered to be subsidised through export credits  or related facilities, ascertaining the exported 
quantities benefitting [sic] from such measures for the purposes of determining conformity with export 
quantity reduction commitments would be reasonably straight forward.  Quantifying related budgetary outlays and revenue foregone for the annual comm itment level in question, using market-related 
premium or interest rate benchmarks for example (it is not clear what, if any,  role there might be for 
export credit “subsidy equivalents” in  this context), may be less stra ight forward but not necessarily 
problematic.    WT/DS267/R/Add.1 
 Page B-71 
 
 
  
ANNEX B-7 
 
 
THIRD PARTY SUBMISSION OF CHINA 
 
15 July 2003 
  
TABLE OF CONTENTS 
 
Page 
 
 
1. INTRODUCTION ................................................................................................ 72 
 
2. ARGUMENTS ...................................................................................................... 72  
2.1. The Burden of Proof Under The Peace Clause .................................................. 72 
 
2.2 Proper Categorization Of US FSRI 2002 Direct Payments .............................. 73 
 
2.3 Panel Treatment Of Measures  Found By Earlier Proceedings To Be In Violation ........................................... 74 
 3. CONCLUSION .................................................................................................... 77 
 WT/DS267/R/Add.1 
Page B-72  
 
 1. INTRODUCTION 
 
1. China is appreciative of this opportunity to present its views to the Panel in this proceeding on various domestic supports and e xport subsidies granted by the United States (the “US”) for the 
production, use and export of US upland cotton.  
 
2. In line with this Panel’s decision dated 20 June 2003, China will focus its submission to issues relating to   (1) the burden of proof under Article 13 of the Agreement on Agriculture  (the “Peace 
Clause”); 
  (2) proper categorization of direct payments under the US. Farm Security and Rural 
Investment Act of 2002 (“FSRI”); and 
 
 (3) treatment of a non-complying measure by this Panel. 
 In China’s opinion, these three issues, amongst others , call for close attention and analysis by the 
Panel.  
2. ARGUMENTS 
 
2.1. The Burden Of Proof Under The Peace Clause 
 
3. China agrees with Brazil that “the [P]eace [C]lau se is in the nature of an affirmative defense, 
and that the burden of proof that US domestic support and export subsidies to upland cotton are 
provided in conformity with the requirements of th e [P]eace [C]lause lies with the United States and 
not with Brazil as the complainant”
1.  
 4. The burden of proof issue has been squarely dealt with by the Appellate Body in the US – 
Shirts and Blouses Case
2.  It stated that a complaining party asserting a claim under a positive rule, 
establishing obligations in themselves, first has the burden of proof to establish a prima facie case of 
an infringement of obligations by the responding Member, then the burden shift to the responding 
Member to adduces sufficient ev idence to rebut the presumption3.  However, with respect to rules 
providing "limited exceptions from obligations under certain other provisions of the GATT 1994", the 
Appellate Body is of the view that they are “in the nature of affirmative defense, thus it is only reasonable that the burden of establishing such a defense should rest on the party asserting it”
4. 
 
5. The parties to this dispute disagree on the nature of the Peace Clause.  The US does not see the Peace Clause as an affirmative defense; it argues that portions of the Peace Clause impose positive obligations.   It cites Articles 13(a)(i), 13(a)(ii) and 13(b)(ii) of the Peace Clause to prove that by 
incorporating obligations under Article 6 and Annex 2 within the "conform fully to" requirement, the 
Peace Clause contains positive obligations on members
5.  
 
                                                      
1 Para. 107, Page 50, First Submission of Brazil , 24 June 2003. 
2 Section IV, Appellate Body Report, US - Shirts and Blouses, WT/DS33/AB/R . 
3 Page13-14, Section IV Burden of Proof, Appellate Body Report, US - Shirts and Blouses, 
WT/DS33/AB/R . 
4 Page 15-16, Section IV and Text at  Note 23, Appellate Body Report, US - Shirts and Blouses, 
WT/DS33/AB/R  . 
5 Paras. 43 and 45, US First Written Submission , 11 July 2003 .  WT/DS267/R/Add.1 
 Page B-73 
 
 
 6. China has a different opinion.  When stand-alone, Article 6 in and Annex 2 to the Agreement 
on Agriculture  and may contain positive obligations on Memb ers.  However, when cross-referred to 
by Articles 13(a)(ii) and 13(b)(ii) respectively, th ey are brought under the Peace Clause to form part 
and parcel of pre-conditions to its application.  Generic components of the relevant Peace Clause provisions
6 are (i) domestic support measures or export subs idies; (ii) that fully conform to Annex 2 
and/or Article 6 of the Agreement on Agriculture ; (iii) are exempt from actions; (iv) provided that…7  
The thrust of the relevant provisions of the Peac e Clause lies in its exemption of measures from 
certain actions.  To qualify under the exemption, a measure under item (i) above must first meet the 
requirements under items (ii) and (iv) above.  The moment either Annex 2 or Article 6 are brought 
into “fully conform to” formula under item (ii) above, it ranks pari passu  with the other requirement 
under item (iv) above to form conditions precedent to a successful exemption. 
 7. China believes the US errs on seeing no distin ction between "obligat ion" and "condition".  
The Peace Clause requirement for full conformity  to Article 6 and Annex 2 does not create new 
obligations because Members have to comply with Article 6 and Annex 2 whet her Article 13 exists or 
not.  Within the Peace Clause, these requirements do not stand to impose obligations on Members, but 
to set conditions precedent for a Members intending to invoke Peace Clause protection.  Positive obligations to comply with Article 6 and Annex 2, lie under where they are, i.e. under Article 6 and 
Annex 2, but not under the Peace Clause.    8. China does not see any "absurdity" as describ ed by the United States in its written 
submission
8.  No such "absurdity" would be instilled into  the process if at the first stage, the party 
alleging protection of Peace Clause for its measures is required to discharge its burden to prove that 
such measures do conform to the relevant Peace Clau se conditions; if it cannot so prove, the measures 
would lose Peace Clause protection.  A second stage will follow for the party claiming against the measures to establish its substantive case, without the Peace Clause shield. 
 
9. China hopes the above two-step approach will he lp both this Panel and the parties to move the 
procedures on towards resolution of the case.   
2.2  Proper Categorization Of US FSRI 2002 Direct Payments 
 
10. The United States in its first written submission argues that direct payments (“DP”) under 
FSRI conforms fully to Annex 2 of the  Agreement on Agriculture
9 and are therefore “Green Box” in 
nature.  Brazil argues that DP programme is inconsiste nt with Paras. 1, 6(a) and (b) of Annex 2 to the 
Agreement on Agriculture , as 
 
 (1) it conditions the type of production undertaken by the producer10; 
  (2) it sanctions base period updating
11; and 
  (3) it has production and trade-distorting effects
12. 
 
11. Para. 6(a) of Annex 2 to the Agreement on Agriculture  provides to the effect that eligibility 
for “Green Box” direct payment support measures “s hall be determined by clearly-defined criteria” 
                                                      
6 Articles 13(b)(ii), 13(b) (iii) and 13(c)(ii), the Agreement on Agriculture . 
7 Note that Article 13(c)(ii) of the Peace Clause has no such proviso. 
8 Para. 36, US First Written Submission , 11 July 2003. 
9 Paras. 54 through to 68, US First Written Submission , 11 July 2003. 
10 Para. 174, First Submission of Brazil , 24 June 2003. 
11 Paras. 176 through to 182, First Submission of Brazil , 24 June 2003. 
12 Paras. 183 through to 191, First Submission of Brazil , 24 June 2003. WT/DS267/R/Add.1 
Page B-74  
 
 “in a defined and fixed base period.”  The word “i n” requires a link between the “criteria” and the 
“defined and fixed base period”.  In other words, to qualify for “Green Box” direct payment measure 
under Para. 6(a), a criterion adopted by a Member must  be tied, in a chronological sense, to a starting 
time frame that cannot be moved up on the calendar.  
12. As the United States concedes, production acreage is a criterion for making FSRI DP
13.  
However, under FSRI, production acreage for the purpo se of DP is not tied to a defined and fixed 
base period.  It moves progressively along the calendar.  13. Under the FSRI DP scheme, payment acreage, being one factor in calculating payment
14, is 
85% of a person’s base acreage.  Base acreage, in turn, are either (i) “a four year average (1998-2001) 
of plantings of covered commodities (including upland cotton)”, or (ii) the total of production 
flexibility contract (“PFC”) acreage under the US  1996 Federal Agricultural Reform Improvement 
and Reform Act (“FAIR”) and the four-year average (1998-2001) of plantings of eligible oilseeds15.  
With respect to base acreage calculation method (i) above, the United States explains, FSRI DP 
allowed landowners to retain PFC base acres and “a dd 1998-2001 acres of eligible oilseeds or simply 
declare base acreage for all covered commodities” (including upland cotton)16.   With respect to base 
acreage calculation method (ii) above, the United St ates explains that while a landowner may elect to 
simply utilize acres devoted to covered comm odities during the 1998-2001 period for purpose of DP, 
a landowner need not do so; base acres may remain those under FAIR, implying no cotton production need have occurred since the 1993-1995 period for a landowner to have “cotton base acres”.   The 
United States then concludes that “[t]hese … base  acres are defined in the 2002 [FSRI] Act and fixed 
for the duration of the legislation (that it, from marketing year 2002-2007)”
17.  Such a conclusion 
ignores the fact that during the progression from PFC to DP,  the requisite link between the programme acreage as a criterion and the “defined and fixed” starting time frame is broken.  The 
change of legislation from FAIR to FSRI and th e replacement of PFC with DP were utilized for 
producers to leap from their previous coverage acr eage, which should have been tied to the base 
period, to a new updated acreage in 2002.  14. Enticement certainly exists for a producer to obtain more payments by leaping over the calendar and updating production acreage.  The fundamenta l requirement that “no, or at most minimal 
trade distorting effects or effe cts on production” as required by Article 1 of Annex 2 to the Agreement 
on Agriculture  is therefore not met. 
 15. In China’s opinion, without dwelling upon the burden of proof issue, the preponderance of evidence as produced by the par ties indicates that the US DP under FSRI fails to meet the “tie” 
requirement under Para. 6(a) of Annex 2 of the Agreement on Agriculture  and shall be properly 
categorized as non-“Green Box” measures. 
 
2.3 Panel Treatment Of Meas ures Found By Earlier Proceedings To Be In Violation 
 
16. Brazil also brought claims against export  subsidy support granted for upland cotton export 
sales by US “Foreign Sales Corporations” (“FSCs”) under  the “FSC Repeal and Extraterritorial 
Income Act of 2000” (“ETI Act”)
 18. 
 
                                                      
13 Paras. 56 and 67, US. First Written Submission , July 11, 2003.,  
14 Para. 58, Ibid. 
15 Para. 59, Ibid. 
16 Para. 60, Ibid. 
17 Subpara. 67(1), Ibid. 
18 Paras. 315 through to 330, First Submission of Brazil .  WT/DS267/R/Add.1 
 Page B-75 
 
 
 17. The US ETI Act has previously been found to violate the Agreement on Agriculture  and the 
Subsidies Agreement  by both the panel19 and the Appellate Body20 in US – FSC (21.5) .  On 
29 January 2002, the WTO Dispute Settlement Body (the “DSB”) adopted the panel and Appellate 
Body reports, declaring that the ETI Act violates Articles 3.1(a) and 4.7 of the Subsidies Agreement,  
Articles 8 and 10.1 of the Agreement on Agriculture  and Article III:4 of GATT 1994 . 
 
18. As the United States had failed to implem ent the DSB recommendations and rulings within 
the prescribed time framework, on 25 April 2003,  the European Communities (the “EC”) requested 
the DSB authorization to take appropriate counter measures and to suspend concessions pursuant to 
Article 4.10 of the Subsidies Agreement  and Article 22.7 of the DSU21.  On 7 May 2003, the DSB 
authorized the EC to impose countermeasures against the US. 
 19. Brazil quoted main EC arguments and portions of the panel’s and the Appellate Body’s reasoning from their  respective reports in US – FSC (21.5) , all to persuade this Panel into taking the 
same reasoning and conclusion
22.  
 
20. China believes that the panel and the Appe llate Body’s reasoning and their conclusion in US – 
FSC (21.5)  are of extraordinary valu e to the current Panel. 
 21. First, “[a]dopted panel reports are an important part of the GATT acquis .  They are often 
considered by subsequent panels.  They create legitimate expectations  among WTO members, and, 
therefore, should be taken into account where they are relevant to any dispute . [emphasis added].”
 23  
Export subsidy support provided to upland cotton export sales by US “Foreign Sales Corporations” 
under the ETI Act as challenged by Brazil in this case , is exactly the very same one challenged by the 
EC and found to violate the Agreement on Agriculture  and the Subsidies Agreement  by the panel24 and 
the Appellate Body25 in US – FSC (21.5) .  The panel and the Appellate Body’s decisions, as well as 
DSB’s adoption of same in US – FSC (21.5) , have already created “legitimate expectations” among 
WTO members.  Should this Panel re-consider the ar guments, analysis and conclusions in respect of 
the same measure adopted by the same Member in dispute, and re-decide with even the slightest 
difference, the WTO Members’ legitimate expectati ons will be seriously disturbed and offended.  
Unless the current Panel finds the FSC export subsid ies under the ETI Act challenged by Brazil in this 
case different from the FSC export subsidies under the ETI Act challenged by the EC in the US – FSC 
(21.5) , relevancy is fulfilled to the maximum extent possible.  The very same export subsidies shall be 
governed by the same juridical analysis, rule and conclusion .  Substantive deviation from that the 
reasoning and conclusion of  the earlier case on the same measure  may well cast misgivings on the 
established DSB authority and reputation.  
22.  The United States in its First Written Submission  argues that: 
                                                      
19 Panel Report, US - FSC (21.5), WT/DS108/RW, adopted on 29 January, 2002. 
20 Appellate Body Report in US - FSC (21.5) , AB-2002-1, WT/DS108/AB/RW,adopted on 29 January, 
2002. 
21 Recourse by the European Comm unities to Article 4.10 of the  Subsidies Agreement and Article 22.7 
of the DSU , WT/DS/108/26, circulated on April 25, 2003. 
22 Paras. 315 through to 327, First Submission of Brazil . 
 23 Para. E, Report of the Appellate Body, Japan - Taxes on Alcoholic Beverages , AB-1996-2, adopted 
on 1 November 1996). 
24 Paras.8.30, 8.46, 8.48, 8.50, 8.74, 8.75, and 9.1(a.), Panel Report, US - FSC (21.5), WT/DS108/RW, 
adopted on 29 January 2002. 
25 Paras.111, 116 through to 1 20, 122, 194, 196, and 256(d) , Appellate Body Report, US -  FSC (21.5) , 
AB-2002-1, WT/DS108/AB/RW, adopted on 29 January 2002. WT/DS267/R/Add.1 
Page B-76  
 
 It also is well-established that even though panels may take into account prior panel 
and Appellate Body reports, “panels are not bound  by previous decisions of panels or 
the Appellate Body even if th e subject-matter is the same.”
26 
China notes that US had omitted the immediate subs equent paragraph, in which the panel states:  
 
However, in the course of "normal dispute settlement procedures" required under 
Article 10.4 of the DSU, we will take into account the conclusions and reasoning  in 
the Panel and Appellate Body reports in WT /DS50.  Moreover, in our examination, 
we believe that we should give significant weight to both Article 3.2 of the DSU , 
which stresses the role of the WTO dispute settlement system in providing security 
and predictability to the multilateral trading system, and to the need to avoid 
inconsistent rulings  (which concern has been referred to by both parties).  In our 
view, these considerations form the basis of  the requirement of the referral to the 
"original panel" wherever possible under Article 10.4 of the DSU.27 [emphasis added] 
China believes that second sentence following the US  quote from the panel’s report could not be more 
relevant to the US ETI Act before this Panel. 
 23. Secondly, the DSB has already, upon request by the EC, authorized the EC to impose countermeasures against the US, for its failure to implement the DSB recommendations and rulings within the prescribed time framework.   DSB’s authorization to counteract  
 (1) further strengthens the weight of the panel and the Appellate Body’s decisions in US 
– FSC (21.5) .  Authorization by the DSB for countermeasures against the very same 
measures is a collective reflection that the measures shall have been withdrawn, and; 
  (2) brings up the need for efficiency.  Gi ven the DSB’s heavy caseload, as well as 
workload of this Panel, benefits of e fficiency far overweighs whatever need for 
repeating the work that had been complete ly accomplished by a previous panel and 
the Appellate Body.  
 24. Thirdly, in light of difficulties encount ered by the DSB in encouraging compliance 
subsequent to the US – FSC (21.5) proceedings, a different finding by this Panel in relation to ETI in 
the current dispute will frustrate WTO’s effect iveness as reflected in the DSB mechanism.  The 
essence of “[p]rompt compliance with recommendations  or rulings of the DSB” “to ensure effective 
resolution of disputes to the benefit of all Members” called for under Article 21.1of the DSU  will 
evaporate.  
25. Being a multilateral system, the WTO cannot afford to permit non-compliance by any 
Member in its face.  One dispute settled will defi nitively involve several legal issues having been 
clarified and practices of certain members adjudicate d.  Such clarification and adjudication in one 
case must serve to benefit all members in the multilateral system.  As  Article 3.2 of the DSU  tries to 
impress, the dispute settlement system of the WTO is  a pivotal element in providing uniform security 
and predictability to the multilateral trading system and to avoid multiplication of the same practices 
being disputed in separate but non-distinct cases.  To compel panels in later instances to re-visit the 
                                                      
26 Para. 185, First Written Submission of the US, 11 July 2003, quoting in quotation marks Para. 7.30,  
Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products , WT/DS79/R, 
adopted 22 September 1998. 
27 Para. 7.30, Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical 
Product , WT/DS79/R, adopted 22 September 1998.  WT/DS267/R/Add.1 
 Page B-77 
 
 
 same legal issue and re-adjudicate the same prac tices the DSB recommends against on a second or 
even indefinite analytical journey would relegate  WTO dispute settlement regime into disrepute. 
 26. The concern is not unfounded.  The fact that Brazil had to resort to the WTO dispute settlement system and bring the ETI Act before this Panel is distinctly telling.  This current Panel 
must put an end to that concern by ruling that the panel and the Appellate Body’s reasoning and their 
conclusion in US – FSC (21.5)  be taken by this Panel, unless by the time the current Panel makes it 
decision, such measures will have already been withdrawn by the US. 
 
3. CONCLUSION 
 
27. To sum up, China is of the following opinion:   (1) The Peace Clause is an affirmative de fense in nature, and a party seeking its 
protection bears the burden of proof; 
 
 (2) The US DP, which removes production acreage from its required nexus with a 
defined and fixed based period by allowing acreage updating, is not “Green Box” measure within the meaning of Para. 6(a) of Annex 2 to the Agreement on 
Agriculture ;  and 
 
 (3) The US ETI Act has been found by a prior panel and the Appellate Body to violate 
the Agreement on Agriculture  and the Subsidies Agreement .  In addition, the DSB has 
authorized the complaining party in the prio r proceeding to take countermeasures.  In 
light of coherency and efficiency of the WTO dispute settlement mechanism, this Panel shall take the reasoning and conclusion of the Appellate Body in the earlier 
case. 
 28. China thanks this Panel for granting this opportunity to present its views on issues related to this proceeding, and hopes that this Panel will finds the above points helpful.  WT/DS267/R/Add.1 
Page B-78  
 
 ANNEX B-8 
 
 
FIRST THIRD PARTY SUBMISSION BY 
THE EUROPEAN COMMUNITIES 
 
15 July 2003 
 
 
TABLE OF CONTENTS 
 
I. INTRODUCTION ............................................................................................................... ... 79 
II. PRELIMINARY ISSUE - BRAZIL’S REFERENCE TO A “MANDATORY / 
DISCRETIONARY DO CTRINE” IS UNFOUNDED ......................................................... 79 
III. ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE CANNOT BE 
CONSIDERED AN AFFIRMATIVE DEFENCE ............................................................... 80 
IV. THE INTERPRETATION OF A NNEX 2 OF THE AGREEMENT ON 
AGRICULTURE ................................................................................................................... . 82 
A. T HE RELEVANCE OF THE FIRST SENTENCE OF PARAGRAPH 1 OF ANNEX 2 ............................... 82 
B. I NTERPRETATION OF PARAGRAPH 6 OF ANNEX 2 ...................................................................... 84 
V. INTERPRETATION OF ARTICLES 10.1 AND 10.2 OF THE AGREEMENT 
ON AGRICULTURE (EXPORT CREDIT GUARANTEES) ............................................ 85 
VI. CONCLUSION ................................................................................................................ ....... 86 
  WT/DS267/R/Add.1 
 Page B-79 
 
 
 I. INTRODUCTION 
 
1. This dispute raises a number of complex yet important questions in respect of the applicable 
WTO regime for trade in agricultural goods.  In this First Third Party Submission, the European Communities has submitted arguments on a number of questions raised by Brazil’s First Written 
Submission.
1  However, the present submission should not be  seen as exhaustive. Given the very short 
period between the deadline for the US First Writte n Submission and the deadline for submissions 
from third parties, the European Communities has not  been able to incorporate in this submission a 
response to all of the arguments brought in the US First Written Submission which might merit a comment.  Consequently, the European Communities reserves its right to submit argument on other 
questions (or to further develop the arguments set out here) at the First Session of the First 
Substantive Meeting with the Parties.  2. Following the Panel’s invitation of 20 June 2003, the European Communities has essentially limited itself to questions related to the interpretation of Article 13 of the Agreement on Agriculture , 
and some of the “non-peace clause” related claims  brought by Brazil.  The European Communities 
will therefore argue that :  
▻ As a preliminary matter, Brazil is incorrect to  consider that only legislation which mandates a 
particular action can be found inconsistent with the WTO Agreements; 
 
▻ Article 13 Agreement on Agriculture  is not an affirmative defence;  
 
▻ The first sentence of paragraph 1 of Annex 2 to the Agreement on Agriculture does not create 
a free-standing obligation, separate from the basi c criteria set out in the second sentence of 
paragraph 1;  and, 
 
▻ Article 10.2 of the Agreement on Agriculture  does not exempt export credits and export credit 
guarantees from the disciplines of the Agreement on Agriculture . 
 
3. The European Communities does not express an opinion on the applicat ion of the relevant 
legal interpretations to the facts of this dispute.  
II. PRELIMINARY ISSUE - BRAZIL’S REFERENCE TO A “MANDATORY / 
DISCRETIONARY DOCTRINE” IS UNFOUNDED 
 
4. Before turning to the substantive questions of interpretation the European Communities would like to touch briefly upon one systemic issue ra ised in Brazil’s submission. Brazil states in its 
First Written Submission that:  
“It is established under WTO law that a Member can only challenge measures of 
another Member per se  if such measures mandat e a violation of the WTO 
Agreement.”
2 
5. Brazil cites as authority for this position para. 88 of the Appellate Body’s Report in 
United States – 1916 Act . However, the Appellate Body did not “establish” that measures can only be 
                                                      
1 Brazil’s First Submission to the Panel regardi ng the “Peace Clause” and Non-Peace Clause Related 
Claims, 24 June 2003 (“Brazil’s First Written Submission”). 
2 Brazil’s First Written Submission, para. 244. S ee, in the same sense, paras. 250 and 341. WT/DS267/R/Add.1 
Page B-80  
 
 challenged if they mandate a violation of the WTO Agreements.  In that case, the Appellate Body 
upheld the panel’s finding that the legislation in question was not discretionary and thus; 
 
“[did] not find it necessary to consider [..] whether Article 18.4, or any other provision of the Anti-Dumping Agreement , has supplanted or modified the distinction 
between mandatory and discretionary legislation”.
3 
6. Panels have taken di fferent approaches to this  issue.  The panel in United States – Section 301  
found that discretionary legislation may violate certain WTO obligations.4  This approach can be 
contrasted with that of the panel in United States – Export Restraints .5  More recently, the Appellate 
Body in considering an EC claim against US legislation noted that; 
 
“[it did not] preclud[e] the possibility that a Member could violate its WTO obligations by enacting legislation granting discretion to its authorities to act in violation of its WTO obligations. We [the Appellate Body] make no finding in this respect”.
6 
7. Consequently, it is far from established that only mandatory legislation can be found per se  
inconsistent with the WTO Agreements.  The European Communities, for one, is convinced that 
discretionary legislation may, in certain circumstances, be found to be inconsistent with WTO obligations.  However, further disc ussion of this issue does not appear necessary at present, since 
Brazil claims that the legislation in question pe rmits of no discretion and the United States does not 
appear to dispute this point.
7  Consequently, the European Communities will not develop its 
arguments on this issue further in this submission. 
 
III. ARTICLE 13 OF THE AGREEMENT ON AGRICULTURE CANNOT BE 
CONSIDERED AN AFFIRMATIVE DEFENCE 
 
8. Brazil argues that Article 13 of the Agreement on Agriculture  should be understood as an 
affirmative defence and thus that the United States bears the burden of proof.8  The United States has 
indicated that it disagrees with this characterisation,  and considers that Article 13 is not an affirmative 
defence.9 
 9. The European Communities shares the view of  the United States that there are compelling 
reasons to consider that Article 13 is not an affirmative defence.
10  Article 13 cannot be considered an 
                                                      
 3 Appellate Body Report, United States – Anti-Dumping Act of 1916 (“United States – 1916 Act”) , 
WT/DS136/AB/R, WT/DS162/AB/R, adopted 26 September 2000, para. 99  
4 Panel Report, United States – Sections 301-310 of the Trade Act of 1974 (“United States – Section 
301”) , WT/DS152/R, adopted 27 January 2000, footnote 23, pa ras. 7.53-7.54. Note that the Appellate Body in 
United States – 1916 Act  mentioned this finding, without suggesting that it was incorrect (see footnote 59 of the 
Appellate Body Report). 
5 Panel report, United States – Measures Treating Export Restraints as Subsidies , WT/DS194/R, 
adopted 23 August 2001, paras. 8.8 and 8.9. 
6 Footnote 334, Appellate Body Report, United States – Countervailing Measures Concerning Certain 
Products from the European Communities , WT/DS212/AB/R, adopted 8 January 2003. 
7 Brazil’s First Written Submission, para. 245. 
8 Brazil’s First Written Submission, paras. 110 to 121. 
9 Para. 38, Comments of the United States of Ameri ca on the Comments by Brazil and the Third Parties 
on the Question Posed by the Panel,.13 June 2003. See also First Written Submission of the United States of 
America, 11 July 2003 (“US First Writte n Submission”), paras. 38 to 47. 
10 The European Communities is aware of the fact that it used the term “defence” in its Initial 
Submission to the Panel of 10 June 2003 (Para. 6 , Comments by the European Communities on certain issues 
raised on an initial basis by the Panel, 10 June 2003). It did so, however, in the context of a discussion of what  WT/DS267/R/Add.1 
 Page B-81 
 
 
 affirmative defence which will excuse a violation of another provision of the WTO Agreements.  
Rather, it seems to the European  Communities, Article 13 is a form of “gateway” or “threshold” 
provision, which regulates the use of certain mechanisms (countervailing duties, serious prejudice claims, non-violation complaints) in respect of certain types of subsidies.  Conformity with the conditions of Article 13 has the effect of providing an exemption from action under Article XVI 
GATT 1994 and the SCM Agreement . Consequently, once a panel has determined whether or not 
agricultural subsides conform to the conditions of Article 13, it need not, indeed cannot, rule on whether those agricultural subsidies are c onsistent with Article XVI GATT 1994 and the SCM 
Agreement . For that reason, it cannot be equated to a defence to a violation of a provision of a WTO 
Agreement, in the way, for instance, Article XX may be considered a defence to a violation of 
Article I or III GATT 1994. 
 10. Even assuming, arguendo , Brazil’s contention th at Article 13 of the Agreement on 
Agriculture  is an exception to the othe rwise applicable disciplines
11, the Appellate Body has pointed 
out in EC-Hormones  that merely characterising a provision as an “exception” and consequently an 
affirmative defence is insufficient to shift the burden of proof in dispute settlement proceedings.12  
Any finding reversing the ordinary rule that the complaining party bears the burden of proof to 
establish a prima facie  case must be derived from an application of the normal rules of treaty 
interpretation.  The ordinary rules of treaty interpretation do not lead to such a conclusion in this case.  11. First, as noted above, the Panel is not asked to examine a general rule – exception situation 
with respect to Article 13. Article 13 is more ak in to a threshold permitting further action if that 
threshold is not complied with.  12. Second, Article 13 is an integral part of the Agreement on Agriculture . In that sense, it is 
comparable to Article 6 of the Agreement on Textiles and Clothing , Article 3.3 of the Sanitary and 
Phytosanitary Agreement  and the second sentence of Article 2.4 of the Agreement on Technical 
Barriers to Trade  which were found not to be affirmat ive defences by the Appellate Body.
13  
Article 13 incorporates the obligations which a WTO Member assumes under the Agreement on 
Agriculture  should it decide to provide agricultural subs idies to its producers, and regulates the status 
of such subsidies with respect to potential dis pute settlement and the application of countervailing 
duties. In a similar fashion, Article 6 of the Agreement on Textiles and Clothing  provides certain 
obligations which a WTO Member assumes if it decid es to dis-apply the disciplines of the ATC in the 
form of a “transitional safeguard measure”. Likewise, Article 3.3 of the Sanitary and Phytosanitary 
                                                                                                                                                                     
appeared to be the extreme logical conclusion of the arguments which the United States made, in order to refute 
the proposition that the issue of conformity with Article 13 could only be dealt with in a separate panel proceeding, divorced from a panel proceeding which dealt with the claims conditional upon Article 13 not being 
applicable.  The term “defence” was used in a general sense to connote an argument which could be invoked in 
reaction to another argument. Moreover, the European Communities did not use the term “affirmative defence” and did not use the term “defence” in the sense of a “def ence […] to a claim of violation of a GATT obligation” 
or as a “limited exception from certain other provisions of the [WTO Agreements]”
 (Appellate Body Report, 
United States – Measure Affecting Imports of Woven Wool Shirts and Blouses from India  (“United States – 
Shirts and Blouses”), WT/DS33/AB/R, adopted 23 May 1997, page 15-16). Finally, the European Communities 
was addressing only the question posed by the Panel and not the question of the burden of proof applicable to 
Article 13. 
11 Brazil’s First Written Submission, para. 120. 
 12 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) (“European 
Communities – Hormones”) , WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, para. 104.  
13 Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and 
Blouses from India  (“United States – Shirts and Blouses”), WT/DS33/AB/R, adopted 23 May 1997, page 16. 
European Communities – Hormones  Para. 104,  Appellate Body Report, European Communities — Trade 
Description of Sardines (European Communities – Sardines),  WT/DS231/AB/R, adopted 23 October 2002. 
Paras. 274-275. WT/DS267/R/Add.1 
Page B-82  
 
 Agreement  sets out obligations on a Member wishing to maintain a higher level of sanitary or 
phytosanitary protection than provided for in in ternational standards.  These provisions, like 
Article 13 of the Agreement on Agriculture  provide certain rights to WTO Members, but cannot be 
seen as exceptions.  
13. Third, as pointed out by the United States, considering Article 13 as an affirmative defence 
leads to perverse effects.
14  If a complaining Member makes a claim that a Member has acted 
inconsistently with the Agreement on Agriculture , the complaining Member will bear the burden of 
proof to establish a breach of the Agreement.  Ho wever, if Article 13 is considered an affirmative 
defence, where a complaining Member bri ngs a claim arguing breach of both the Agreement on 
Agriculture  and the SCM Agreement  the complaining Member would bear the burden of establishing a 
breach of the Agreement on Agriculture, the responding Member would bear the burden of proving 
that it was in compliance with  the same provisions of the Agreement on Agriculture  in order to apply 
Article 13, and the complaining Member would bear the burden of proof under the SCM Agreement .  
This cannot be what WTO Members intended when they negotiated Article 13. Indeed, the 
negotiators were aware of the issue of burden of pr oof and explicitly reversed the burden of proof in 
Article 10.3 Agreement on Agriculture  with respect to potential circumvention of export subsidy 
commitments.  That they did not agree on similar language with respect to Article 13 suggests that 
they intended the ordinary rules of burden of proof to apply.   14. Consequently, the European Communities respectfully requests that the Panel find that 
Article 13 is not an affirmative defence. 
 
IV. THE INTERPRETATION OF ANNEX 2 OF THE AGREEMENT ON 
AGRICULTURE  
 
A. THE RELEVANCE OF THE FIRST SENTENCE OF PARAGRAPH 1 OF ANNEX 2 
 
15. Brazil argues in several instances that the fi rst sentence of paragra ph 1 of Annex 2 of the 
Agreement on Agriculture  is an independent obligation which must  be satisfied in addition to the basic 
criteria set out in paragraph 1 and the policy-specif ic criteria set out in paragraphs 2 to 13 of 
Annex 2.15  The European Communities considers that this interpretation is incorrect.  The first 
sentence does not set out an independent obligation. It simply signals the objective of Annex 2.   16. Paragraph 1 of Annex 2 reads as follows:  
 1. Domestic support measures for which ex emption from the reduction commitments is 
claimed shall meet the fundamental requirement that they have no, or at most minimal, trade-distorting effects or effects on production.  Accordingly, all measures for which exemption is claimed shall conform to the following basic criteria: 
   (a) the support in question shall be provided through a publicly-funded government 
programme (including government reve nue foregone) not involving transfers 
from consumers;  and,  
   (b)  the support in question shall not have the effect of providing price support to 
producers;  
 
  plus policy-specific criteria and conditions as set out below.  
                                                      
14 US First Written Submission, para. 44 
15 See, e.g. Brazil’s First Written Subm ission, paras. 163- 172, 183-191 and 199-201.  WT/DS267/R/Add.1 
 Page B-83 
 
 
 17. The European Communities will set out its unde rstanding of the first sentence below.  While 
some ambiguity as to the effect of the first se ntence might arise when considering its ordinary 
meaning in isolation, as Brazil do es, it is quite clear that, when seen in context, the first sentence 
should not be considered to be a free-standing obligation.  This result also follows from a consideration of the objective of Annex 2. 
 
18. It should be recalled that the provision of do mestic subsidies for industrial products (i.e. non-
export contingent subsidies) is not prohibited as such under the SCM Agreement  or other WTO 
Agreements .
16  Such subsidies will only be actionable if they meet the requirements of Articles 1 and 
2 of the SCM Agreement , and cause adverse effects to the interest s of another Member in the sense of 
Article 5 of the SCM Agreement .  
 19. The Agreement on Agriculture  initiated a process of reform for domestic support for 
agricultural products.
17  Negotiators recognised that domestic support for agricultural products 
required discipline and binding limits on the amount  of domestic support.  However, given that the 
provision of domestic subsidies to industrial products can be unlimited,  provided there is no 
infringement of Article 5 of the SCM Agreement,  it would have been inequitable to subject all types of 
domestic support to the strict discipline and limitations of the Agreement on Agriculture  when the 
economic effects of different types of measures are not comparable.  Consequently, it was necessary for the negotiators to differentiate between thos e types of support measures whose economic effect 
was deemed significant
18, and those types of measures whose economic effects were deemed less 
significant.  This differentiation was achieved, not by defining those measures deemed to have a 
significant effect, but rather those deemed to have a less significant effect.  The result was Annex 2 to 
the Agreement on Agriculture . 
 20. The first sentence of paragraph 1 announces the differentiation which is achieved by the 
criteria set out in Annex 2.
19  It sets out the logic for distinguishing between the types of domestic 
support which come under Annex 2 and are exempt from reduction commitments and other domestic support measures.  That the first sentence does not set  out an independent obligation can be seen from 
the next sentence of Paragraph 1 which starts with  the word “accordingly”.  “Accordingly” means “in 
accordance with the logical premises; correspondingly”.
20  “Accordingly” consequently links the 
“fundamental requirement” in the first sentence with the “basic criteria” in the second sentence 
making it clear that in order to be considered to ha ve “no, or at most minimal, trade-distorting effects 
or effects on production” the measure must meet the basic criteria in the second sentence of paragraph 1 together with the policy-specific criteria set out in paragraphs 2 to 13. 
 
                                                      
16 Provided the subsidisation is not contingent upon the use of domestic over imported goods, in the 
sense of Article 3.1(b) of the SCM Agreement .  
17 See the Preamble to the Agreement on Agriculture . 
18 Without analysing whether the eff ects would, in the absence of the Agreement on Agriculture  and 
assuming the SCM Agreement  to be applicable to agricultural goods, lead, in a particular case, for a particular 
product, to a finding of inconsistency with the SCM Agreement . 
19 It can be noted that one commentator, who has undertaken one of the most comprehensive reviews of 
the Agreement on Agriculture , notes that the requirement in the first sentence of paragraph 1 is: 
“[t]oo vague to translate into concrete  and enforceable obligations.  As an 
appreciation of this fact, the Agreement on Agriculture has gone to great 
lengths to provide a detailed and comprehensive [..] list of measures along with the general and specific criteria they have to satisfy before they are 
exempted from the reduction commitments.” 
 P. 420-421, M. G. Desta, The Law of International Trade in Agricultural Products (Kluwer 
Law International 2002). 
20 The New Shorter Oxford English Dictionary, 1993. WT/DS267/R/Add.1 
Page B-84  
 
 21. Contextual support for this position can be f ound in Annex 2 itself and in Articles 6 and 7 of 
the Agreement on Agriculture .  
 22. Paragraph 5 of Annex 2 states that support provi ded through direct payments which are to be 
exempted from reduction commitments “shall meet th e basic criteria set out  in paragraph 1 above, 
plus specific criteria applying to individual types of direct payment as set out in paragraphs 6 through 
13.”  It is quite clear that the “basic criteria” referred  to here is the “basic criteria” referred to in the 
second sentence of paragraph 1 of Annex 1.  There is no reference to the fundamental requirement and thus that the measures should have “no or at le ast minimal trade distorting effects or effects on 
production”.  Consequently, this fundamental requi rement cannot be an additional criteria for a 
domestic measure to be exempted fr om reduction commitments under Annex 2. 
 23. Further support for this view is found in the Agreement on Agriculture . Article 6.1 applies to 
domestic support measures other than those “which ar e not subject to reduction in terms of the criteria 
set out in this Article and in Annex 2” (emphasis a dded).  Article 7.1 obliges Members to ensure that 
domestic support measures “not subject to reduc tion commitments because they qualify under the 
criteria set out in Annex 2 to this Agreement are maintained in conformity therewith” (emphasis 
added).  Article 7.2(a) goes on to state that “any measure that is subsequently introduced that cannot 
be shown to satisfy the criteria in Annex 2 to this Agreement […] shall be included in the Member’s 
calculation of its Current Total AMS” (emphasis a dded). Annex 2 itself clearly distinguishes between 
the “fundamental requirement” of the first sentence of paragraph 1 and the “basic criteria” of the 
second sentence of paragraph 1 and the “policy-specific criteria” set out in paragraphs 1 to 13.  The 
use of the word “criteria” in Articles 6 and 7, and its use in Annex 2 make it quite clear that in order 
to be exempted from reduction commitments by virtue of inclusion in the green box a domestic support measure must meet the criteria.  It is obviou s that the negotiators developed the criteria in 
order to determine whether a policy could be deem ed to meet the “fundamental requirement” set out 
in paragraph 1 of Annex 2 and did not intend the fi rst sentence to set out an independent obligation. 
 24. This interpretation is also supported by the objective behind Annex 2 and the Agreement on 
Agriculture  more generally. In the administration of its agricultural policy, in or der to ensure respect 
for their reduction commitments, a WTO Member must know how to classify its support measures.  It is thus vital, for reasons of legal security a nd predictability, that a Member can determine the 
classification of its measures.  The clear and sp ecific criteria set out in Annex 2 provides WTO 
Members with guidance on how to approach this task. Assuming Brazil’s argument to be correct, a 
Member would also have to determine whether a pa rticular measure to be taken might have a more 
than minimal trade distorting effect or effect on production.  This is inevitably a difficult exercise, based on a subjective appreciation of  a particular situation, which of ten may only be performed on an 
ex post facto  basis.  This is not a reasonable basis for a dvancing reform of trade in agriculture, and 
promoting the predictability of the system.  Moreover, it can be noted that there is no such “effects” text in respect of other exempted domestic support measures viz. “de minimis payments” under 
Article 6.4 of the Agreement on Agriculture  and “blue box payments” under Article 6.5 of the 
Agreement on Agriculture . 
 
25. On the basis of the above, the European Communities respectfully requests the Panel to 
conclude that the first sentence of Paragraph 1 of Annex 2 of the Agreement on Agriculture  does not 
impose an obligation independent of the basic a nd policy-specific criteria set out in Annex 2. 
 
B. INTERPRETATION OF PARAGRAPH 6 OF ANNEX 2  
 26. Brazil’s first written submission raises a number of questions as to the correct interpretation 
of paragraph 6 of Annex 2.  The European Communiti es attaches the utmost importance to the correct 
interpretation of these provisions.  While the Eur opean Communities is still analysing the Brazilian  WT/DS267/R/Add.1 
 Page B-85 
 
 
 and US arguments, it already takes note of the fact that the US does not claim that its counter-cyclical 
payments qualify as exempt under the green box.21 
 
V. INTERPRETATION OF ARTICLES 10.1 AND 10.2 OF THE AGREEMENT ON 
AGRICULTURE (EXPORT CREDIT GUARANTEES) 
 
27. Brazil argues that the US export credit guarantee schemes violate the Agreement on 
Agriculture and the  SCM Agreement .22  The European Communities can concur with this argument to 
the extent it can be confirmed that the export credit  guarantees in question are to be considered export 
subsidies. 
 
28. The European Communities points out, in this regard, that Article 10.2 of the Agreement on 
Agriculture  cannot be considered to exempt export credit guarantees from the disciplines of 
Article 10.1 of the Agreement on Agriculture .23 Article 10.2 states: 
 
Members undertake to work toward the development of internationally agreed 
disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export credits, export credit guarantees or in surance programmes only in conformity 
therewith. 
29. Article 10.2 makes it clear that the provision of export credit guarantees is not one of the 
types of export subsidies listed in Article 9.1 wh ich a Member is given a limited authorisation to 
apply.  Article 10.1 provides that non-listed e xport subsidies may not be applied in order to 
circumvent export subsidy commitments. Since expor t credit guarantees may be “export subsidies not 
listed in paragraph 1 of Article 9” they may be applied in a manner which “results in or threatens to lead to, circumvention of export subsidy commitments” and thus may be prohibited by Article 10.1.  
For unscheduled products, since the listed export s ubsidies cannot be provided, the Appellate Body 
has found that the transfer of economic resources in the form of non-listed export subsidies (e.g. 
export credit guarantees) threatens to circumvent the prohibition on giving listed export subsidies to 
such products.
24  Thus, export credit guarantees which qualify as export subsidies may be illegal 
under Article 10.1 where they might lead to circumvention of the export subsidy commitments.   
30. Such a conclusion does not render Article 10.2 devoid of meaning. Article 10.2 is designed to 
develop disciplines of a broader nature than simply  the regulation of export credits and export credit 
guarantees which operate as an export subsidy, sin ce whether an export credit guarantee is an export 
subsidy depends on an analysis of the structure of  that instrument.  One reason why Article 10.2 was 
necessary is that export credits and export credit guarantees for agricultural commodities are not 
covered by the OECD Arrangement on Guidelines  for Officially Supported Export Credits (see 
Article 3d).
25  Export credits which conform to this arrangement are considered not to be prohibited 
export subsidies.26  Consequently, Article 10.2 sets up an ob ligation to develop disciplines for export 
credits and export credit guarantees irrespective of  the question whether such instruments operate as 
                                                      
21 US First Written Submission, para 5, para. 118. 
22 Brazil’s First Written Submission, paras. 252-314. 
23 The European Communities notes that the US has ma de this argument in paras. 154-166 of its First 
Written Submission. 
24 Appellate Body Report, United States – Tax Treatment for “Foreign Sales Corporations” (“United 
States – FSC”),  WT/DS108/AB/R, adopted 20 March 2000, para. 150. 
25 OECD Arrangement on Guidelines for Officially Supported Export Credits of 15 October 2002 
available at www.oecd.org/dataoecd/52/3/2763846.pdf.  
26 See Item K of the Illustrative List of Export Subsidies, Annex 1 to the SCM Agreement . WT/DS267/R/Add.1 
Page B-86  
 
 export subsidies.  It does not permit any differen tiation in treatment between export credits, export 
credit guarantees or insurance programm es and other non-listed export subsidies.
27 
 31. The European Communities submits, therefore, that Article 10.2 cannot be seen as exempting export credit guarantees granted to agriculture products from WTO disciplines. 
 
VI. CONCLUSION 
 
32. By way of conclusion, the European Communiti es respectfully requests the Panel to find that: 
 
▻ Article 13 Agreement on Agriculture  should not be considered an affirmative defence; 
 
▻ The first sentence of the first paragraph of Annex 2 to the Agreement on Agriculture  should 
not be interpreted as a free -standing obligation; and, 
▻ Article 10.2 of the Agreement on Agriculture  does not exempt export credits and export credit 
guarantees, which are export subsidies, from the disciplines of the Agreement on Agriculture . 
 33. The European Communities reserves its right to address new arguments, and further develop 
the arguments set out herein, in its oral statement to the first session of the first substantive meeting. 
                                                      
27 Note that Desta arrives at a similar conclusion: 
 
“To the extent that no such agreement [on the provision of export credits 
etc] has been reached, this provision si mply remains to be an agreement to 
maintain good faith for a planned future negotiation devoid of any 
substantive additional obligation for some time to come. Until then, there 
seems to exist no legal distinction in the treatment of these three practices 
and the other forms of export subsidies not listed under Article 9.1.” 
 See Desta, p. 234 op cit. footnote 19.  WT/DS267/R/Add.1 
 Page B-87 
 
 
 ANNEX B-9 
 
 
THIRD PARTY SUBMISSION OF NEW ZEALAND 
 
15 July 2003 
  
CONTENTS 
 
I. INTRODUCTION ............................................................................................................. 8 8 
 
II. DOMESTIC SUPPORT MEASURES ............................................................................. 89 
 
A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST 
 ACTIONABLE SUBSIDY CLAIMS RELATED TO SUPPORT PROVIDED TO UPLAND 
 COTTON IN MARKETING YEAR S 1999, 2000, 2001 AND 20 02 ............................................... 89  
1. Step 2 payments, loan deficiency payments, marketing loan gains and 
 cottonseed payments ..........................................................................................................  91 
2. Marketing loss payments, counter-cyclical payments and crop insurance payments . 91 
3. Production Flexibility Contract  Payments, Direct Payments ........................................ 93 
 
III. PROHIBITED EXPORT SUBSIDIES ............................................................................ 95 
 
A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST 
 PROHIBITED AND ACTIONABLE SUBSIDY CLAIMS RELATED TO EXPORT SUBSIDIES95 
 
B. THE UNITED STATES EXPO RT SUBSIDIES VIOLATE THE AGREEMENT ON  
 AGRICULTURE  AND THE SCM AGREEM ENT ............................................................................. 95  
1. Step 2 Export Payments .................................................................................................... 95 
(a) Per se violation of Articles 3.3 and 8 of the Agreement on Agriculture .............................. 95 
(b) Violation of Article 3.1(a) and 3.2 of the SCM Agreement ................................................. 96 
2. Export Credit Guarantee Programme ............................................................................. 96 
(a) Violation of Articles 8 and 10.1 of the Agreement on Agriculture ...................................... 96  
(b) Violation of Articles 3.1(a) and 3.2 of the SCM Agreement ................................................ 97  
3. FSC Replacement Measure ............................................................................................... 98 
 
IV. PROHIBITED SUBSIDIES .............................................................................................. 98 
 
A. STEP 2 DOMESTIC PAYMENTS VIOLATE THE SCM AGREEMENT  AND GATT 1994  
 ARTICLE III:4 ................................................................................................................ .................. 98 
 
V. UNITED STATES REQUEST FOR A PRELIMINARY RULING ON 
 CERTAIN MATTERS ...................................................................................................... 98 
 
VI. CONCLUSION ................................................................................................................ .. 99 
 WT/DS267/R/Add.1 
Page B-88  
 
 I. INTRODUCTION 
 
1.01 The present dispute between Brazil and the Un ited States regarding United States subsidies to 
upland cotton, as well as being important in respect  of addressing the rights and obligations of the 
parties concerned, is also timely.  New Zealand hopes this dispute will give greater clarity to the 
proper interpretation of important WTO disciplin es applicable to agricultural trade.  Although 
New Zealand is not a producer or exporter of cotton, New Zealand has a systemic interest in ensuring the continued integrity of these disc iplines and has therefore joined this dispute as a third party. 
 1.02 New Zealand also acknowledges the importance of the cotton sector for a number of 
developing countries.  In this rega rd New Zealand recalls the recent joint proposal made in the context 
of the Doha Development Agenda negotiations by  Benin, Burkina Faso, Chad, Mali entitled ‘Poverty 
Reduction: Sectoral initiative in favour of cotton’.
1  The joint proposal calls for recognition of the 
strategic nature of cotton for development and pove rty reduction in many least developed countries 
and for the complete phasing out of support measures for the production and export of cotton.  As the 
paper points out, the efforts of cotton producers in West and Central African countries towards 
liberalisation and competitiveness are virtually nullified by the fact that certain WTO Members 
continue to apply support measures to cotton that distort global markets.  1.03 The joint proposal outlines the damage caused by the very high levels of support given to cotton producers in certain WTO Member countries, including artificially increasing supply in 
international markets and bringing down export prices.  This is the very same damage that Brazil is 
attempting to address through this dispute.  1.04 With respect to WTO disciplines, one of the biggest achievements of the Uruguay Round was the recognition that domestic support policies were in strumental in determining the overall nature of 
international agricultural trade.  For the first time specific discip lines were placed on the ability of 
Members to use domestic support programmes in an unfettered manner.  Trade-distorting or production-distorting domestic support measures be came subject to reduction commitments.   
 1.05 New Zealand is concerned to ensure trade- distorting or “amber box” measures cannot be used 
contrary to the “peace clause” in a manner  that negatively affects other Members. 
 
1.06 At the same time as addressing trade-distorting support, Members recognized that some forms of domestic support were less trade-distorting than others and that certain types of programmes should 
continue to play a role in Members' policy “tool box”.  Accordingly the “green box”, as set out in Annex 2 of the Agreement on Agriculture , was designed to allow Members to pursue agricultural 
objectives such as the provision of general services, disaster relief, food security and structural 
adjustment assistance and to support incomes as long as that was done in a way totally “decoupled” from production.  The “green box” therefore allows WTO Members to meet legitimate non-trade objectives in a non-trade distorting way.    1.07 Strict eligibility criteria have been set down in Articles 6 and 7 and Annex 2 of the Agreement 
on Agriculture  to ensure that only genuine non-trade distorting measures escape reduction 
commitments, including explicit inclusion of the “fundamental requirement” that such measures “have no, or at most minimal, trade-di storting effects or effects on production”.
2   
 1.08 The fact that basic and policy-sp ecific criteria were included in the Agreement on Agriculture  
shows Members recognised the potential for the “g reen box” to be abused and domestic support 
commitments circumvented.  In New Zealand's view it  is critical that the integrity of the disciplines 
                                                      
1 TN/AG/GEN/4 
2 Agreement on Agriculture  Annex 2, paragraph 1.  WT/DS267/R/Add.1 
 Page B-89 
 
 
 on “green box” measures are not weakened or their legitimate purpose undermined through the 
inclusion of measures that fail to meet the strict requirements of Annex 2, including the fundamental criterion that such measures are non-trade or production distorting.  Accordingly one of New Zealand’s key objectives in joining this dispute as a third party is to ensure that the “green box” cannot be used to circumvent commitments on trade-distorting measures. 
 
1.09 Under the Uruguay Round Members also ag reed to a “peace clause” (Article 13 of the 
Agreement on Agriculture ).  Of particular relevance to this dispute is Members’ agreement that 
provided non-“green box” measures meet the requirements of the Agreement on Agriculture  and the 
levels of support did not exceed 1992 levels, such measures would be exempt during the 
implementation period of the Agreement  from certain actions that w ould otherwise be available to 
Members under the Agreement on Subsidies and Countervailing Measures  (the “ SCM Agreement ”) 
and General Agreement on Tariffs and Trade 1994  (the “ GATT 1994” ).  “Peace clause” protection 
was also extended to export subsidies conforming with the requirements of the Agreement on 
Agriculture .   
 
1.10 Accordingly, New Zealand is also concerned to ensure that Members are able to utilise their 
rights under the SCM Agreement  and GATT 1994  to take action in respect of domestic support 
measures and export subsidies where the requirements of  the “peace clause” have not been respected.   
 1.11 New Zealand believes that the arguments put forward by Brazil
3 show that the “peace clause” 
has not been respected in relation to domestic support and export subsidies provided by the United 
States to upland cotton in the marketing years (“MY”) 1999, 2000, 2001 and 2002, and that accordingly Brazil is en titled to bring actionable and prohi bited subsidy claims against the 
United States under the GATT 1994  and the SCM Agreement .   
 
1.12 This submission, as requested by the Panel
4, primarily addresses issues raised in the 
submissions of Brazil and the United States relating to the substantive interpretation of Article 13 of 
the Agreement on Agriculture .  As further elaborated in this  submission New Zealand supports the 
claims made by Brazil.  New Zealand has had only limited time to consider the First Written Submission of the United States
5 and therefore addresses only some of the issues raised therein.  In 
particular New Zealand addresses, at the end of this submission,6 the request by the United States for 
a Preliminary Ruling on certain matters.7  New Zealand looks forward to the next phase of the case 
which will examine Brazil’s claims under Articles 3, 5 and 6 of the SCM Agreement  and Article XVI 
of the GATT 1994 . 
 
II. DOMESTIC SUPPORT MEASURES 
 
A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST ACTIONABLE 
SUBSIDY CLAIMS RELATED TO SUPPORT PROVIDED TO UPLAND COTTON IN MARKETING YEARS 1999, 2000, 2001 AND 2002 
 
2.01 New Zealand agrees with Brazil that Members may assert a “peace clause” defence under 
Agreement on Agriculture  Article 13(b)(ii) only if the total quantity of support granted through all 
                                                      
3 Brazil’s First Submission to the Panel Rega rding the “Peace Clause” and Non-“Peace Clause” 
Related Claims, 24 June 2003 (“First Written Submission of Brazil”). 
4 Panel communication to the Parties, 20 June 2003. 
5 First Written Submission of the United States of America, July 11 2003 (“First Written Submission of 
the United States”). 
6 Para 5.01-5.02. 
7 First Written Submission of the United States, Pt V. WT/DS267/R/Add.1 
Page B-90  
 
 non-“green box” domestic support measures to a specific commodity does not exceed the quantity of 
non-green box domestic support decided to be granted in MY 1992.  2.02 New Zealand endorses the process outlined by Brazil
8 for determining whether the 
United States can claim peace clause protec tion against serious prejudice claims under SCM 
Agreement  Articles 5(c) and 6.3 and GATT 1994 Article XVI.1.   
 2.03 Specifically New Zealand agrees that the first step is to identify and quantify all the 
United States non-“green box” support for the pr oduction of upland cotton in MY 1992.  The second 
step is to identify and quantify all non-“green box” United States payments that grant support to 
upland cotton in MY 1999, 2000, 2001 and to provide estimates for MY 2002.  The final step is to 
determine whether United States support to upland cotton in MY 1999-2002 exceeded its 1992 support to upland cotton.  2.04 The information provided by Brazil
9 demonstrates that the level of domestic support for 
upland cotton in each of those marketing years did in fact exceed the level decided during the 1992 
marketing year and therefore such domestic suppo rt measures may be subject to claims based on 
GATT 1994  Article XVI or SCM Agreement  Articles 5 and 6. 
 2.05 New Zealand notes that the United States argue s that the relevant con cept for the comparison 
required by Article 13(b)(ii) is only the ‘per pound’  rate of support set by the relevant domestic 
support measures.
10  Using this concept the United States argues that the support currently granted to 
upland cotton ($0.52 per pound) does not exceed that  granted to upland cotton in the 1992 marketing 
year ($0.729 per pound).11   
 2.06 New Zealand agrees that the measures concerne d (the loan rate) contribute to the effect of 
guaranteeing a producer price at a specified rate  per pound of production and that the per pound rate 
of guaranteed price for producers is one of the rele vant factors in making the comparison required by 
Article 13(b)(ii).  However New Zealand does not agr ee that the use of the wo rd “decided” in Article 
13(b)(ii) was intended to be, or should be, construed to mean that the per pound rate of guaranteed 
price to producers of a commodity is the only factor to be considered in determining the amount of support granted.  Indeed, New Zealand sees no support for such an approach in either the specific 
wording of Article 13(b)(ii) or in its object and purpose. 
 2.07 New Zealand considers that the comparison must take into account the totality of payments to upland cotton producers in order to reflect the true nature of the support that is being granted to a 
producer – the United States approach ignores this obj ective.  For example, in relation to support 
granted to United States producers of upland cotton, Step 2 payments and crop insurance payments 
are also factors which affect farmers production de cisions as is, of course, the “counter-cyclical” 
payments programme that effectively guarantees a price of $0.724 per pound.  Therefore even under the United States assumption that the use of a “rate” is key, the story is very different from that 
claimed by the United States.    
2.08 Further, New Zealand considers that an eval uation of budgetary payments is also essential in 
order to see the real effects of the support programmes.  Focussing solely on a rate per pound ignores the actual levels of domestic support represented by b udgetary outlays that must be granted in order to 
maintain those rates and the other payments received.    
                                                      
8 First Written Submission of Brazil, para 123. 
9 Ibid, para 124. 
10 First Written Submission of the United States, paras 94 and 105. 
11 Ibid, para 125.  WT/DS267/R/Add.1 
 Page B-91 
 
 
 2.09 In this respect New Zealand recalls that th e rationale behind the proviso in Article 13(b)(ii) 
that such measures not grant support to a specific commodity in excess of that decided during the 1992 marketing year is to create an upper limit in the level of trade or production distortion caused by such measures.   The clear overarching intention of WTO Members in the negotiation of the Agreement on Agriculture  was that henceforth such distortions would be reduced, consistent with the 
long term objective of “correcting and preventing re strictions and distortions in world agriculture 
markets”.
12  Accordingly it would be inconsistent with the object and purpose of the Agreement , and 
Article 13(b)(ii) specifically, to adopt an interpre tation that artificially limits consideration of the 
scope of support granted to that of a ‘per pound rate ’ of guaranteed price to a producer rather than the 
totality of the support granted that creates  the trade and production distortions.   
 
2.10 In that respect the fact that United States budgetary outlays have increased from their 1992 levels is not coincidental.  Such increases are due , at least in part, to the production and market 
distorting effects of the United States measures that  have lead to higher export levels of upland cotton 
from the United States that have in turn pushed wo rld market prices for cotton down.  In essence, the 
level of trade distortion has increased as the gap be tween the price farmers expect to receive and the 
world price has increased.  Looking at it the other way around, had the United States maintained the 1992 level of support its producers would be far more aware of the realities of the world market for cotton and have less incentive to add further to the trade distortion.  
1. Step 2 payments, loan deficiency paym ents, marketing loan gains and cottonseed 
payments 
 
2.11 These payments are clearly non-“green box” s upport, as implied by the notification by the 
United States to the WTO Committee on Agriculture for MY 1999.
13  As Brazil points out, the 
structure of most of these programmes is substa ntially the same in MY 2000-2001 and under the Farm 
Security and Rural Investment Act of 2002 (the “2002 FSRI Act”)14 as it was in MY 1999.  New 
Zealand considers that these payments should con tinue to be treated as non-“green box” support to 
upland cotton and must therefore be used in calcula ting the total quantity of support granted to upland 
cotton in MY 1999-2002.  
2. Marketing loss payments, counter-cyclical  payments and crop insurance payments 
 
2.12 The United States has notified crop insura nce payments and marketing loss assistance 
payments as “amber box” domestic support.
15  Brazil notes that the 2002 FSRI Act institutionalised 
marketing loss assistance payments with a new program of “counter-cyclical” payments (“CCP”).16 
 
2.13 New Zealand notes that Brazil  argues that CCP subsidies do not meet the criteria set out in 
Agreement on Agriculture  Annex 2, specifically paragraphs 6( b) and (c), and fail to meet the 
fundamental requirement that “green box” measures “have no, or at most minimal, trade-distorting effects or effects on production”.  2.14 Brazil argues that the CCP programme is not a “green box” measure because payments are 
not based on prices of upland cotton that took place in a prior base period but are linked to present 
prices for the product concerned, contrary to  the requirements of Annex 2 paragraph 6(c).
17 
 
                                                      
12 Preambular paragraph 3 of the Agreement on Agriculture . 
13 G/AG/N/USA/43, Exhibit BRA-47. 
14 Exhibit BRA-29. 
15G/AG/N/USA/43 page 37. Exhibit BRA-47. 
16 First Written Submission of Brazil, para 62. 
17 Ibid, para 197. WT/DS267/R/Add.1 
Page B-92  
 
 2.15 Paragraph 6(c) of Annex 2 makes it clear  that the amount of decoupled income support 
payments “shall not be related to, or based on, the prices, domestic or international, applying to any production undertaken in any year after the base period.” As Brazil notes, the amount of the payment under the CCP programme varies with fluctuations in the national average market price, that is, it is 
linked to a current price.  Accordingly, in New Zealand’s view this is sufficient to support a finding 
by the Panel that the CCP programme involves paym ents that are not “green box” support measures in 
accordance with Annex 2 of the Agreement on Agriculture  and must therefore be used in calculating 
the total quantity of domestic support granted to upland cotton for MY 2002.  Indeed, the United States endorses this approach.
18 
 
2.16 New Zealand notes, however, that the United States has argued that the term “support to a 
specific commodity” used in Article 13(b)(ii) should be interpreted to mean “product-specific 
support”.19  On this basis the United States argues that the CCP programme and crop insurance 
programme should be excluded from the scope of support granted to upland cotton for the purposes of 
Article 13(b)(ii). 20  
 
2.17 While New Zealand notes that the United St ates has notified marketing loss assistance and 
crop insurance (and presumably will notify CCP payments) as non-product specific domestic support,
21 it is clear from discussion in the WTO Committee on Agriculture that Members, including 
New Zealand, have questioned whether that is appropriate.22   
 
2.18 The United States asserts that CCP payments are non-product specific because they are not 
coupled to current production of any specific commodity but rather are based on historical fixed base acreage and yields.
23  However in New Zealand’s view Brazil has brought forward significant 
evidence of a strong linkage between the CCP payments and production of upland cotton, such that farmers with upland cotton base acreage are likely to continue to produce upland cotton.   
 
2.19 In particular Brazil points out that most co tton farmers have made considerable investments in 
cotton-specific equipment, or farm in locations where cotton is the most productive crop, and are 
therefore more likely to continue to produce cotton.
24  The linkage between the receipt of CCP 
payments and production of cotton is further reinforced by the CCP payments being explicitly calculated on the basis of current cotton prices.   
 
2.20 Brazil also points out that CCP payments create incentives for farmers with upland cotton base acreage to maintain upland cotton production.
25  In fact under the CCP programme the only way 
a farmer can guarantee a particular outcome is to  continue to grow the same crop, otherwise the 
farmer runs the risk of missing out.  For exampl e, if he or she chooses to produce wheat and cotton 
prices are high enough that no CCP payment is made but wheat prices fall, the farmer will make a loss 
they would not have made had they stayed with cotton production.    2.21 Irrespective of whether or not these payments are notified as product-specific or not, they must still be considered “support granted to a specific commodity” for the purposes of Article 13(b)(ii).  There is no foundation for the assertion by the United States that “support granted to a 
specific commodity” should be read as meaning “p roduct-specific support”. Given the detailed listing 
                                                      
18 First Written Submission of the United States, para 118. 
19 Ibid, para 78. 
20 Ibid, para 122. 
21 G/AG/N/USA/43, Exhibit BRA-47. 
22 See for example, G/AG/R/34 ‘Summary report of the meeting held on 27 March 2003’ at page 32. 
23 First Written Submission of the United States, para 115. 
24 First Written Submission of Brazil, para 207. 
25 Ibid, para 211.  WT/DS267/R/Add.1 
 Page B-93 
 
 
 of domestic support measures potentially exempt in the chapeau to Article 13(b)(ii) itself, had 
Members intended to exclude non-product specific suppor t they would surely have said so.  Further, 
had they meant that “support granted to a specific commodity” was to be read as “product specific” support they would have said so – the phrase was used at least five times elsewhere in the Agreement . 
 
2.22 Rather, the reference to support to a “specific  commodity” in Article 13(b)(ii) was used to 
distinguish the nature of the “peace clause” from the domestic support commitments more generally which are on a “Total” (i.e. over all agriculture) Aggregate Measurement of Support (“AMS”) basis.  
Only if support increases for a particular product can it be open to challenge under the SCM 
Agreement .  Without such clarification “peace clause” protection could potentially be lost for any 
agricultural product if Total AMS increases, even though support to that specific product had not 
increased.  This would have unpredictable results for individual products and cannot have been the 
intended effect of the “peace clause”.  2.23 Nothing in Article 6 suggests that treati ng product-specific and non-product specific support 
separately under Article 13 is wa rranted.  New Zealand sees no basis on which to suggest that support 
to a specific commodity should be excluded simply because other commodities may receive similar support.  Support provided through generally avai lable programmes (which, New Zealand notes, the 
marketing loss assistance programme and now the CCP programme are not) is still support received 
for the individual products.  Taking the United States argument to its logical extreme would effectively render all agricultural support non-produ ct specific so long as the same kind of support 
was being provided to more than one product.   
 2.24 Accordingly, New Zealand considers that the United States incorrectly categorises CCP 
payments as non-product specific support.  But whether they are product-specific or non-product specific is, in fact, irrelevant for the purposes of Article 13(b)(ii) as there is no basis upon which to 
read such a limitation on the kinds of domestic support to be considered within the meaning of that 
provision.  Instead, the portion of any non-product specific support granted to a specific commodity, in this case to upland cotton, must be includ ed in the comparative analysis required by 
Article 13(b)(ii).  In this respect New Zealand notes  that what Brazil is proposing is no more than 
what the United States has done in relation to export credits in its First Written Submission where it has allocated export credit administrative costs to the specific product of upland cotton.
26 
 
2.25 The same arguments can be made with respect to the payments under the crop insurance programmes.  
3. Production Flexibility Contract Payments, Direct Payments 
 
2.26 In New Zealand’s view one important aspect of the “Direct Payments” (“DP”) programme rules out inclusion of those payments in the “green box”, specifically the ability of farmers to update the base acreage used for calculation of DP payments.
27  As outlined by Brazil, the DP programme is 
the successor to the Product ion Flexibility Contract Payments (“ PFC”) programme and to permit an 
updating of the ‘fixed’ base period by changing the name of the PFC programme to a DP program 
would render the provisions of paragraph 6(a) and (b) of Agreement on Agriculture  Annex 2 a 
nullity.28  
 2.27 The option for farmers to update base acreage under the 2002 FSRI Act directly violates the requirement under Annex 2 paragraph 6 that decoupled income support be determined in relation to a 
                                                      
26 First Written Submission of the United States, para 175. 
27 First Written Submission of Brazil, para 52; Exhibit BRA-35. 
28 Ibid, para 182. WT/DS267/R/Add.1 
Page B-94  
 
 “defined and fixed base period”.  New Zealand agrees with Brazil’s interpretation that paragraph 6(a) 
and (b) contemplates only one base period that is fixed and unchanging.   
 2.28 As Brazil points out, permitting the updating of the base period to capture additional payment acreage (as one third of all United States farms with eligible acreage opted to do)
29 would link 
increased recent volumes of production with the amount of current payments.30  Brazil is also correct 
to state that this is contrary to the object and purpose of “de-coupled income support”, which is to break the link between production and the amount of support and thereby ensure that such measures 
“have no, or at most minimal” effects on production.  As the evidence brought forward by Brazil shows, an expectation of being able to update base acreage and payment yields influences production 
in a number of ways,
31 particularly as, having had one opportu nity to update their base acreage, 
farmers could reasonably expect further opportunities to do so in the future.  2.29 In New Zealand’s view the updating of base acr eage for the DP programme alone is sufficient 
to exclude it from the scope of permitted “green box” measures as set out in Annex 2.  Instead such 
payments are “amber box” measures that, in accordance with Article 6 of the Agreement on 
Agriculture , are domestic support to upland cotton in MY 2002. 
 2.30 Brazil has also argued that the PFC and DP programmes have more than a minimal effect on 
production and trade and therefore fail to meet the “fundamental requirement” of “green box” domestic support measures. 
 
2.31 New Zealand agrees with Brazil’s interpretation that the “fundamental requirement” that “green box” domestic support measures “have no, or at most minimal, trade-distorting effects or effects on production” means that the quantity or le vel of production or trade distorting effects need 
only be very small to trigger denial of  “green box” status under Annex 2 of the Agreement on 
Agriculture .
32  The language of paragraph 1 of Annex 2 makes it clear that this fundamental 
requirement and the other criteria set out in Annex 2 are to be strictly applied to any measures in order 
to obtain exemption from reduction commitments.  2.32 The trade-distorting effects or effects on production of any domestic support measure must be 
determined on a case-by-case basis, looking at the sp ecific circumstances and characteristics of each 
particular measure.  Brazil has provided comprehens ive information regarding the effects of the PFC 
and DP programmes to enable the Panel to dete rmine whether those payments have even very 
minimal production or trade distorting effects and thus fail to meet the “fundamental requirement” for “green box” measures as provided in Agreement on Agriculture  Annex 2. 
 
2.33 New Zealand notes that the United States provides no response to any of Brazil’s arguments 
regarding the PFC/DP programme and the level of production distortion it causes other than to claim that changing the name of the programme indemnifi es it from consideration.  Accordingly Brazil’s 
arguments should stand.  
                                                      
29 Ibid, para 181. 
30 Ibid, para 179. 
31 Ibid, paras 185 – 190. 
32 Ibid, para 165.  WT/DS267/R/Add.1 
 Page B-95 
 
 
 III. PROHIBITED EXPORT SUBSIDIES 
 
A. THE UNITED STATES HAS NO “PEACE CLAUSE” PROTECTION AGAINST PROHIBITED 
AND ACTIONABLE SUBSIDY CLAIMS RELATED TO EXPORT SUBSIDIES 
 
3.01 New Zealand supports the arguments made by Brazil that the three types of export subsidies applied to upland cotton and other commodities by the United States (the Step 2 Export Programme, 
the Export Credit Guarantee Programme, and the FSC  Replacement Programme) violate Articles 3.3, 
8 and 10.1 of the Agreement on Agriculture  and therefore fail to meet the requirement of conformity 
with Part V of the Agreement , with the result that such subsidi es are not exempt from claims by Brazil 
based on Article XVI of GATT 1994  or Articles 3, 5 and 6 of the SCM Agreement . 
 
B. THE UNITED STATES EXPORT SUBSIDIE S VIOLATE THE AGREEMENT ON AGRICULTURE 
AND THE SCM AGREEMENT 
 
1. Step 2 Export Payments 
 
 (a) Per se violation of Articles 3.3 and 8 of the Agreement on Agriculture 
 3.02 As outlined by Brazil,
33 Step 2 export payments clearly fall within the description of an export 
subsidy set out in Article 9.1(a) of the Agreement on Agriculture  in that it is a direct subsidy provided 
by the United States government to exporters  of upland cotton contingent upon export.   
 
3.03 Even if the Panel were to find that Step 2 export payments did not fall within the description 
set out in Article 9.1(a) of the Agreement on Agriculture , the Appellate Body has determined, as 
Brazil notes, that the effect of Article 10.1 is that a Member can only provide export subsidies in conformity with the Agreement on Agriculture  if it has scheduled export subsidy reduction 
commitment levels for the agricultural product concerned.
34  The use of any other type of export 
subsidy will “at the very least” threaten circum vention of subsidy reduction commitments within the 
meaning of Article 10.1.  3.04 Accordingly New Zealand agrees with Brazil that the Step 2 export payments violate per se  
Articles 3.3 and 8 of the Agreement on Agriculture   
 
3.05 New Zealand notes that the United States has argued that Step 2 export payments are not 
export subsidies as defined by Article 9.1(a) and 10 of the Agreement on Agriculture  (and 
Article 3.1(a) of the SCM Agreement ) because the Step 2 payments are available to domestic users as 
well as exporters of upland cotton.
35  As the Appellate Body in US-FSC  Recourse to Article 21.536 
recognised, the fact that a scheme allows for paymen ts to be made otherwise than contingently on 
export does not diminish the export contingency of those that are.   
 3.06  In US-FSC Recourse to Article 21.5  the United States argued that a measure that provided tax 
exclusion for exported products, but also allowed ta x exclusion to be obtained without exportation, 
could not be considered to be ‘contingent upon expo rt performance’.  The Appellate Body disagreed. 
 
                                                      
33 Ibid, paras 238-243. 
34 Report of the Appellate Body, United States – Tax Treatment for “Foreign Sales Corporations” , 
WT/DS108/AB/R (“ US-FSC ”), para 150-152; First Written Su bmission of Brazil, para 237. 
35 First Written Submission of the United States, para 132. 
36 Report of the Appellate Body, United States – Tax Treatment for “Foreign Sales Corporations” 
Recourse to Article 21.5 of the Dispute Settlement Understanding by the European Communities, 
WT/DS108/AB/RW (“ US-FSC Recourse to Article 21.5” ). WT/DS267/R/Add.1 
Page B-96  
 
 3.07 The Appellate Body said that the measure “c ontemplates two differen t factual situations”; 
where property is produced within the United States and held for use outside the United States, and where property is produced outside the United States and held for use outside the United States.  The 
Appellate Body said that “the fact that the subsid ies granted in the second set of circumstances might 
not be export contingent does not dissolve the export contingency arising in the first set of 
circumstances”.
37 
 3.08 New Zealand considers that the fact that paym ents are also able to be made to domestic users 
of upland cotton does not ‘dissolve’ the export contingency of the payments that are made to exporters.  Payments to eligible exporters of upland cotton are dependent on proof of export being 
provided and are therefore conti ngent on export performance.   
 3.09 Accordingly Step 2 export payments breach the obligation of the United States under Article 3.3 not to provide such subsidies in respect of any agricultural product that it has not specified in Section II of Part IV of its Schedule and therefore violates per se  the undertaking by the United 
States in Article 8 not to provi de export subsidies otherwise than in conformity with the Agreement on 
Agriculture .   
  (b) Violation of Article 3.1(a) and 3.2 of the SCM Agreement  
 3.10 New Zealand supports Brazil’s conclusion that the Step 2 export payments meet the 
requirements of a subsidy under Article 1. 1(a)(1)(i) and Article 1.1(a)(2) of the SCM Agreement  and 
are contingent upon export within the meaning of Article 3.1(a) of the SCM Agreement . 
 3.11 Accordingly if the Panel finds, as New Ze aland believes it should, that Step 2 export 
payments constitute per se  prohibited subsidies under Article 3.1(a) and 3.2 of the SCM Agreement , 
the Panel is required to recommend under Article 4.7 of the SCM Agreement  that the United States 
withdraw the programme without delay.  New Zeal and therefore supports Brazil’s request that the 
Panel expressly make such a recommendation.  
2. Export Credit Guarantee Programme 
 
 (a) Violation of Articles 8 and 10.1 of the Agreement on Agriculture 
 3.12 New Zealand supports Brazil’s arguments that the export credit guarantee programme 
provides export subsidies that can lead to, or thre aten to lead to, circumvention of export subsidy 
commitments under Article 10.1.  As established by the Appellate Body in US-FSC,
38 Article 10.1 of 
the Agreement on Agriculture  is violated where an export subsidy is available for unscheduled 
agricultural products for which no reduction commitm ents have been made, as, “at the very least”, 
this threatens to lead to circumvention of export subsidy commitments.  3.13 It is evident that Members considered th at export credit programme s could provide export 
subsidies through the specific re ference to such programmes in Agreement on Agriculture  
Article 10.2.  While not all government export credit programmes necessarily provide export 
subsidies, it is clear that the United States programme does so in both of the ways demonstrated by Brazil (ie because it clearly falls within Item j of th e Illustrative List of Export Subsidies in Annex I of 
the SCM Agreement
39 or is otherwise an export subsidy as defi ned in Articles 1.1 and 3.1(a) of the 
                                                      
37 Ibid, para 119. 
38 Report of the Appellate Body,  US-FSC , para 150-152. 
39 First Written Submission of Brazil, paras 272-286.  WT/DS267/R/Add.1 
 Page B-97 
 
 
 SCM Agreement ).40  The export credit scheme is therefore a subsidy contingent on export in the 
context of Article 10.1 of the Agreement on Agriculture . 
 3.14 New Zealand notes that the United States has argued that “the plain words of Article 10.2 (of the Agreement on Agriculture ) indicate that the export credit guarantee programs are not subject in 
any way to the export subsidy disciplines of that Agreement .”
41  New Zealand disagrees with this 
assertion.  The heading of Article 10 is ‘Prevention of circumvention of export subsidy commitments’ and the inclusion of reference to export credits unde r that Article clearly reflects Members’ concern 
that export credits can provide export subsidies.  
3.15 Nor does Article 10.2 in any way suggest that it provides an exception fr om the disciplines of 
Article 10.1.  New Zealand agrees with the United States that Article 10.2 does not say “in addition to 
the export subsidy commitments” of the Agreement .
42  That is because it did not have to, coming as it 
does directly after the general prohibition against ci rcumvention in Article 10.1.  While Article 10.1 
currently provides the only discipline on the use of export credits, it is expected that the work 
envisaged in Article 10.2 will elaborate further and more specific disciplines that will presumably 
make identification of the extent to which such export credit programmes constitute export subsidies 
more straightforward.  However it is incorrect to assume that ther e is a vacuum in the meantime.  
Item j of the Illustrative List of the SCM Agreement  clearly already provides guidance on when export 
credit guarantee or insurance programmes are to be  considered to be ‘export subsidies’ and beyond 
this the general definition in Articles 1.1 and 3.1(a) of the SCM Agreement  also applies.  While the 
provisions of Item j do not apply to agricultural products mutatis mutandis  there is no reason to 
believe that the guidance th ere and elsewhere in the SCM Agreement  is not appropriate for analyses 
under the Agreement on Agriculture . 
 3.16 Nor should the application of the disciplines in the Agreement on Agriculture  in the meantime 
obviate the need for continued negotiations as envi saged by Article 10.2, as New Zealand hopes that 
those negotiations will result in clea rer and more specific rules.  Ind eed it may even be that the result 
of the negotiations is that an export credit programme  that is considered to be an export subsidy under 
the current, more generally applicable rules, will be deemed not to be an export subsidy in the future.  
However in that respect New Zealand notes, for example, that the United States Intermediate Export Credit Guarantee Program (GSM-103) provides for a repayment term of between 3 and 10 years
43, 
terms clearly well outside the scope of disciplines to govern the use of export credit guarantee 
programmes currently being considered in the negotiations.   (b) Violation of Articles 3.1(a) and 3.2 of the SCM Agreement  
 
3.17 As export credits are not in conformity with Part V of the Agreement on Agriculture  and thus 
do not benefit from protection under the “peace clause”, they can equally be examined under the SCM 
Agreement .  If the Panel finds, as New Zealand believes it should, that export credit guarantee 
payments are prohibited subsidies under Article 3.1(a) of the SCM Agreement , the Panel is required to 
recommend under Article 4.7 of the SCM Agreement  that the United States withdraw the payments 
without delay.  New Zealand therefore supports Braz il’s request that the Panel expressly make such a 
recommendation. 
 
                                                      
40 Ibid, paras 287-293. 
41 First Written Submission of the United States, para 164. 
42 Ibid. 
43 Ibid, para 151. WT/DS267/R/Add.1 
Page B-98  
 
 3. FSC Replacement Measure 
 
3.18 New Zealand supports the claims made by Brazil,
44 based on the findings already made by the 
Appellate Body in US-FSC Recourse to Article 21.5 , that the tax cuts under the FSC Repeal and 
Extraterritorial Income Act of 2000 threaten to circumvent United States export subsidy commitments 
within the meaning of Article 10.1 of the Agreement on Agriculture  and therefore cannot be exempt 
from actions under the SCM Agreement  under Article 13(c)(ii) of the Agreement on Agriculture .  In 
addition the Appellate Body found that there was a prohibited subsidy under Article 3.1(a) of the SCM 
Agreement . 
 
3.19 Accordingly if the Panel finds, as New Zeala nd believes it should, that the tax cuts under the 
FSC Repeal and Extraterritorial Income Act of 2000 are prohibited subsidies under Article 3.1(a) of 
the SCM Agreement , the Panel is required to r ecommend under Article 4.7 of the SCM Agreement  that 
the United States withdraw the subsidies without delay.  New Zealand therefore supports Brazil’s 
request that the Panel expressly  make such a recommendation. 
 
IV. PROHIBITED SUBSIDIES 
 
A. STEP 2 DOMESTIC PAYMENTS VIOLATE THE SCM AGREEMENT AND GATT ARTICLE III:4 
 
4.01 New Zealand supports Brazil’s argument that the “peace clause” provides no immunity for 
“amber box” subsidies from prohibited subsidy claims under Article 3.1(b) of the SCM Agreement.45  
New Zealand believes that Brazil has demonstrated that Step 2 domestic payments are a prohibited 
subsidy under Article 3.1(b) in that the payments are contingent on the use of domestic over imported 
upland cotton.  On that basis they also violate Article III.4 of GATT 1994 . 
 
4.02 Accordingly if the Panel finds, as New Ze aland believes it should, that Step 2 domestic 
payments violate per se Article 3.2 of the SCM Agreement , the Panel is required to recommend under 
Article 4.7 of the SCM Agreement  that the United States withdraw the payments without delay.  New 
Zealand therefore supports Brazil’s request that the Panel expressly make such a recommendation. 
 
V. UNITED STATES REQUEST FOR A PRELIMINARY RULING ON CERTAIN 
MATTERS 
 
5.01 New Zealand rejects the arguments of the United States that measures no longer in effect are not within the Panel’s terms of reference.
46  Such measures should be within the scope of the Panel’s 
consideration, particularly when the programmes in  question have effectively only been renamed and 
in fact continue in a slightly different form.  In  addition, the nature of serious prejudice claims may 
necessitate consideration of data beyond a single y ear and may in fact require a Panel to consider 
trends over a number of years.  Accordingly New Zealand rejects the United States claim that market loss assistance payments and PFC payments should be excluded from the Panel’s consideration of Brazil’s claims. 
 
5.02 New Zealand also considers that the Panel should reject the United States request that that 
Panel rule that export credit guarantee measures relating to eligible United States agricultural 
commodities (other than upland cotton) ar e not within its terms of reference.
47  While New Zealand 
did not participate in the consultations, in New Zeal and’s view Brazil had little choice but to look at a 
broader commodity coverage in relation to export credits because the information specific to upland 
                                                      
44 First Written Submission of Brazil, paras 315-330. 
45 First Written Submission of Brazil, para 332. 
46 First Written Submission of the United States, paras 207-211. 
47 Ibid, paras 191-206.  WT/DS267/R/Add.1 
 Page B-99 
 
 
 cotton alone was not available.  To prevent Brazil from doing so would unjustly allow a lack of 
transparency to preclude scruti ny of measures by Members taking disputes, especially where the 
information at a higher level of aggregation showed there was clearly a case to answer in respect of a 
particular measure, in this instance export credit s.  While more time is needed to analyse the 
information brought forward by the United States (which does not appear to be sourced from publicly 
available documents), at this stage of the Pane l’s consideration of Brazil’s claims, New Zealand 
considers that the Panel should not make the ruling requested by the United States. 
 
VI. CONCLUSION 
 
6.01 In conclusion, New Zealand believes that Brazi l had demonstrated that the “peace clause” has 
not been respected in relation to domestic support and export subsidies provided by the United States 
to upland cotton in the marketing years 1999, 2000 , 2001 and 2002, and that  accordingly Brazil is 
entitled to bring actionable and prohibited subs idy claims against the United States under the GATT 
1994  and the SCM Agreement .  New Zealand looks forward to the next phase of the case which will 
examine Brazil’s claims under Articles 3, 5 and 6 of the SCM Agreement  and Article XVI of the 
GATT 1994 . WT/DS267/R/Add.1 
Page B-100  
 
 ANNEX B-10 
 
 
THIRD PARTY SUBMISSION BY PARAGUAY 
 
 INTRODUCTION 
 
1. Paraguay is grateful for the opportunity to express its views on the matter at issue in this 
dispute.  2. Because Paraguay is a firm believer in a fair system of international trade, it feels that it 
should explain its position on this issue which is  of particular interest to its economy. 
 
Applicable rules 
 
3. In the Marrakesh Ministerial Declaration of April 1994 itself, Ministers affirmed that the establishment of the WTO ushered in a new er a of global economic cooperation, reflecting the 
widespread desire to operate in a fairer and more  open multilateral trading system for the benefit and 
welfare of their peoples, and expressed their determinat ion to resist protectionist pressures of all kinds 
as well as their belief that the strengthened rules achieved in the Uruguay Round would lead to a progressively more open worl d trading environment. 
 4. Moreover, in October 2002, on the occasion of the meeting of the International Cotton 
Advisory Committee, governments observed the critical situation that the world cotton industry was 
going through and its link to subsidies, suggesting th e establishment of a schedule for the elimination 
of measures that distorted world production and trade in cotton, and stressing the need to submit complaints before the WTO for viol ation of the applicable rules. 
 
5. Paraguay considers that the subsidies and sup port granted by the United States to its cotton 
production are inconsistent with the Agreement on Subsidies and Countervailing Measures, the 
Agreement on Agriculture and the rules and principl es of the GATT 1994, and that for the purposes of 
this dispute it is therefore essential to take account of WTO legislation, which was carefully drafted to avoid causing distortions in international trade and prejudice to developing countries such as 
Paraguay. 
 6. WTO jurisprudence and the principles of inte rpretation of international law applied to the 
various cases suggests that the applicable rules sh ould be read cumulatively, taking account of all 
elements applied to the case in order to support the system as an integrated whole. 
 
7. Paraguay considers Brazil's complaint and the legal justifications invoked with respect to the 
inconsistency of the United States' laws, regulations  and administrative procedures with the applicable 
WTO rules to be fully consistent with the law.  
PEACE CLAUSE 
 
8. With respect to the applicability of Article 13(b)(ii) concerning domestic support measures that conform fully to the provisions of Article 6 of the Agreement including direct payments that 
conform to the requirements to paragraph 5 thereof,  as reflected in each Member's Schedule, as well 
as domestic support within de minimis  levels and in conformity w ith paragraph 2 of Article 6, 
Paraguay considers they shall be exempt from ac tions based on paragraph 1 of Article XVI of GATT  WT/DS267/R/Add.1 
 Page B-101 
 
 
 1994 or Articles 5 and 6 of Subsidies Agreement, provided that such measures do not grant support to 
a specific commodity in excess of that decided during the 1992 marketing year.  9. This implies that it is not limited or confin ed to specific products.  Thus, it can be concluded 
that the United States does not enjoy protection from actions relating to subsidies using 1999, 2001 
and 2002 as a basis, as Brazil duly proved. 
 10. In interpreting the Peace Clause, account must  be taken of the serious prejudice that Member 
economies could suffer, and an assessment made of the overall significance of all of the agreements 
relating to the case. 
 
11. Paraguay does not grant subsidies, either  under the Subsidies Agreement or under the 
Agreement on Agriculture.  Paraguay did notify the Committee on Agriculture, on 22 July 2002, of its domestic support commitments for 2000 and 2001 (G/AG/N/PRY/10, supporting table DS.1 and related supporting tables) as required under the Agreement on Agriculture and the Agreement on 
Subsidies and Countervailing Measures. 
 12. Consequently, as long as discriminatory s upport not provided for under WTO Agreement on 
Agriculture or the WTO Agreement on Subsidies on Countervailing Measures continues to be granted, Paraguay will have no choice but to file complaints with the relevant bodies.  
Inconsistency with the Agreement on Agriculture 
 
13. The Step 2 programme introduced by the United States to stimulate exports and the competitiveness of its products on the international market is inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture. 
 
14. Article 3 of the Agreement on Agriculture re fers to the incorporation of concessions and 
commitments.  Paragraph 3 thereof stipulates that:  
Subject to the provisions of paragraphs 2(b)  and 4 of Article 9 of this Agreement, a 
Member shall not provide export subsidies listed in paragraph 1 of Article 9 in 
respect of the agricultural products or groups of products specified in Section II of 
Part IV of its Schedule in excess of the budgetary outlay and quantity commitment levels specified therein and shall not provide such subsidies in respect of any agricultural product not specified in that Section of its Schedule.  
15. The above paragraph enables Members to provi de the subsidies listed in Article 9.1 of the 
Agreement on Agriculture subject to fu lfilment of the commitments assumed. 
 16. Similarly, Article 8 of the said Agreement regulates export competition commitments, stipulating that:  
Each Member undertakes not to provide export subsidies otherwise than in 
conformity with this Agreement and the co mmitments as specified in that Member's 
Schedule. 
17. For the above reasons, and b ecause it does not consider the provisions of the Agreement on 
Agriculture to have been complied with, Paraguay be lieves that the export subsidies granted by the 
United States to its cotton industry are inconsistent with Articles 3.3, 8 and 9.1 of the Agreement on 
Agriculture. 
 WT/DS267/R/Add.1 
Page B-102  
 
 Inconsistency with the Agreement on Subsidies and Countervailing Measures 
 
18. The agricultural subsidies cause "serious prejudice" to the domestic industry of other 
Members  under Articles 5 and 6 of the Agreement on Subsidies and Countervailing Measures.  
19. The introductory paragraph of part III, Arti cle 5 of the said Agreement provides that no 
Member should cause, through the use of any subsidy – specific and not exempted under the Agreement – adverse effects to the interests of other Members, more specifically, as categorically stated in the indents that follow, (a) injury to th e domestic industry of anot her Member and (c) serious 
prejudice to the interests of another Member. 
 
20. Article 6 specifically refers to cases in whic h "serious prejudice" is deemed to exist in the 
sense of paragraph (c) of Article 5.  
Effects of agricultural subsidies 
 
21. Agricultural subsidies have effects on world trade, and measures such as those applied by the 
United States have a significant impa ct on developing countries like Paraguay. 
 22. Indeed, Paraguay is all the more affected by the said measures in that it is precisely cotton 
production that provides sustenance for the most needy segments of the population. 
 
23. Paraguay has a total population of approximate ly 5,300,000, of which more than 500,000 are 
linked to cotton production.  If we add the related industries and activities, the figure reaches an estimated 1,500,000, or approximately 30 per cent of the country's total population.  
24. Any slump in the cotton trade causes an e xodus of rural population towards the urban areas 
which do not offer any relief or solution, and th is further undermines the economic situation of a 
country that depends on its agriculture.  25. As regards exports, in 1991, the foreign exch ange revenue generated by sales of cotton and 
byproducts thereof reached US$318,912,000, approximately 43 per cent of the total for the country's 
exports that year.  At the time, a total of 299,259 farms, 190,000 were cultivating cotton. 
 26. By 2001, the figures had changed considerably .  Export revenue had fallen to US$90,505,000, 
a 72 per cent drop in the value of exports.  The number of farms producing cotton decreased to about 90,000, representing a 52 per cent decrease in farms, employment and small farmer income.  In other 
words, the impoverishment was real. 
 27. Regarding international cotton fibre prices, in  1991, the price per ton of Paraguayan type fibre 
was quoted on the New York Exchange at US$1,624, while in 2001, it was quoted at US$934.  28. In Paraguay, some 60 per cent of cotton is produced on farms of less than 10 hectares, making 
it the main or only source of income for small farmers and the main source of employment for the 
rural workforce in the most disadvantaged segment of society where access to capital and technology is more restricted and the leading socio-economic welfare indicators are lower than anywhere else. 
 
CONCLUSION 
 
29. Paraguay is a small economy.  It is a land-lock ed country that has no oil, gas, gold or other 
natural resources of a kind that could make it of pa rticular interest to the developed countries.  The 
Paraguayan economy is essentially based on agricultural production, including the production and sale of cotton.  WT/DS267/R/Add.1 
 Page B-103 
 
 
  
30. Paraguay therefore considers that the measures adopted by the United States cause serious prejudice to world trade, affecting Paraguay in partic ular, and that the necessary steps should be taken 
to eliminate the adverse effects and seek to achieve a balance in world trade.  
31. Paraguay respectfully requests the Panel to c onclude that the measure applied by the United 
States is inconsistent with its WTO obligations under the various provisions of the Agreement on Agriculture, the GATT 1994 and the Agreemen t on Subsidies and Countervailing Measures. 
 WT/DS267/R/Add.1 
Page B-104  
 
 ANNEX B-11 
 
THIRD PARTY SUBMISSION OF THE SEPARATE CUSTOMS 
TERRITORY OF TAIWAN, PE NGHU, KINMEN AND MATSU. 
 
15 July 2003 
  
1. In its fax of 28 May 2003 to the parties to th is dispute, the Panel poses questions regarding the 
correct interpretation of Article 13 of the Agreement on Agriculture and the on the issue of preliminary rulings.  As the Panel’s questions ra ise an important point of law and the Separate 
Customs Territory of Taiwan, Penghu, Kinmen and Matsu has a systemic interest in the proper 
interpretation and operation of these and other re levant provisions involved in the procedures, we 
would like to submit our views on the following aspects:   
I.  THE BURDEN OF PROOF REQUIRED BY ARTICLE 13 OF THE AGREEMENT 
ON AGRICULTURE (THE “PEACE CLAUSE”), AND  
 II.  THE QUESTION OF PRELIMINARY RULINGS.  
 
 
I. BURDEN OF PROOF IN THE “PEACE CLAUSE”  
 
2. In attempting to arrive at a proper interp retation of the burden of proof as provided in 
Article 13 of the Agreement on Agriculture, we s uggest comparing differen t types of exemptions, 
defences, or carving-out under different agreements.     
3. It could happen that a matter is brought under an agreement not covered by the DSU. Since 
Article 1 of the DSU provides that the DSU shall apply to disputes brought pursuant to the consultation and dispute settlement provisions of the agreements listed in Appendix 1 to the DSU and 
the WTO Agreement, it follows that consultation or dispute arising from or in connection with any non-covered agreement would not be within the scope  of the dispute settlement procedures under the 
DSU.  Thus, if a Member brings a complaint alle ging a breach of certain international environmental 
treaties, for example, the complaining party would bear the burden to prove that the issue in dispute 
falls within the purview of the DSB.    4. It could also be that a matter is specifical ly excluded from the dispute settlement procedures 
by certain relevant agreements.  A typical example of  this would be the provision in Article 6 of the 
TRIPS agreement, which provides that “for the purposes of dispute settlement under this Agreement, 
subject to the provisions of Articl es 3 and 4 nothing in this Agreement shall be used to address the 
issue of the exhaustion of intellectual property rights”.  It is apparent that as long as it is an “issue of 
the exhaustion of intellectual property rights,” the dispute settlement procedure shall not be used.  There is no threshold or prerequisite for applying such provision.  The Member applying this 
provision would be able to prev ent such dispute settlement procedures unless the complaining party 
asserts and proves that the measure concer ned is not such an “exhaustion issue”. 
 5. It could also happen that exceptions or ex emptions are granted under relevant agreements 
providing specific obligations.  There are different wa ys of providing exceptions for specific activities 
or measures.  Examples include paragraph 2 of Arti cle XI of the GATT stating “...shall not extend to 
the following”; Articles XX and XXI of the GATT stating “nothing in this Agreement shall be  WT/DS267/R/Add.1 
 Page B-105 
 
 
 construed to...”  These are in the nature of an affi rmative defence. Here, the burden of proof rests on 
the party invoking the exception.  6.  It is clear that Article 13 of the Agreemen t on Agriculture is not a “matter under an agreement 
not covered under the DSU”.  Neither is it a matter  specifically excluded from the dispute settlement 
procedures as provided in Article 6 of the TRIPS Agreem ent.  It is also not typical of the type of 
exception as contained in Articles XI, XX or XXI of the GATT.  In our view, Article 13 falls between the type of exception in Article 6 of the TRIPS and that in Article XI, XX or XXI of the GATT.  Thus the procedures for applying the provisi on should be interpreted differently. 
 
7. In its First Written Submission, Brazil assert ed that, “Article 13 is in the nature of an 
affirmative defense, because it provides an exception to a legal regime otherwise applying to agricultural support measures. It does not alter the scope of other provisions providing positive 
obligations on Members, and is not itself a positiv e obligation” and as a consequence, in this 
proceeding the United States has th e burden of proof on the question of whether its subsidies “are in 
conformity with the AOA Article 13”
1.  
 8. In our view, the very nature of Article 13 is such that it is not appropriate for any particular description or “label” such as an “a ffirmative defence”, or “exception”, to  be ascribed to it, simply for 
the convenience of resolving the question of burden of proof.
2  We consider that Article 13 in itself 
contains both rights and obligations of Members.  The right conferred by Article 13, i.e. entitlement to 
“exempt from actions” is conditional; conditional upon a positive obligation of full conformity to the 
requirements as set out in the relevant provisions of the Agreement on Agriculture.  We agree with the view put forward by the United States at paragr aph 43 of its First Written Submission which purports 
to identify such positive obligations. If the contention that Article 13 confers a right as well as imposes a positive obligation, is accepted, then, as a complainant, it is for Brazil to prove a breach of 
this positive obligation by demonstrating non-conformity rather than for the United States to bear the 
burden of proving conformity.  We consider that th e above contention is the only logical conclusion in 
giving effect to Article 13.  Since there is no scheme for a Member under Article 13 to prevent the initiation and the establishment of a panel, suppose Ar ticle 13 is interpreted in such a way as to still 
require the United States to bear the burden of pr oving the conformity of relevant provisions of the 
Agreement of Agriculture, it would mean Article 13 having less than its originally intended effect. 
 
9. In addition to the above, drafters’ intent s hould be taken into account when interpreting this 
Article.  Domestic support measures are expressly allowed under this Article with the intention of 
giving Members some flexibility on domestic support measures to help the progressive liberalization of their agriculture.  Requiring the respondent to b ear the burden to prove that the subsidy measure in 
question is consistent with this Agreement will, to  a certain degree, offset the respondent’s right to 
claim for the exceptions provided by this Provision, which is contrary to the drafters’ intention.    10. To impose the burden of proof on the respondent  has another negative implication.  In the 
case before us, if Brazil’s argument stands, it w ould render the words “exempt from actions” pointless 
as the result would inevitably be  a full-blown dispute settlement proceeding with Brazil submitting 
evidence to substantiate its complaints and the US filing its defence by invoking Article 13 and 
submitting proof of conformity thereto.    
                                                      
1 Brazil first Written Submission, paragraph 23. 
2 In EC-Hormones , the Appellate Body is of the view that the particular description of “exception” did 
not discharge the burden of the complaining party in establishing a prima facie case. At para 104, the Appellate 
Body stated: the general rule in a dispute settlement proceeding requiring a complaining party to establish a 
prima facie case of inconsistency of a provision…before the burden of showing consistency with that provision 
is taken by the defending party is not avoided by simply describing the same provision as an exception.”   WT/DS267/R/Add.1 
Page B-106  
 
 II. THE QUESTION OF PRELIMINARY RULINGS 
 
11. Although on the evidence of past dispute settlement cases the normal practice of the Panel tends to be that it hears preliminary issues, provi des indicative rulings and consolidates detailed 
reasoning only in the final Panel report, the questio ns associated with the co rrect interpretation of 
Article 13 are such that they merit the Panel’ s consideration and disposition at the earliest 
opportunity.  12. We consider that the preliminary issues raised  in this dispute determine the manner in which 
the parties to this proceeding prepare their case. If  the question of the correct interpretation of the 
words “exempt from actions” is not resolved along with the question of the allocation of burden of 
proof, considerable resources will be wasted both by complaining and defending claims.  Needless to 
say, due process will not be properly served in such  a case. Accordingly, we respectfully urge this 
Panel to adopt a special procedure to deal with this preliminary issue at the earliest opportunity so that 
parties to this dispute will not be prejudiced.
3  
 
                                                      
3 This Panel may recall that the Appellant Body in EC-Banana  indicated its opinion that “…this kind of 
issue could be decided early in panel proceedings, without causing prejudice and unfairness to any party or third 
party,..” WT/DS27/AB/R, at para. 144. 