 WT/DS267/R/Add.1 
 Page F-1 
 
 
ANNEX F 
 
ORAL STATEMENTS OF PARTIE S AND THIRD PARTIES AT THE 
RESUMED SESSION OF THE FIR ST SUBSTANTIVE MEETING 
 
 
Contents Page 
Annex F-1 Executive Summary of the Opening Statement of Brazil F-2 
Annex F-2 Executive Summary of the Closing Statement of Brazil F-7 
Annex F-3 Executive Summary of the Openi ng Statement of the United States F-11 
Annex F-4 Executive Summary of the Closing Statement of the United States F-16 
Annex F-5 Third Party Oral Statement of Argentina F-19 
Annex F-6 Third Party Oral Statement of Benin F-28 
Annex F-7 Third Party Oral Statement of Chad F-33 
Annex F-8 Third Party Oral Statemen t of the European Communities F-37 
Annex F-9 Third Party Oral Statement of India F-40 
Annex F-10 Third Party Oral Statement of New Zealand F-42 
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ANNEX F-1 
 
 
EXECUTIVE SUMMARY 
STATEMENT OF BRAZIL AT THE 
RESUMED FIRST SUBSTANTIVE MEETING 
OF THE PANEL WITH THE PARTIES 
 
 
1. Brazil’s Claims of Present Serious Prejudice Relating to Subsidies Provided in MY 
1999-2002 
 
1. Brazil’s present serious prejudice claims relate to US  subsidies provided for the production, 
export and use of US upland cotton during the period MY 1999-2002.  This period covers the 
measures challenged by Brazil and represents th e relevant period of investigation to examine present 
serious prejudice caused by the US subsidies under Articles 5(c) and 6.3 of the SCM Agreement.  
This four-year period is long enough to allow the Pa nel to make a determination (in the words of the 
Appellate Body in the recent EC – Pipe Fittings decision) “that is less likely to be subject to market 
fluctuations or other vagaries that may distort a proper evaluation.”   
 
2. Brazil Has Established That the US  Subsidies between MY 1999-2002 Caused 
Significant Price Suppression within the Meaning of Article 6.3(c) of the SCM Agreement 
 
2.  Brazil has shown in its Further Submission the amount and the subsidization rate of the US subsidies which cause serious prejudice to Brazil as we ll as demonstrated that all of the US subsidies 
are specific within the meaning of Article 2 of the SCM Agreement.  The United States asserts that 
crop insurance subsidies provided to upland cotton producers by the 2000 Agricultural Risk Protection (“ARP”) Act are not specific.  In seeking to rebut Brazil’s evidence that more than 50 per 
cent of the value of US agricultural commodities did not benefit from crop insurance benefits, the 
United States now argues that livestock is covered in “pilot programmes”.  Yet, a close examination of the “pilot” programmes indicates that the great majority of livestock production was not covered by 
the crop insurance programmes during the period of investigation.  Therefore, the crop insurance 
programme is specific.   
 
3. Contrary to the US arguments, the Panel is required by Article 5 of the SCM Agreement to 
examine the collective and interactive effects of all US subsidies.  While different economists have 
estimated varying degrees of acreage, production, export and price effects of the US subsidies, no 
economist has ever found or suggested that rem oving all of the US subsidies would have only 
minimal effects.   
 
4. The conditions of competition in the upla nd cotton market that existed during MY 1999-2002 
(and that exist today) explain why:  First , upland cotton is a basic fungible commodity that is widely 
traded throughout the world;  Second , demand for upland cotton is relatively price-inelastic and 
consumption increased steadily during MY 1999-2002 , whether upland cotton prices rose or fell;  
Third , world market prices for upland cotton as reflect ed in the New York futures price and the A-
Index are sensitive to changes in supply – prices tend to rise when  world supply decreases and fall 
when world supply increases;  Fourth , US producers in MY 2002 supplied 41.6 per cent of world 
export market demand – the next largest exporter (Uzbekistan) had only 13 per cent of the world 
market share.  Fifth , US producers of upland cotton are among the world’s highest cost producers and 
total average costs between MY 1999-2002 were 77 per cent higher than market revenue received for  
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upland cotton lint;  and Sixth, US upland cotton subsidies cove red the cost-revenue gap with 
subsidies averaging 95 per cent which are 19 times gr eater than the five per cent subsidization rate 
formerly deemed to create a presumption of serious prejudice under Article 6.1(a) of the SCM Agreement.  
5. US subsidies are a key element of the conditions of competition in the world market for 
upland cotton.  The US subsidies create a s ituation in which USDA’s Chief Economist has 
acknowledged that many US upland cotton producers ar e immune from market forces.  This is readily 
illustrated by the extensive record provided by Brazil.    
6. The United States now argues that US upla nd cotton farmers are sensitive to changes in 
market prices.  Yet, US planted acreage increased  as prices declined between MY 1999-2001 .  There 
can be little doubt that without the US subsidies, many US upland cotton producers would have to 
switch to crops providing a higher market return or take marginal land out of production.  This means 
that without subsidies, US acreage and production w ould fall considerably.  In addition to falling US 
production, the removal of US subsidies would also  result in significant reductions in US exports 
contributing to increased world prices.  Professor Sumner found that, but for the US subsidies 
between MY 1999-2002, US exports would fall from the annual actual average exports of 
8.62 million bales by 41.2 per cent to 5.07 million bales.  This reduction of 3.55 million bales represents 13.4 per cent of the total average world export market between MY 1999-2002.  Given the 
relatively inelastic demand for upland cotton, it woul d be remarkable if world prices did not increase 
with a 13.4 per cent decrease in the supply of  upland cotton to the world export market.  
 7. Brazil has examined some of the non-subsidy ma rket factors that the United States apparently 
now claims account for all of the fall in prices in MY 1998-2002.  Even though some of these factors 
may have contributed to lower and suppressed pr ices during MY 1999-2002, the US arguments and 
evidence do not refute Brazil’s ev idence that the impact of $12.9 billion in US subsidies on US 
acreage, production, exports and prices was significant.   Moreover, Brazil does not dispute that there 
were other factors causing world prices to fluc tuate throughout MY 1999- 2002.  And these same 
types of factors are causing prices to fluctuate t oday – and they will do so tomorrow.  Changes in 
weather, exchange rates, economic growth, and fi nancial conditions, among other factors, will always 
play a role in price discovery in world commodity markets.  But it is simply not credible for the 
United States to argue now that $12.9 billion in su bsidies to US producers faced with an average 
24.3 cents per pound cost-revenue gap, who nevertheless increased their world market share to 
41.6 per cent at times of record low prices, had no impact on production or world prices.      8. Having established that US production and exports would fall significantly if US upland 
cotton subsidies were eliminated, Brazil also demonstr ated that the effects of lower US exports would 
result in world upland cotton prices being higher by an amount that is “significant”.  Brazil presents 
additional evidence on the price-suppressing effect of the US subsidies from the Report of the 
Commission on the Application of Payment Limitati ons for Agriculture.  At the request of the 
Commission, USDA economists Westcott and Price ex amined the effects of eliminating marketing 
loan benefits for MY 2000 and MY 2001 finding  significant acreage and price effects representing 
33.6 per cent of the average prices received by US  farmers in MY 2001.  The record contains the 
results of a number of different simulations of pri ce suppression effects caused by all or some of the 
US subsidies.  All of these results reveal “si gnificant” price suppression within the meaning of 
Article 6.3(c).  They are “significant” because these results of price suppression are far from de 
minimis .   
 
9. Finally, Brazil has demonstrated the clo se link between world A-Index prices, Brazilian 
internal prices and prices received by Brazilian producers in the export markets.  
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10. Andrew Macdonald has provided his expert testimony and described the importance of US 
market factors in influencing the perception of trad ers in the New York futur es market and in shaping 
the perceptions of price movements by traders in in ternational transactions as reflected in the A-Index 
price development.  Mr. Macdonald has also pr ovided evidence of the close relationship between 
these two sets of prices and the determination of pr ices in the Brazilian market.  This evidence fully 
supports the pricing data reflecting the close c onnection between US domestic prices, US export 
prices, A-Index prices, Brazilian prices, and the prices received by Brazilian and third country 
exporters.    11. The United States has asserted that the term world market share in Article 6.3(d) “would 
appear to encompass all consumption of upland co tton, including consumption by a country of its own 
production”. This is incorrect.  The ordinary m eaning of the term “world market share” in 
Article 6.3(d) of the SCM Agreement is not “world  production share” or “world consumption share”.  
Rather, it is the share of the world market for expor ts.  This interpretation is consistent with USDA’s 
and the EC’s use of the term “world market share”.  In addition, footnote 17 to Article 6.3(d) states:  
“Unless other multilaterally agreed specific rules apply to the trade  in the product or commodity in 
question.”  This provision refers explicitly to “t rade” referring to international commercial sales and 
purchases in export markets, not global consumption or production.     
3. Threat of Serious Prejudice 
 12. By guaranteeing a level of support of appr oximately 75 cents per pound, the US Subsidies 
create a continuing threat of excess US acreage , production, and exports, and continued suppressed 
world prices.  This threat is a seamless continuation of the present serious prejudice that Brazil has 
already demonstrated.  The threat exists today a nd will exist throughout the lifetime of the 2002 US 
Farm Act – until the end of MY 2007.  A key initial i ssue for the Panel to decide is the time period for 
assessing data regarding the existence of a threat of  serious prejudice.  The Appellate Body has noted 
that a threat analysis requires examination of “f acts” not “conjecture” and requires the “use of facts 
from the present and the past to justify the conclusion  about the future”.  The Appellate Body also has 
held it is important to examine data for the entire period of investigation “to allow the investigating 
authority to make a . . . determination that is less lik ely to be subject to market fluctuations or other 
vagaries that may distort a proper evaluation”.   
 
13. A threat of serious prejudice exists for the following reasons:  The mandatory US subsidies in the 2002 US Farm Act create a guaranteed revenue st ream for US producers of 75 cents per pound.  
This revenue cannot be stopped betw een MY 2003-2007 regardless of how low US and world prices 
may fall, regardless of how much  US production of upland cotton increases ¸ and regardless of the 
amount of US exports.  As found by the EC – Sugar Exports  panels, and the Appellate Body in US – 
FSC, the absence of any legal mechanism to limit the qua ntity of subsidies is a critical factor to assess 
in determining the existence of threat.      14. Brazil has demonstrated the existence of present price suppression, increases in world market 
share and an inequitable share of world export tr ade based on actual data and market conditions for 
MY 1999-2002.  This four-year period of serious prejudice is the best guide for the Panel to assess 
whether during the remaining five years of the 2002 US Farm Act there is a significant threat that 
serious prejudice will occur again.  In making this assessment, the Pane l should also consider the fact 
that the US National Cotton Council estimated that the 2002 US Farm Act increased the revenue 
stream to US producers by 10 cents a pound over that provided in MY 1999-2001.  
 
15. US planted acreage during MY 2003-2007 will remain at significant levels – around 
14 million acres (slightly less than the average for MY 1999-2002).  USDA and FAPRI both estimate that there will be no
 significant reduction in US acreage or  production between MY 2003-2007.  The  
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guaranteed high US acreage between MY 2003-2007 m eans high levels of production and exports.  It 
also means suppressed world prices.    16. USDA estimates that US producers’ cost of production will increase during MY 2003-2007 and remain high relative to market revenue.  The mo st recent data shows that US producers’ cost of 
production in MY 2002 was 83.59 cen ts per pound.  At these cost le vels, many US upland cotton 
producers will not be able to meet total costs of production without receiving all of the US subsidies.  This fact demonstrates the clear causal connec tion between US subsidies and continuously high 
acreage, production, and exports along with significantly suppressed prices throughout MY 2003-
2007.    
   
17. With respect to Brazils threat claim under Ar ticle 6.3(d), Brazil notes that the threat of an 
increased US world market share in MY 2002 has alr eady materialized, as the US world market share 
continued to increase in MY 2002 to 41.6 per cen t, well above the MY 1999-2001 three-year average 
of 29.1 per cent.  Brazil also notes that there is a real  and clear threat of an Article 6.3(d) violation for 
MY 2003 as recent USDA projections for MY 2003 US exports indicate that the likely US share will 
be 38.8 per cent in MY 2003 – an increase over the three-year (MY 2000-2002) average of 34.9 per 
cent.  This evidence further supports the finding of a threat that the US share of world export trade 
will continue to be inequi table for MY 2003-2007.   
 18. Finally, Brazil has established that GATT Articl es XVI:1 and 3 allow for  threat claims to be 
based on this provision. Brazil has also demonstrated th at a threat of the United States to have a more 
than equitable share of world export trade exists.  
5. Export Credit Guarantees 
 19. Contrary to the US allegation, Brazil has de monstrated that the C CC export credit guarantee 
programmes are “mandatory” programmes.  More over, the CCC export credit guarantee programmes 
are expressly exempt from the requirement that  a programme receive new Congressional budget 
authority before it undertakes new loan guarantee commi tments.  The Appellate Body considered that 
the unlimited nature of the FSC regime posed a significant threat, under Article 10.1 of the 
Agriculture Agreement, that the United States w ould surpass its agricultura l export subsidy reduction 
commitments.  In addition, Brazil again notes th at for guarantees, the United States, through the 
Federal Credit Reform Act, has concluded that costs and losses are best measured and recorded on a 
net present value basis, rather than on a cash basis, at the time the guarantees are issued.   
 
6. New US Requests for Preliminary Rulings  
 20. The United States’ “new” request for a pr eliminary ruling addresses Brazil’s failure to 
provide a statement of available evidence with respect to export credit guarantees for commodities 
other than upland cotton.  This request is in fact not “new”.    21. The US request for a preliminary ruling that  Brazil should have included more information in 
its statement of available evidence has no merit.  Brazil has already addressed this issue.  Brazil was 
required to file a statement of the ev idence available to it at the time.   
 
22. Second, the United States claims that cott onseed payments for 1999 and 2000, and 2002 are 
not within the terms of reference of the Panel because the measures allegedly were not identified 
within Brazil’s consultation or panel request, a nd because Brazil and the United States allegedly did 
not consult regarding these measures.  Both of these claims are false.  Brazil and the United States did 
consult about “any programme providing support to the US upland cotton industry for the production, processing, use, sale, promotion or export of cottonseed or products derived from cottonseed.”    WT/DS267/R/Add.1 
Page F-6  
 
Similarly, Brazil’s Panel request  specifically identif ied in four different places “measures” that would 
encompass all forms of cottonseed payments from MY 1999-2007.    23. Finally, the United States argues that the “other payments” such as “storage payments” and 
“interest subsidies” allegedly were not included in Brazil’s consultation or panel request, that Brazil 
and the United States did not consult about such pa yments, and that these payments are not properly 
within the Panel’s terms of reference.  These assertions  are also false.  Both the consultation and panel 
requests identify in four different paragraphs as “measures” payments which encompass “other 
payments” and “storage” and “interest subsidy” paym ents.  Further, Brazil understands that “storage 
payment” and “interest subsidy” are part of th e operation of the marketing loan programme, which 
Brazil specifically identified in both the consultation and panel requests, as well as in its questions to 
the United States during the consultations.   The record demonstrates that Brazil and the United States 
consulted about all marketing loan and loan deficiency payments, as well as “any other support to or 
government funding for the US upland cotton industry” .  Therefore, it is properly before the Panel. 
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ANNEX F-2 
  
EXECUTIVE SUMMARY 
CLOSING STATEMENT OF BRAZIL AT THE 
RESUMED FIRST SUBSTANTIVE MEETING 
OF THE PANEL WITH THE PARTIES 
 
 
1. Introduction 
 
1. In its Closing Statement, Brazil reiterates that  at the core of this case are $12.9 billion of US 
subsidies for upland cotton for MY 1999-2002.  These subsidies increase and maintain the production 
of high-cost US upland cotton, increase US upl and cotton exports, suppress US, world and Brazilian 
prices and lead to the United States having a more th an equitable share of world export trade.  In 
short, these US subsidies cause and will continue to cause serious prejudice to the interests of Brazil. 
 
2. Direct, CCP, PFC, and Market Loss Assist ance payments were received by producers of 
upland cotton 
 
2. In its Oral Statement of 7 October, the Unite d States alleged that Brazil has not substantiated 
the amount of PFC, market loss assistance, direct a nd counter-cyclical payments to US upland cotton 
producers.  Brazil requested this information from the United States more than a year ago in the 
consultation phase of this dispute but never received any information.  Yesterday, the United States 
indicated to the Panel that it did not collect or have  this information.  In similar circumstances, WTO 
panels have held that “[i]n situations where direct  evidence is not available, relying on inferences 
drawn from relevant facts . . . to determine whether applicable and unr ebutted inferences are sufficient 
for satisfying the burden of proof”.  In lieu of this non-existent direct  proof, Brazil presented 
extensive circumstantial evidence that all or nearly all of these producers of upland cotton in 
MY 1999-2002 received PFC, market loss assistance , direct and counter-cyclical payments.  
 3. Brazil previously set forth this circumstantial evidence in a number of different Submissions between 24 June and 9 September 2003.  To assist the Panel, Brazil has coll ected this evidence in 
Annex I to its Closing Statement. 
 
4. A summary of the evidence set out in the Anne x is the following:  It demonstrates very high 
production levels of cotton relative to total upland cotton base acreage  throughout MY 1999-2002.  It 
shows near universal participation of eligible  upland cotton producers in the 1996 PFC programme 
and 95.7 per cent participation of upland cotton ba se acreage planted to programme crops in MY 
2001.  By June 2003, nearly all eligible farms producing , upland cotton in MY 1993-95 or MY 1998-
2001 signed up for the direct and counter-cyclical payments.  USDA recognized that cotton farmers 
benefited from PFC and market loss assistance paymen ts and even treated such payments as part of 
“Government Payments by Crop Year” to upland cott on.  Additional evidence shows relatively small 
fluctuation of cotton planted acreage between MY 1999-2002 and the strong cotton equipment and 
geographic forces maintaining historic cotton prod ucers in current cotton production.  Numerous 
statements by the National Cotton Council establish th at their members received PFC and market loss 
assistance payments, and would (and do) receive  direct and counter-cyclical payments.  
 5. In addition, the 2002 FSRI Act provides much higher per acre payments for upland cotton than other programme crops (except rice and pea nuts).  The 1996 FAIR Act similarly provided higher 
per acre payments for upland cotton (except rice).  The only possible rationale for the much higher  
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upland cotton per acre payments for PFC, market lo ss assistance, direct and counter-cyclical payment 
base acreage than other programme crops was the expectation that historical producers of upland 
cotton needed the higher per-acre income to con tinue to produce high-cost upland cotton on base 
acreage.  This conclusion is furthe r supported by the fact that given their high costs of production, US 
upland cotton producers would have lost 10 cents pe r pound in MY 2002 if they had planted on corn 
(or six other programme crops) direct and count er-cyclical payment base acreage in MY 2002.  
Similar losses would also have been experien ced in MY 1999-2001 if upland cotton were grown on 
most other programme crop base acreage.  6. The evidence in Annex I supports Brazil’ s methodology to calculate the amount of PFC, 
market loss assistance, direct and counter-cyclical  payments by using the ratio of actual US upland 
cotton production and the amount of upland cotton ba se acres for programme paym ents.  For example, 
total planted upland cotton acreage in MY 2002 w as 14.1 million acres.  The total amount of upland 
cotton base acreage in MY 2002 was 16.2 million acres.  The ratio of these two amounts is 0.87.  Brazil used this ratio to adjust the amount of tota l upland cotton direct and counter-cyclical payments 
for the marketing year to obtain the amount of subs idies received by upland cotton producers.  Out of 
the 16.2 million upland cotton base acres, 2.1 million acres were not planted to upland cotton in MY 2002.  Thus, holders of these 2.1 million cotton base acres either did not plant any crops or 
planted other crops.  Consequently, Brazil has not included direct and counter-cyclical payments on 
these 2.1 million acres in its calculation of  payments to upland cotton producers. 
 
7. The total amount of upland cotton base acreage for direct payments in MY 2002 (which 
include the portion of PFC payments that were deemed to be direct payments) was $558 million. 
USDA paid out the maximum amount of upland co tton CCP payments in MY 2002 – $1.148 billion. 
Multiplying those figures by 0.87 results in $485 million in direct payments and $998 million in counter-cyclical payments to US upland cotton producers.  
 
8. The United States refuses to offer a methodol ogy for calculating the amount of direct and 
counter-cyclical (or PFC and market loss assistan ce) payments made to upland cotton farmers.  
Brazil’s suggested methodology is based on the c onclusion that all upland cotton producers received 
these payments.   In particular, the evidence sugg ests that the amount of payments can be best 
calculated by finding that US upland cotton produc ers received those payments using upland cotton 
base acreage.  This follows from th e evidence listed in Annex I to Brazil’s Closing Statement.   
 9. The United States asserts that “Brazil has pres ented no evidence that the recipients of these 
decoupled payments on upland cotton base acres are, in fact, upland cotton producers”.  Apparently 
what the United States had in mind in making this statement is that Brazil must produce data detailing 
the amount of each direct payment received by every single upland cotton farmer between MY 1999-
2002.  This is data the United States admits does not  exist.  But such a burde n would require the Panel 
to disregard all the circumstantial evidence provided by Brazil.  DSU Article 11 requires the Panel to 
“make an objective assessment of the facts of the case”.  In the absence of any alternative 
methodology proposed by the United States, the “fact s of the case” are those presented by Brazil.   
 
10. Therefore, what the United States suggests is that the Panel ignores $1.7 billion in PFC and 
direct payments simply because the United States does not collect data that could ascertain the precise figure – which will be very small – of upland cotto n farmers that did not receive those payments.  
Such an approach would permit WTO Members to write off large amounts of subsidies by simply 
refusing to collect data.  The Panel must not allow this position to prevail. 
 
3. Brazil’s Article 6.3(c) Price Suppression Claims and the Econometric Studies 
 
11. Brazil has offered considerable evidence in the form of documents and witness statements 
demonstrating the existence and pa yment of subsidies, as well as the causal link between the subsidies  
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and significant price suppression.  In addition, Br azil presented the Panel with evidence of a number 
of different studies that show significant price suppressing effects.  Notably among these are the two Westcott/Meyer USDA studies (referred to and commissioned by the Payment Limitation Commission) showing 10 per cent price suppression for MY 2000 and an estimated 33.6 per cent 
price suppression in MY 2001 from only the effects of removing the marketing loan subsidies.  By 
contrast, Professor Sumner found that US prices were suppressed by 32.7 per cent by the effects of all 
US subsidies that applied during MY 2001.  In li ght of the lower level of price effects found by 
Professor Sumner, the United States claim that Prof essor Sumner’s analysis is not “conservative” is 
curious.  Other studies by the ICAC – of which th e United States and Brazil are both Members – show 
increases in world prices from the removal of some  US subsidies of 10.5 per cent for MY 2000 and 
26.3 per cent for MY 2001.  Professor Sumner found that the effects of a removal of all US subsidies 
that applied during MY 2000 and MY 2001 would ha ve resulted in world price increases of 7.74 per 
cent and 17.7 per cent respectively.  Brazil has presented many other studies as evidence.  They all show significant price suppression.   
12. What has been the US reaction to every one of  these studies?  As they indicated over the past 
two days, they have found many initial problems with  all of them.  But they reserved the broad scale 
attack for Professor Sumner’s FAPRI model that h as been repeatedly relied on by the US Congress 
and USDA.  The United States even identified flaw s in the results of the Westcott/Meyer 2000 and 
2001 marketing loan studies.  And the United States pr omises they will be busy for the next six weeks 
in critiquing all the studies cited by Brazil.  
 
13. But the Panel must ask whether all these economists, including some of USDA’s own leading 
economists, could be wrong although their results  support USDA’s own Chief Economist’s views that 
US producers are insulated from market forces by these subsidies?  Could these economists be wrong because they made the mistake of applying the f undamental notion that large production subsidies 
create larger supplies, and larger suppli es result in significantly lower prices?  
 14. In the final analysis, these econometric studies are useful tools to confirm what common sense already tells us.  That $12.9 billion in subsidies provided betw een MY 1999-2002 have 
production effects.  That the National Cotton Co uncil was correct when it argued that US upland 
cotton farmers could not exist without all of the co tton-specific subsidies.  That many US producers 
needed subsidies to bridge the huge gap between their total costs and market revenue.  That US 
acreage did not decrease as prices plummeted to reco rd lows between MY 1999-2001 – rather planted 
US acreage increased.  That US producers plante d 14.1 million acres of upland cotton when prices 
were at record lows in the spring of 2002.  That US exports did not decrease  as prices plunged and the 
US dollar appreciated, rather they increased.  And that the effects of US subsidies on suppressed 
prices are transmitted to the world and individu al country markets, including Brazil.   
 
4. Brazil has established a claim under Article 6.3(d)  
   
15. With respect to Brazil’s cl aim under Article 6.3(d), Brazil demonstrated that the ordinary 
meaning of the term “world market share” is the world market share of exports.  USDA, the EC and 
Canada all use this term to refer to export market  share, not share of world consumption.  This 
interpretation is consistent with  the use of the term “trade” in  footnote 17 of the SCM Agreement 
which means the “sale and distribution of goods and services across international borders”.  It is also consistent with the object and purpose of Article 6. 3(d) which is to prevent a Member from using its 
subsidies to increase its share of the world market for a particular product.   
 
16. Undisputed facts show that the US shar e of world trade increased considerably from 
MY 1998 to MY 2002, and is projected to remain at very high levels in MY 2003.  This increase 
follows a consistent trend from MY 1996.  The “cons istent trend” need not be an unbroken line of 
increases during the trend period examined, as the Un ited States appears to argue.  Because of severe  
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Page F-10  
 
weather problems, such as occurred in the  Un ited States in MY 1998, export market share in 
agricultural problems will always susceptible to some annual variations not caused by subsidies.  
Rather the trend must reflect an overall increase and not reflect a number of wide swings within the period examined.  The trend for US world market share of upland cotton from MY 1996, and particularly the period from MY 1998 onward, show s a sustained and signifi cant increase in the US 
world market share.  And the undisputed facts show that the record US world market share reached in 
MY 2001 and 2002 occurred at the same time as r ecord high levels of US subsidies.  
 
5. Brazil has established that the US sha re of world export trade is not equitable 
 
17. The notion of “equitable share of world expor t trade” necessarily depends on the facts of each 
case.  The fact-intensive nature of each case is refl ected in the text of Article XVI:3, which requires 
the Panel to examine “special factors”.  Brazil suggests that examining whether there were any 
subsidy-induced increases in market share is one factor to consider.  Another factor is the relative cost 
of production of the Members competing for world ma rket share.  The undisputed facts show (based 
on September 2003 ICAC data) that the US shar e of world exports of cotton more than doubled  
between MY 1998-2002 – from 18.7 to 39.3 per cent.  At the same time, the African producers’ 
collective share of world exports decreased from 10.2 to 8.1 per cent of world trade.  Figure 26 shows 
these trends.  If a picture is worth a thousand words, it is this one.    18. Brazil submits it is not equitable for a heavily  subsidized WTO Member to more than double 
its share of competitive world markets for upland cotton in only five years reflecting a significant 
contribution of subsidies.  And it is not equitable for that Member to do so when its costs of 
production were double those of the poorest and needi est producers in the world.  Yet, when faced 
with these facts, the United States’ only response is that the definition of “inequitable” is hopelessly 
vague.  Brazil does not believe the inequity in  this case is so difficult to determine.  
 
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 Page F-11 
 
 
ANNEX F-3  
 
 
EXECUTIVE SUMMARY OF THE OPENING STATEMENT 
OF THE UNITED STATES AT THE SECOND SESSION 
OF THE FIRST MEETING OF THE PANEL WITH THE PARTIES 
 
 1. Brazil’s Analysis Fails to Establish to Whom Certain Payments Go and Whether 
Certain Payments May Properly Be Attributed to Exported Upland Cotton .  One of the 
fundamental elements of Brazil’s claims is that Br azil needs to identify the “subsidized product” that 
is causing the serious prejudice that Brazil claims its interests are suffering.
1  Brazil has not even 
explained, however, what is the “subsidized product”  for each of the types of subsidies from which it 
claims serious prejudice.  Brazil appears to assume that the “subsidized product” is upland cotton in 
the form traded on the world market.  Yet many of the subsidies at issue are paid to producers of 
cotton.  Cotton is processed and sold before bei ng traded.  Brazil has made no showing of how the 
subsidy to the producer can be assumed to pass through to the exporter.   
 2. Brazil’s panel request identifies the cha llenged measures as “subsidies provided to US 
producers, users, and/or exporters of upland cotto n”.  However, it is for Brazil as the complaining 
party to establish who are the recipients of the subs idies and that the subsidies are properly attributed 
to upland cotton.  Brazil’s failure to do so means that it has not carried its burden in demonstrating 
that cotton is subsidized for purposes of considering adverse effects.  3. In the Peace Clause portion of this dispute, the United States has discussed at length certain 
decoupled payments that are not linked to production of upland cotton.  With respect to these 
decoupled payments, Brazil has failed to demonstrat e who the recipients of these payments are in 
connection with any exported upland cotton.  Br azil simply presumes that every upland cotton 
producer is an upland cotton base acreage holder a nd receives a decoupled payment.  Brazil has 
brought forward no facts to demonstrate that this is the case.  4. Even if Brazil had brought forward evidence that the recipients of these payments were 
upland cotton producers, that would not be eno ugh.  Brazil would still need to allocate these 
payments, which Brazil concedes are not linked to current production of upland cotton, over total 
production on a recipient’s farm.
2  
 
                                                      
1 For example, for purposes of a claim under Article 6.3(c) of the Subsidies Agreement, the “effect of 
the subsidy” must be “significant price undercutting” or “significant price suppression, price depression, or lost 
sales” caused by “the subsidized product.”  Similarly, under Article 6.3(d) “the effect of the subsidy” must be an 
increase in world market share “in a particular subsidized primary product or commodity .” 
2 Subsidies Agreement, Annex IV, paras. 1-3 (We note the context provided by Annex IV of the 
Subsidies Agreement, which explained the calculation of the ad valorem subsidization of a product under the 
now-defunct Article 6.1(a) of the Subsidies Agreement.  This Annex provided that (among other conditions), unless “the subsidy is tied to the production or sale of a given product,”  the overall rate of subsidization of a 
“product” is found by taking the amount of the subsidy over the “total value of the recipient firm’s sales in the 
most recent 12-month period”.). WT/DS267/R/Add.1 
Page F-12  
 
5. Thus, Brazil assumes that the subsidies
3 at issue are received by someone currently producing 
cotton, based simply on the fact that the subsidy is based on past production of cotton.  Brazil has not 
explained how this makes upland cotton currently for sale on the export market the “subsidized product” with respect to these payments.  Brazil has failed to demonstrate that the recipients of the 
subsidies are involved in current cotton production, no r has it demonstrated how much of the subsidy, 
even under Brazil’s approach, should be allocated to ot her products produced by the recipient, such as 
corn or soybeans.   6. Brazil Has Not Established that US Subsidi es Have Suppressed or Depressed Prices in 
the Same Market .  As noted above, Brazil has in fact not even demonstrated the subsidized product 
for each of the subsidies it challenges or the size of the subsidies to exported upland cotton.  However, 
without relieving Brazil of its burden on these issues, we note that even Brazil’s overly simplified approach does not suffice to demonstrate causation.  US subsidies largely resulted from low market 
prices, not the other way around.  
7. This is nowhere more evident than in marketing year 2001, a year with historically low 
market prices.  Brazil has failed to explain that market signals (futures prices) at the time when 
planting decisions were taken by US producers suggest ed prices would remain high.  Thus, the large 
marketing loan payments ultimately made in mark eting year 2001 do not demonstrate that marketing 
year 2001 payments had the effect of increasing US production.  Brazil’s expert acknowledges this 
very point, but Brazil has not presented in its further submission any information on “the expectations 
about production incentives that growers hold at the time they make their planting decisions”, 
information on which its own expert has stated “cotton plantings depend”.  Thus, Brazil’s simple 
explanation of the conditions in marketing y ears 1999 through 2002 ignores “the basic economic 
principles” its own expert says are relevant in this case.  
8. The Sumner Model Presented by Brazil Is Inadequately Explained, Inappropriately 
Applied for a Retrospective Analysis, a nd Apparently Uses Faulty Assumptions and 
Estimations.   In presenting this reaction to Brazil’s expert ’s analysis, the United States notes that the 
use of a simulation model to explore the counter-fact ual of removal of US subsidies cannot be made 
without answers to previous questions on the subsidiz ed product and size of the subsidies.  That is, the 
use of a simulation model cannot relieve Brazil of its burden of arguing the elements necessary to 
establish its claims.  This critique of Dr. Sumner’s an alysis is made to show that Brazil’s approach is 
fundamentally flawed in all aspects.   9. Since Brazil has not provided access to the m odel itself, one cannot say with certainty how 
the modelling affects the results.
4  Nonetheless, based on what has b een presented in Annex I, Brazil’s 
analysis appears flawed in several respects and as a result, the conclusions drawn are biased and 
misleading.  While the modelling approach used is well accepted for forward-looking projections, 
using a baseline model to simulate counterfactual out comes over the historical period 1999-2002 is  
 
                                                      
3 Brazil purports to include expo rt credit guarantees under th e GSM-102 programme within its 
actionable subsidy claims.  However, Brazil has mere ly alleged the quantities of export credit guarantees 
benefitting cotton and the value of exports.  Brazil has nowhere presented evidence on any alleged subsidy rate 
resulting from this programme nor the amount of the subs idy.  Therefore, Brazil ag ain has not provided any 
evidence with respect to the amount of the subsidy alleged to be provided by US export credit guarantees. 
4 The report provided by Brazil as Annex I to its further submission does not provide the model itself, 
including detailed specifications of the equations used therei n.  As a result, Brazil is essentially asking the Panel 
and the United States to accept Dr. Sumner’s results on faith alone.  The United States points out why Brazil’s 
expert’s approach is inapprop riate for a retrospective analysis of the effe ct of US subsidies.  Even were Brazil’s 
expert’s approach appropriate, howeve r, Brazil has failed to provide sufficient evidence to allow the Panel to 
fully understand and evaluate that model.  Thus, quite  apart from flaws identified by the United States, Brazil’s 
reliance on Dr. Sumner’s inadequately explained results, evident throughout Brazil’s latest submission, further 
demonstrates that Brazil has not established a prima facie  case that US subsidies have  the effects complained of.  WT/DS267/R/Add.1 
 Page F-13 
 
 
problematic because of the implicit assumption of pe rfect foresight by producers of actual conditions 
in the historical year.  This potentially overstates the effects of the programme because the model assumes outcomes that were unanticipated by produ cers when they made their planting decisions.  
Also, it is not clear to what extent actual observed da ta enter into the solution process.  The difference 
is not merely conceptual: the choice of values can potentially affect the reported results.   
 
10. Brazil’s use of lagged prices as a proxy for expected prices is also problematic.  Recent studies have criticized the use of lagged variables as substitutes for expectations, and numerous papers 
use the futures price for next year’s crop as the best  proxy for expected price.  The use of futures 
prices in a multi-commodity modelling framework fo r extended time projection is cumbersome.  
Nonetheless, the use of lagged prices as a modelling convenience does not preclude the possibility of 
bias.  In those years where there are large shocks, lagged prices are poor predictors of expected price. 
Futures prices, by contrast, are more efficient b ecause they are based on more current information.
5 
 
11. Brazil’s expert’s estimates of US programme impacts after marketing year 2001 are further 
inflated by his choice of a low-price baseline for the counter-factual comparison.6  The low-price 
baseline exaggerates the 2003-07 results and ensur es projections of significant marketing loan 
payments throughout 2003-07. 
 12. The economic literature on decoupled pa yments acknowledges the programmes may have 
some impact on production, and that those impact s depend in part on farm er’ s expectations.  
However, the research concludes that the impact a ppears negligible.  Brazil’s expert, on the other 
hand, uses a stylized logic to come up with th e estimates for the impact of production flexibility 
contract (PFC) payments that have neither empirical  nor theoretical grounding.  It is widely accepted 
that these programmes have whole farm impacts rather  than crop specific impacts.  Furthermore, the 
impact is much smaller than Braz il has estimated; the whole farm im pact is, at its upper estimate,  
perhaps one-quarter to one-fifth the impact Brazil’s expert cites for cotton alone.   
13. Brazil argues that market loss assistance (MLA) payments have a larger effect on area than do 
PFC payments, despite the fact that MLA payments were paid on the identical payment base as the 
PFC payments.  Supplemental legislation authorizing each of these MLA payments was passed several months after planting for the crop year in question had occurred.  Brazil asserts that producers had expectations about MLA payments at the time of planting.  However, if producers had 
expectations of payment, then they also knew that they would be eligible to receive such a payment 
whether or not they planted cotton.  Indeed, they could choose not to plant any crop at all and still be 
eligible for the payment.  14. Brazil argues that counter-cyclical payments  “clearly provide more production incentive than 
the market loss or the direct payments,” yet offers no empirical evidence to justify such a claim.  The 
claim, as well as Brazil’s expert’s treatment of decoupl ed payments in general, is particularly puzzling  
 
                                                      
5 Consider as an example the 2002 crop year.  In Br azil’s analysis, area response to the removal of the 
cotton loan programme results in a 36-per cent reduction in US planted area–the larges t single effect for any of 
the years considered in his analysis.  Based on lagged prices, price expectations for 2002 were 29.8 cents per 
pound, a 40 per cent reduction from 2001 levels.  Yet, th e futures market data suggests a far smaller reduction in 
expected price.  December futures prices taken as an av erage in February 2002 aver aged 42.18 cents per pound, 
a 28 per cent drop from year earlier levels.  Based on  Brazil’s range of supply response elasticities of 0.36 to 
0.47, a decline of this magnitude would suggest a drop in acreage of 10 to 13 per cent from the preceding year.  In fact, actual US cotton acreage dropped 12 per cent (from 15.5 million acres in 2001 to 13.7 million acres in 
2002) suggesting acreage levels entirely consistent w ith world market conditions  and price expectations. 
6 Brazil’s expert’s estimate for the 2002 A-Index is 51 cents, compared with 54 cents in FAPRI’ s 
March 2003 baseline, and an actual pri ce of 56 cents.  For 2003, Brazil’s expe rt’s A-Index is estimated again at 
51 cents, whereas FAPRI’s baseline has a 58.4 cent fo recast; as of 15 September 2003, the A-Index is at 
65.5 cents. WT/DS267/R/Add.1 
Page F-14  
 
given a recent paper by Brazil’s expert in which he concludes that the 2002 farm bill would have a 
minimal effect on cotton area and world prices.  Brazil’s expert also remarked that: “The impacts of the FSRIA will be hard to isolate amid the normal flux of world markets".
7  We agree with 
Dr. Sumner’s previously published  conclusions on these points. 
 
15. Crop insurance subsidies are generally ava ilable for most crop producers and hence do not 
give a specific advantage to one crop over another.   Thus, their effects are not commodity specific, 
and have no or minimal impacts on cotton markets.  Moreover, crop insurance purchases by cotton growers have generally been at lower coverage levels than for other row crops.  Over 2002-03, 
roughly 90 per cent of cotton acreage insured was at c overage levels at 70 per cent or less, consistent 
with the criterion under paragraph 8(a) of Annex 2 of the Agreement on Agriculture.  This suggests 
that even if one were to consider cotton crop insu rance subsidies as crop specific, over 90 per cent of 
insured cotton area would be exempt as having no or minimal trade-distorting effects.  16. Lastly, while some studies like the ones cited by Brazil have suggested crop insurance 
subsidies may have a slight effect on acreage, the effects on production are less clear.  Recent studies 
suggest that farms with more insurance tend to u se less inputs like fertilizer and pesticides and vice 
versa.  This demonstrates a potential moral hazard problem with crop insurance: a negative effect on 
yields, which may well offset any marginal effects on crop area.  17. The size of Step 2 payments under Brazil’s baseline appears to be biased upwards, in part, 
due to the low-price baseline discussed earlier.  Braz il’s results are inconsistent with other analyses of 
Step 2.
8  Thus, contrary to the results of Brazil’s expe rt’s model, the benefits of Step 2 payments 
would appear to largely accrue to the producer, with  only negligible effects on world markets.  While 
Brazil’s model documentation is lacking, one expl anation for the difference may be a more price 
responsive acreage equation by Brazil. 
 
18. While Brazil has presented a modelling framework  that is conventional,  much of how Brazil’s 
expert has modelled US farm payments can be co nsidered “unconventional”.  Thus, the analysis 
presented by Brazil in Annex I is not “conservative”, but rather produces results that are inconsistent 
with a wider body of academic research.  
19. Additional Legal Arguments .  With respect to price suppression or depression under 
Article 6.3(c) of the Subsidies Agreement, Brazil be lieves that it is the effect on the producers of the 
complaining Member that must be “significant”.  We find it implausible that the Subsidies Agreement was intended to create multiple standards for panels to  apply: that is, what may be “significant” to one 
Member’s producers may be “insignificant” to another’s.  Context for rejecting Brazil’s approach can 
be found in Article 15.2 of the Subsidies Agreemen t, which sets out for countervailing duty purposes 
the same effects found in Article 6.3.  This text ma kes it even more clear that  the analysis is whether 
the level of price suppression or depression itself is "significant".
9  Brazil has not suggested that the 
analysis under Articles 15.2 and 6.3(c) should be different. 
                                                      
7 Sumner, D.A.  “Implications of the US Farm Bi ll of 2002 for Agricultural Trade Negotiations.”  
Australian Journal of Agricultural and Resource Economics. 47(2003): 99-123, at 114.  (See Exhibit US-56) 
8 In Brazil’s baseline, Step 2 payments average 5.6 cents per pound over the 2003-07 period, 
elimination of Step 2 payments raises world prices by an average of 1.6 cents, while farm prices fall by 2.5 cents 
per pound.  These alleged effects are higher than those f ound by others.  For example, in 1999, when Congress 
was debating whether to reauthorize Step 2 subsidies, th e FAPRI analyzed the effects of reauthorization for the 
Senate Committee on Agriculture, Nutrition and Forestry.  Their analysis estimated an average Step 2 payment 
of 5.3 cents per pound, resulting in an increase of the US spot price by 4 cents and a fall in the world cotton 
price of less than 0.5 cents.  
9 Subsidies Agreement, Article 15.2 (“With regard to  the effect of subsidized  imports on prices, the 
investigating authorities shall consider whether . . . the effect of such imports is otherwise to depress prices to a  
  WT/DS267/R/Add.1 
 Page F-15 
 
 
 20. With respect to GATT 1994 Article XVI:3, Br azil appears to assume that it may advance a 
claim under this provision on all challenged US subsid ies.  However, Article XVI:3 only applies to 
export subsidies.  Therefore, as Brazil has pred icated its claim under Ar ticle XVI:3 on evidence 
relating to all challenged US subsidies and not only  those subsidies it alleges are export subsidies, 
Brazil has failed to establish a prima facie  case on its claims.  
 21. Finally, with respect to Brazil’s claims of a threat of serious prejudice, the United States notes Brazil’s failure to present recent market and futures price data, which belie the notion that there is a 
clearly demonstrated and imminent likelihood of future  serious prejudice.  In fact, prices are currently 
above the level at which the marketing loan pr ogramme confers any benefit on US upland cotton 
producers and are expected to remain so.  If ther e is not a “clearly demonstrated and imminent 
likelihood” of serious prejudice in marketing year 2003, it follows that there cannot be a threat of 
serious prejudice for marketing years 2004-07, either. 
                                                                                                                                                                     
significant degree  or to prevent price increases, which otherwise would have occurred, to a significant 
degree .”). WT/DS267/R/Add.1 
Page F-16  
 
 ANNEX F-4 
 
 
EXECUTIVE SUMMARY OF THE CLOSING STATEMENT 
OF THE UNITED STATES AT THE SECOND SESSION OF THE 
FIRST MEETING  OF THE PANEL WITH THE PARTIES 
 
 1. The US comments speak briefly to Brazil’s allega tions regarding “the effe ct” of US subsidies.  
Brazil has not shown causation between the US subs idies and the effects Brazil attributes to those 
subsidies.  The United States has pointed out the fa ilure of Brazil to separate and distinguish evidence 
on the effect of other factors from the alleged effect of the challenged US subsidies.  Ultimately, this issue goes to the quality of the evidence before the Panel and whether Brazil has established a prima 
facie  case on its claims. 
 
2. There are three main elements of Brazil’s argument.  First is the “temporal proximity” 
argument – that is, that low world prices correspond in time with high US subsidies.
1  Mr. Chairman, 
there are subsidies and there are subsidies.  For example, there is a difference if I give you a $10 
subsidy to produce versus $10 whether you produce or not.  Depending on the nature of the payment, 
one would estimate different effects.  Therefore, one cannot merely aggregate the value of all US 
payments and claim that those subsidies ha ve had “an effect” on production and prices. 
 
3. In this part of its argument, Brazil misu ses the data on production by making comparisons 
using marketing years 1998 and 2001.  In 1998, production was driven downward by drought and record crop abandonment.  In 2001, production was driven upward by record yields.  To use 1998 and 2001 as the beginning and end of a comparison therefore distorts a proper analysis. 
 
4. Brazil stated yesterday that the increase in US production in marketing year 2001 was not 
solely due to record yields but also  to an increase in acreage.  That  is true – there was some increase 
in acreage in 2001, but Brazil has failed to make the proper comparison to put that information in 
context.  Brazil should have compared the US acreage increase between marketing years 2000 and 
2001 with that in the rest of the world.  The Un ited States invites the Panel’s attention to Exhibit 
US-63 circulated today.  This exhibit reflects, for marketing years 1996-2002, the percentage change 
in harvested acreage over the previous marketing year in the United States and the rest of the world. 
 5. In marketing year 1996, when the progra mmes challenged by Brazil were introduced, you see 
a large decrease in US acreage comp ared to the rest of the world.   The United States draws your 
attention to marketing year 1998, in which there is  a large decline in US harvested acreage due to 
drought, followed by a large increase in marketing y ear 1999, which largely cancel each other out.  In 
marketing year 2001, we see that the increase in acreage in the United States corresponds to the 
increase in acreage for the rest of the world.  In marketing year 2002,  the percent decline in harvested 
acreage in the United States is greater  than that observed in the rest of the world.  Thus, the data do 
not support Brazil’s contention that US producers are insulated from market forces.  In fact, US 
harvested acreage largely increases and decrea ses in line with the rest of the world. 
 6. (Yesterday Mr. Moulis asked about the data in the upland cotton fact sheet.  The data in 
Exhibit US-63 does not come from that fact sheet  but from the most recent US Department of 
Agriculture data base – the specific source is indicat ed on the second page of the exhibit.  Brazil has 
used this same source for numerous exhibits in its submissions.) 
                                                      
1 The United States has addressed the disconnect between low world prices and the level of subsidy in 
Exhibit US-44.  WT/DS267/R/Add.1 
 Page F-17 
 
 
  
7. The second element of Brazil’s arguments that the United States would like to address is its reliance on Mr. Sumner’s model.  We first woul d like to comment on something Mr. Sumner said 
today in his statement to the effect that the Un ited States does not object to the use of the FAPRI 
baseline model.  In fact, as reflected in the po rtion of the US opening statement delivered by 
Dr. Glauber, we do criticize as inappropriate the us e of a baseline simulation model for retrospective 
analysis, a type of analysis for which it is not designed and is poorly suited.  8. Mr. Sumner’s analysis also uses an inappropr iately low baseline for hi s prospective analysis 
of future years.  I noted with interest Mr. Sumn er’s statement that he used the  November 2002 
preliminary FAPRI baseline because this was availabl e when he ran his model and that the results 
would have been even more extreme had he used FAPRI’s published 2002 baseline “released the 
previous winter”.  The United States realizes it would have been inconvenient for Mr. Sumner to 
re-run his model, but FAPRI released a more  recent baseline in January 2003 (published in 
March 2003
2), many months before Brazil submitted the results of its model to the Panel and the 
United States.   We believe this more recent FA PRI baseline would have been a more appropriate 
baseline with which to do calculations, but Brazil ha s chosen not to do so, instead presenting to the 
Panel results based on more out-of-date and inaccura te data.  We wonder what would arise from a 
prospective analysis using such more recent data.  9. The third issue concerns the allegations of hi gh US costs, an issue we have touched on only 
briefly in this hearing and will return to in mo re detail in our submissi ons.  Brazil asks: without 
subsidies how could high-cost US producers have stayed  in business?  It is important first to point out 
that all of the cost projections by the US Departme nt of Agriculture cited by Brazil are merely updates 
of a 1997 cost survey.  In every year subsequent to  1997, the Department simply takes the results of 
the 1997 cost survey and updates it to reflect the ge neral increase in prices according to the producer 
price index. 
 10. This approach assumes that the mix of input s remains the same in 1997 as in subsequent 
years.  However, this causes a presentation of in accurate data on what costs are now.  Brazil has 
several times in this hearing stated that it is not  denying that factors reducing costs have occurred – 
for example, pest eradication bringing new, low-cost  areas of the United States into production or the 
adoption of biotech cotton which requires fewer p esticide applications.  Brazil, however, has not 
updated the cost information it presents to the Pa nel to account for such new developments and 
information.  11. The United States also notes Brazil’s repeated re ferences to a so-called cost/revenue gap. In 
fact, Brazil presents another such comparison for mark eting year 2002 at page 5 to the annex to its 
Closing Statement.  However, Brazil’s so-calle d “gap” is the difference between an inaccurate 
average total cost per pound and the average marketing y ear farm price.  Mr. Chairman, this is a faulty 
comparison.  Total costs are relevant over the long -term, but Brazil uses this (inaccurate) number to 
compare to revenue in the short term – that is, the market price for one year.  Such a comparison tells you nothing and does not establish that it is only the effect of US subsidies to keep US cotton farmers 
in business. 
 12. In fact, Brazil has apparently not listened to the testimony of its own farmer witness, 
Mr. Christopher Ward.  In his statement during the firs t day of this hearing, he said the following (and 
I quote from paragraph 6 of his statement): 
 
But even with these high yields and the excellent quality of our land, we were not 
able to fully recover all of our variable costs of production during the 2000/01 and 
                                                      
2 Exhibit US-52. WT/DS267/R/Add.1 
Page F-18  
 
 2001/02 seasons .  These variable costs included depreciation and maintenance of 
equipment, seed and fertilizer, labor, insurance, and fuel.  Nor were we able to meet 
our total costs  which include the additional fixed costs .3 
That is, Mr. Ward says he has not been able to cover either  his variable costs or his total costs for a 
period of two marketing years, and yet he continu es producing.  Under Brazil’s analysis, he should be 
out of the business of producing cotton.  He is not, and Brazil claims he is not subsidized, so how can 
Brazil claim that it is “the effect of the subsidy” to keep US farmers in business when they allegedly 
were not able to cover their total costs in marketi ng year 2002?  What’s true for Brazil should also be 
true for the United States.  
13. Mr. Chairman, members of the Panel, on the basis of these argum ents and the evidence 
presented to date, the United States does not believe that Brazil has established a prima facie  case that 
the challenged US subsidies have caused the effects complained of.  We will continue to develop and 
provide our response to the voluminous submissions of  Brazil in our answers to your questions and in 
our rebuttal submission.  Thank you. 
                                                      
3 Statement of Mr. Christopher Ward at the Second Session of the First Panel Meeting, para. 6 
(emphasis added).  Mr. Ward goes on to state: “Based on my discussions with many producers relating to Mato Grosso cotton production and revenue, I know that most other producers in State of Mato Grosso were in the 
same situation as we were during the 1999-2002 period .”  Id. (emphasis added).  WT/DS267/R/Add.1 
 Page F-19 
 
 
 ANNEX F-5 
 
 
ORAL STATEMENT OF ARGENTINA 
 
Table of Contents 
 
Page 
 
I. INTRODUCTION ............................................................................................................. 1 9 
 II. CLAIMS OF THE UNITED STATES ............................................................................. 19 II.1 Causal relationship and other factors wh ich affected and still affect the world  
 cotton economy ............................................................................................................... .... 19 
II.2 Exclusion of measures .................................................................................................... .... 23 
II.3. Interpretation of Article 6.3(c) ........................................................................................ .. 24 
II.3.1 Effect of the subsidy .................................................................................................. .......... 24 
II.3.2 "In the same market" ................................................................................................... ......... 24 
II.3.3 Time period to be considered ........................................................................................... .... 25 
II.4 Interpretation of article 6.3(d) ......................................................................................... . 25 
II.4.1 World market share ..................................................................................................... ......... 25 
II.4.2 Time period to be considered ........................................................................................... .... 26 
II.5 Threat of serious injury ................................................................................................. .... 26 
 
III. EXPORT CREDIT GUARANTEES ................................................................................ 26 
 IV. CONCLUSION ................................................................................................................ .. 27 
  
I. INTRODUCTION  
1. Argentina would like thank the Panel for th is renewed opportunity to submit its views as a 
third party in these proceedings, and as st ated in its submission of 3 October
1, it will be commenting 
on some of the claims made by the United St ates in its written submission of 30 September.2 
 
II. CLAIMS OF THE UNITED STATES 
 
II.1 Causal relationship and other factors whic h affected and still affect the world cotton 
economy 
 
2. In paragraph 5 of its submission, the United States asserts with respect to marketing loan 
payments and step 2 payments that Brazil seeks to as cribe extraordinarily low cotton market prices in 
recent years to US subsidy payments without presenting or explaining to the Panel the factors that led to this low market price level that in turn resulted in larger US subsidies. 
 
3. Similarly, in paragraph 80 of its submission, the United States claims that Brazil's argument 
rests largely on the assertion that large US outlays under the challenged measures necessarily demonstrate that US measures caused those price declines.
3 
                                                      
1 Second Written Third-Party Submission of Argentina, 3 October 2003, paragraph 4. 
2 Further Submission of United States, 30 September 2003. 
3 Further Submission of the United States, paragraph 80. WT/DS267/R/Add.1 
Page F-20  
 
  
4. The United States claims that Brazil has not been able to demonstrate the causal connection 
between the US measures and their effects, nor has it considered other factors which affected and still 
affect the world cotton economy.  
5. Argentina believes that Brazil, in its First Written Submission, provided a precise and 
comprehensive description of the world cotton market situation, backing the facts with considerable 
evidence and documentation.
4  Similarly, in its Further Submission, Brazil took account of other 
factors which also contributed to demonstrating the suppressing or depressing effect on prices of the 
US subsidies.5 
 
6. Argentina would further like to point out that despite the existence of factors other than the 
US subsidies that could also have had a depr essing effect on international prices (such as the 
development of synthetic fibres, Chinese trade poli ces and other factors raised by the United States in 
its further submission6, some of which will be considered by Argentina further on), Article 6.3 of the 
SCM Agreement7 clearly states that " serious prejudice … may arise in any case  where … the effect of 
the subsidy... ". 
 7. In other words, Argentina considers that Brazil has demonstrated the causal relationship 
between the subsidies that the United States has gran ted and continues to grant to its cotton sector and 
the fall in international cotton prices. 
 
8. That is, Argentina considers that under the SCM Agreement it is not necessary for a subsidy 
to be the only factor  in the decline in international prices in  order to be able to establish a causal 
relationship between that subsidy and the serious prejudice.
8  Rather, the subsidy must be a 
determining factor or, according to the text of Article 6.3(c), its effect must be a " significant " price 
suppression or price depression, and this was demonstrated by Brazil. 
 9. Argentina recalls that the United States, give n the size and global impact of its cotton market 
– with a 41.6 per cent share of the world market  – is the international market "price-setter" par 
excellence . 
 
10. Thus, without the US subsidies which generate  a world market surplus, international cotton 
prices would have been higher or w ould not have fallen as much.  Similarly, if the US share in the 
world market had not increased as a result of the su bsidies, the international price of cotton would 
have been higher or would have not fallen as much , and as a result, third-country producers, including 
Argentina, would not have suffered as much prejudice as a result of artificially depressed prices.
9 
 
11. Argentina does not agree with the US statement that Brazil has not established a prima facie  
case because it has failed to provide sufficient evidence of the causal relationship between the enormous budgetary outlays and the low international cotton prices.
10 
 
                                                      
4 Brazil's First Submission to the Panel, 24 June 2003. 
5 Brazil's Further Submission to the Panel, 9 September 2003,  Section 3.3.4.4. 
6 Further Submission of the United States, Section IV.B and C. 
7 Agreement on Subsidies and Countervailing Measures. 
8 "Further Third Party Submission of New Zealand"  (3 October 2003), para. 2.09:  "Brazil's argument 
is not that declining cotton prices were due solely to the impact of the United States subsidies.  Nor does 
Article 6.3(c) require that to be the case … ".  
9 Second Written Third-Party Submission of Argentin a, 3 October 2003, paragraphs 21, 26 and 27. 
10 Further Submission of the United States, paragraphs 17 and 80.  WT/DS267/R/Add.1 
 Page F-21 
 
 
 12. Brazil has not based its claims on a mere assertion, but rather, as we have already stated11, the 
number and quality of the empirical and economet ric analyses presented by Brazil in its Further 
Submission12, which were carried out both by internati onal organizations and by various prestigious 
US institutions, not to mention the USDA it self, provide irrefutable evidence of the collective  and 
individual  effects of each subsidy programme on the price of cotton. 
 
13. It is therefore difficult for Argentina to unde rstand how the United States can claim that other 
factors, and not its subsidies, were the cause of th e dramatic fall in cotton prices over the past few 
years.  Nor does Argentina understand how the United  States can disregard the evidence provided by 
Brazil13 to the effect that during the marketing y ears 1999 to 2002, the total value of US cotton 
subsidies amounted to almost US$13 billion while th e average cotton subsidization rate was 95 per 
cent.14 
 14. In the paragraphs that follow , Argentina will refute some of the arguments put forward by the 
United States concerning other factors that may have influenced the fall in in ternational cotton prices: 
 
15. FIRST:  the United States claims that the explosion in the production of synthetic fibres played a considerable part in causing cotton prices to fall.  Argentina submits that the contrary appears 
to be true.  16. Indeed, the "Fibre Prices" Table in paragr aph 23 of the US Further Submission shows that 
polyester prices have always been lower than cott on prices (see:  "US mill" as compared to "US spot" 
and "Asia poly") and, moreover, they appear to follow cotton prices (see 1995, when cotton prices reached their record level for the series and polyester happened to follow the same trend). 
 17. The fact that polyester had to adapt to cott on prices, and not the reverse as the United States 
claims, is confirmed by the very close correlation between cotton and polyester prices.  On the other 
hand, the last few years do not show any correlation between the price per barrel of oil and the price 
of polyester fibres.   18. SECOND:  Argentina does not understand how th e United States can claim that without the 
increase in US retail consumption, interna tional cotton prices would currently be lower
15 (which is not 
being questioned), while disregarding th e role that its enormous subsidies have played and still play in 
the fall of international cotton prices.  19. As we have already pointed out
16, price movements of the US Cotlook "A" Index and third 
country (e.g. Brazilian and Argentine) market pri ces are directly interconnected, and this is an 
unquestioned and irrefutable fact.  This being the cas e, the amount of the US subsidies granted to the 
cotton sector added to the scale of US production  and exports are decisive when it comes to 
determining the extent to which the subsidies affect  the fixing of both international and third market 
prices.17 
 20. THIRD:  The United States correctly points out  that since the world's cotton trade is managed 
in US dollars, an appreciation of the dollar will l ead to a fall in the price of cotton both in the 
                                                      
11 Second Written Third-Party Submission by Argentina, paragraphs 34-36. 
12 Further Submission of Brazil, Section 3.3.4.8.1.  
13 USDA's "Fact Sheet:  Upland Cotton" (January 2003).  (See Annex BRA-4). 
14 Written Third-Party Submission by Argentina, 15 July 2003, paragraph 20. 
15 Further Submission of the United States, paragraph 26. 
16 Second Written Third-Party Submission by Argentina, paragraph 22. 
17 Idem , paragraph 28. WT/DS267/R/Add.1 
Page F-22  
 
 United States and in third markets.
18  What the United States does not explain in connection with this 
fact is why this appreciation of the dolla r by some 37 per cent between 1995 and 200219 did not also 
result in a fall in production, and consequently, in US cotton exports.  The National Cotton Council (NCC) gives us the answer, pointing out that without  its subsidies, the United States' share in the 
world cotton market would have declined. 
 
21. FOURTH:  Regarding the United States argument  that China is the giant of the world cotton 
industry, and hence the impact of its trade polici es and stocks, we note that neither Brazil nor third 
parties, such as Argentina, overlooked this fact.  We repeat, Argentina has already pointed out
20 that 
while there were a great many cotton producing count ries, four of them (China, the United States, 
India and Pakistan, in descending order) alone acc ount for two thirds of world cotton production. 
 22. However, Argentina also pointed out that most of the cotton was used in the producing 
country itself, and that the great exception to that rule was the United States, which exported over a half of the cotton it produced and was the world' s leading exporter.  This was why the level of  
subsidization in the United States w as the main factor in determining the world cotton market price.  
In other words, while China may be the giant in the world cotton industry , the United States is the 
giant in world cotton trade . 
 23. FIFTH:  The United States claims that the d ecisions of farmers are based on expected cotton 
prices for the upcoming crop year and not prices from the previous crop year as cited by Brazil, and 
that US cotton producers are not insulated from international price movements.
21  We can only repeat 
some of the questions that we addressed to the United States during the consultations22, namely: 
 24. If this is so, how does the United States explain the fact that in 2001 – the fifth year of falling 
prices – US cotton producers achieved a record harvest  of 20.3 million tons, an increase of 42 per cent 
compared to 1998, and that the cotton planted area increased by 6 per cent during the same period?  
Why does the USDA estimate a 10 per cent drop in the world production for 2002 – reflecting the impact of world prices on investment – and at the same time estimate for this year another record harvest in the US – the fourth biggest ever reco rded?  How does the US explain the reasons for the 
increase in the volume of its cotton exports from 946, 000 tons in 1998 to 1. 8 million tons in 2001, 
while there was a drop in international prices? 
 
25. Besides, the United States is not a low-cost producer
23 (despite its claim that pest eradication 
programmes and the adoption of gene tically modified varieties of cotton have lowered its production 
costs24), and its productivity levels are lower than t hose of other exporting countries.  Nevertheless, 
while international prices have fallen by some 54 per cent since the middle of the 1990s, the 
United States has expanded the area under cotton and increased its production.  How does the 
United States explain the lack of correlation between the world cotton price and US cotton 
production?  26. Brazil has given answers to all of these questions .  Argentina has also pointed out that if the 
United States did not grant subsidies to its co tton sector, the US cultivated acreage and production 
                                                      
18 Further Submission of the United States, paragraph 35. 
19 Idem , paragraph 32. 
20 Written Third-Party Submission by Argentina, 15 July 2003, paragraph 21. 
21 Further Submission of the United States, paragraph 45. 
22 Second Written Third-Party Submission by Argentina, 3 October 2003, paragraph 7. 
23 International Cotton Advisory Committee, "Survey of the Cost of Production of Raw Cotton", 2001. 
24 Further submission of the United States, paragraph 46.  WT/DS267/R/Add.1 
 Page F-23 
 
 
 would diminish.  US exports would also diminish and, the US being the world's leading supplier of 
cotton, international prices would be high er or would not have decreased as much.25 
 27. Argentina considers that the evidence submitte d with respect to the increase in US production 
and exports which took place entirely independently or  in isolation from the fall in the international 
price clearly demonstrates that US cotton producer s are immune to changes in the market prices for 
cotton.
26 
 28. SIXTH:  The United States claims that the er adication of pests and the adoption of genetically 
modified varieties of cotton have lowered production costs.
27  We stress that even so, there continues 
to be a widening gap between those costs and market prices. 
 29. We repeat what has already been stated by Brazil and Argentina
28, namely that while 
US cotton production costs are among the highest in the world, US producers' market prices have fallen from US$0.60 to US$0.30 per pound.
29  The only possible explanation of how the United States 
has been and continues to be able to bridge the widening gap between production costs and market 
prices is subsidies, since without them many US pr oducers would have been or  would be compelled to 
cease cotton production.  30. SEVENTH:  Argentina does not understand how the United States can claim that US cotton producers are highly sensitive to price changes when in spite of a 54 per cent fall in international 
prices since the middle of 1990s, the area under cotton and the production of cotton in the 
United States expanded considerably.  In other words,  contrary to what the United States has claimed, 
the area under cotton has responded to the fall in in ternational prices by increasing steadily.  The only 
way to achieve such a result is to grant enormous subsidies, since without them the cultivated area, 
and hence production, would have decreased.   
 
31. EIGHTH:  Argentina does not understand how the United States can state that its cotton producers show greater sensitivity to price changes th an is demonstrated by third markets when, for 
example in Argentina – which is basically a "price- taker" in the international cotton market – the 
cultivated area shrank by 76 per cent during the ma rketing year 2001/2002, while production fell by 
63 per cent compared to 1998.
30 
 
II.2 Exclusion of measures 
 
32. Regarding the US argument that some of  its domestic support measures should not be 
included in the analysis31, Argentina considers that the Panel sh ould examine the collective effects of 
all of the support measures that are not green box m easures.  Argentina does not agree with the US 
statement that direct payments and counter-cycli cal payments should be excluded from the analysis 
simply because their individual effects may not be that significant.  
                                                      
25 Second Written Third-Party Submission by Argentina, 3 October 2003, paragraphs 11 and 12. 
26 Idem , paragraph 5. 
27 Further Submission of the United States, 30 September 2003, paragraph 46. 
28 Written Third-Party Submission by Argentin a, 15 July 2003, paragraphs 17 and 18. 
29 According to a recent ICAC study, the cost of production in the United States was US$0.81 per 
pound of cotton in the marketing year 1999.  In contrast, as pointed out by Brazil in paragraph 32 of its 
submission, Argentina's production costs averaged 59 cents per pound of cotton.  "Cotton:  World Statistics", Bulletin of the International Cotton Advisory Committee,  September 2002 (Annex BRA-9). 
30 "Argentina:  Economic Injury to the Cotton Sect or as a Result of Low Prices", Working Group on 
government Measures of the International Cotton Advisory Committee, 2002.  Written Third-Party Submission by Argentina, 15 July 2003, paragraph 22. 
31 Further submission of the United States, 30 September 2003, paragraphs 71 to 75.  WT/DS267/R/Add.1 
Page F-24  
 
 33. It is the collective impact of all of the US  subsidies that has effects on the cultivated area, 
production, exports and prices.  
II.3. Interpretation of Article 6.3(c) 
 
II.3.1 Effect of the subsidy 
 34. Argentina considers that Brazil has made a proper prima facie  case with respect to its claim of 
inconsistency with Article 6.3(c) of the SCM Agre ement, conclusively demonstrating the significant 
price suppression or depression effect. 
 
35. Firstly, Argentina does not understand how the United States can simply brush aside the Panel's findings in Indonesia-Automobiles
32, since this was the only dispute under the GATT-WTO 
which dealt with the interpretation of the term "significant".  
36. Secondly, Argentina fails to understand how the United States can claim that Brazil argued 
that it is the effect on producers that must be si gnificant, and not on prices, when Brazil has submitted 
copious evidence, based on numerous empirical and econometric analyses, of the effects of the subsidies on prices.  37. It is remarkable that the United States shoul d completely disregard these analyses, especially 
considering they were conducted by  international organizations a nd by different prestigious US 
institutions, not to mention the USDA itself
33, in an attempt to distort Brazil's evidence. 
 38. Argentina repeats that over and above any e ndorsement that may be given to the conclusions 
of any one of these studies (and each study's estimate of  the price effect of the subsidies), an increase 
in the world price of cotton would be significant, ev en if international price suppression or depression 
were to amount to only one per cent per pound, sin ce such an increase would en able countries such as 
Brazil and Argentina to recover their comp etitive positions in the world cotton market.
34 
 39. Finally, at no time does the United States s eem to suggest that a suppression or depression 
effect of 12.6 per cent on international cotton pr ices is not "significant" within the meaning of 
Article 6.3(c).  The Panel should therefore find that  the subsidies in question have caused and still 
cause significant depression of cotton prices in the world market resulting in serious prejudice to 
Brazil's interests.  II.3.2 "In the same market" 
 
40. Contrary to what the United States has claimed
35, Argentina considers that Brazil has 
presented sufficient evidence with re spect to the significant effect of subsidies on prices for each 
relevant geographical market, including the United States, Brazil, the African Countries, other producer countries  and Brazilian export markets.  
41. The United States provides no legitimate reason why the Panel should not consider the world 
market.  As stated earlier
36, price movements of the United States, of the Cotlook "A" Index and third 
                                                      
32 Idem, paragraph 82. 
33 Further Submission of Brazil, 9 September 2002, Section 3.3.4.8.1. 
34 Second Written Third-Party Submission by Argentina,  3 October 2003, paragraph 34 to 36.  See also 
Further Third-Party Submission of New Zealand (3 October 2003), paragraph 2.21: " ...As Brazil demonstrates 
even a 1 cent per pound price-suppressing effect can re duce world wide export reven ue by 552 m illion dollars". 
35 Further Submission of the United States, paragraphs 90 to 92. 
36 See paragraph 17 above.  WT/DS267/R/Add.1 
 Page F-25 
 
 
 country (e.g. Brazilian and Argentine) market pri ces are directly interconnected, and this is an 
unquestioned and irrefutable fact.  42. Moreover, US cotton forms part of Cotlook's "A" Index basket, so that the Panel cannot ignore the fact that the US subsidies have a decisive  impact on the price of cotton in the world market. 
 
43. Indeed, this being the case, the amount of US subsidies granted to the cotton sector added to 
the scale of US production and exports is decisive wh en it comes to determining the extent to which 
the subsidies affect the fixing of both third market and world market prices.  
II.3.3 Time period to be considered 
 44. Regarding the US argument that subsidies that have ceased to exist can have no "effect"
37, 
Argentina would like to recall the Panel's remarks in the Indonesia-Automobiles  concerning the 
irrelevance of serious prejudice having been caused by  programmes that are no longer in force.  Upon 
examining whether the subsidies caused serious prej udice to the interests of the complainants, the 
Panel in the said case rejected the argument that the effects of an expired subsidy programme could 
not be considered.38 
 45. Moreover, Argentina considers that it is neces sary to consider a sufficiently extensive period 
to reflect market trends, and a period of one year  as suggested by the United States is not sufficient.
39 
 
II.4 Interpretation of article 6.3(d) 
 
II.4.1 World market share 
 
46. The United States errs in its interpretation of the expression "world market share" by trying to 
identify it with "share in world consumption".40  If, as the United States contends, the expression 
"world market share" in Article 6.3(d) refers to  the increase in consumption of the country granting 
the subsidy, it would be contrary to the object a nd purpose of Articles 5 and 6 of the SCM Agreement, 
namely to avoid adverse effects of subsidies to the interests of other Members.  
47. Indeed, if there were an increase in the shar e in world consumption of the product subsidized 
by the Member granting the subsidy, this would very probably lead to an increase in the international 
price of the product in question, and hence, there w ould be no adverse effects for other Members.  In 
other words, to identify "world market share" with  "share of world consum ption" would completely 
subvert the underlying rationale of Article 6.3(d).
41 
 
                                                      
37 Further Submission of the United States, paragraph 94. 
38 The Panel stated that:  "[W]e must assess the 'effect of the subsidies' on the interests of another 
Member to determine whether serious pr ejudice exists, not the effect of 's ubsidy programmes'.  We note that at 
any given moment in time some payments of subsidies have occurred in the past while others have yet to occur 
in the future.  If we were to consider that past subsid ies were not relevant to our serious prejudice analysis as 
they were 'expired measures' while future measures coul d not yet have caused actual serious prejudice, it is 
hard to imagine any situation where a panel would be able to determine the existence of actual serious 
prejudice. "  Panel Report on Indonesia – Automobiles , paragraph 14.206. 
39 See WT/DS219/AB/R, paragraph 80:  " … we understand a POI to provide data collected over a 
sustained period of time, which period can allow the investigating authority to make a dumping determination 
that is less likely to be subject to market fluctuations or other vagaries that may distort a proper evaluation" . 
40 Further Submission of the United States, paragraph 97. 
41 See also Further Third-Party Submission of New Zealand, paragraph 2.34. WT/DS267/R/Add.1 
Page F-26  
 
 48. Moreover, if we take account of the immediate context of Article 6.3(d), i.e. footnote 17, 
which states "unless other … rules apply to trade  … " , we have a clear indication that the expression 
"world market share" can only refer to the share in world exports.  II.4.2 Time period to be considered 
 
49. Contrary to the US claim that  the trend in the period consider ed is not consistent because it 
includes years in which the United States world market share decreased rather than increasing
42, the 
fact is that there will always be peaks and troughs in agricultura l production and export for climatic 
and other reasons.  This does not mean that a trend over the years cannot be "consistent". 
 
50. In other words, the word "consistent" cannot  be interpreted in such a way as to allow a 
decrease in world market share during a given year to  invalidate a trend over several years.  On the 
contrary, the word "consistent" should be interpre ted in the context of the investigation period, 
disregarding the market variations. 
 
II.5 Threat of serious injury 
 
51. Argentina considers that since Brazil has est ablished the existence of serious prejudice caused 
by the US subsidies, the threat of serious prejudi ce is clearly foreseeable and imminent as a result of 
the even higher subsidies planned under mandatory US  legislation for the marketing years 2003-2007.  
Consequently, Argentina maintains that Brazil has established a prima facie case that these subsidies 
threaten to cause serious prejudice to Brazil.  52. Argentina contends that this guaranteed flow of subsidies will unquestionably lead to a higher 
level of US cotton production a nd exports.  This will inevitably result in price suppression and 
depression as well as an increasing and inequitable US market share for cotton, thus creating a source 
of permanent uncertainty that confirms the threat  of serious prejudice generated by the subsidies. 
 53. Argentina further considers that the link be tween US cotton subsidies and the threat of 
significant price suppression and depression and of an increase in the US world market share for cotton stems from the fact that the future subsid ies will be as necessary as the current ones for US 
producers to bridge the gap between market prices and their total production costs.  This will enable 
US producers to continue competing with more  efficient third country producers, especially 
considering that the USDA itself forecast s an increase in total production costs.
43 
 
III. EXPORT CREDIT GUARANTEES 
 54. In its Further Submission, the United States reverts to its argument in connection with the 
negotiating history for the interpretation of Article  10.2 of the Agreement on Agriculture, maintaining 
that there are no disciplines regulating the use of export credit guarantees.  55. Argentina repeats what it stated in its oral submission of 24 July 2003, namely that 
Article 10.2 in no way provides an exception to the general disciplines on export subsidies, and in 
particular, to the applicability to Article 10.1.  As Argentina has pointed out, "if that had been the 
intention, then the negotiato rs would have expressly said so."
44 
 
                                                      
42 Idem , paragraph 101.   
43 See Annexes BRA-7 (ERS Data:  Commodity Co sts and Returns);  BRA-257 ("Cost of Farm 
Production Up in 2003", USDA, 6 May 2003) and BRA-82 (USDA Agricultural Baseline Projections until 
2012, USDA, February 2003, p.48). 
44 See Oral Third-Party Submission by Argentina, paragraphs 35 to 43.  WT/DS267/R/Add.1 
 Page F-27 
 
 
 IV. CONCLUSION 
 
56. For the reasons set forth both in this stat ement and in previous submissions, Argentina 
requests the Panel to issue the findings and r ecommendations requested by Brazil throughout these 
proceedings. WT/DS267/R/Add.1 
Page F-28  
 
 ANNEX F-6 
 
 
ORAL STATEMENT OF BENIN 
 
8 October 2003 
 
 
Mr. Chairman, members of the Panel, 
 
1. My name is Eloi Laourou from the Mission of Benin.  I am joined by Mr. Nicholas Minot of 
the International Food Policy Research Institute in Washington, D.C., the co-author of the study that 
has been annexed to our Third Party submission, “E ffect  of Falling Cotton Prices on Rural Poverty in 
Benin”.  I will ask Mr. Minot to speak to you in a moment.  The other members of our delegation are 
our legal advisers, Mr. Brendan McGivern and Mr. Stefan Ramel, both from White & Case.   
 
2. As noted in our Third Party submission, this is  the first time that Benin has participated in a 
WTO dispute.  We have not taken the decision to participate lightly.  Indeed, it was only the serious 
threat posed to the economic and social  stability of our country by massive, WTO-inconsistent US 
subsidies on cotton that  has led us to take this unprecedented step.  
3.  The cotton farmers of Benin are efficient pr oducers.  The World Bank has estimated that the 
cost of producing cotton in West Africa is about  50 per cent of the cost of production in the 
United States.  Moreover, the cotton sectors of both countries have undergone considerable structural 
reforms.  
4. Yet the economic efficiencies of our producers,  and the painful reforms they have accepted, 
have in the end proved to be almost completely i rrelevant.  US subsidies have had a ruinous effect on 
the world price of cotton, which in turn has had  devastating effects on the economies of West Africa. 
 5. US cotton subsidies do not just dwarf the co tton sectors of West Africa.  They dwarf all 
economic activity in the region.  As noted in our su bmission, the subsidies paid  by the United States 
to its prosperous 25,000 cotton farmers exceed the gross national income of Benin, Chad, Burkina 
Faso, Mali, Togo and the Central African Republic.  6. Oxfam estimates that for the period from 1999/2000 to 2001/2002, Benin suffered a total cumulative loss of $61 million in export earnings.  Mr. Chairman, this is not an abstract, anodyne 
statistic.  This translates into genuine suffering on the ground, as  hundreds of thousands of people, 
deprived of export earnings, are pushed from bare su bsistence to absolute poverty.  Indeed, Dr. Minot 
estimates that a 40 per cent reduction in farm-level prices of cotton has the effect of pushing an additional 334,000 thousand people below the poverty line in Benin.     7. This is an important point, one that should be considered carefully by the panel as it assesses 
the meaning of “serious prejudice” to one of the poorest countries in the world. 
 8. With your permission, I would now ask Mr. Minot to summarize briefly the results of his study on how depressed world prices for cotton translate into poverty in Benin.    
 
  WT/DS267/R/Add.1 
 Page F-29 
 
 
 Dr Minot: 
 9. Thank you for the opportunity to present the resu lts of a study that I hope will be relevant to 
the dispute.  Before I begin, I would like to provide  some background.  I am a Research Fellow at the 
International Food Policy Research Institute, a W ashington-based international organization whose 
mandate is to generate information to addr ess problems of hunger and poverty in developing 
countries.  I received my Ph.D. in agricultural ec onomics from Michigan State University and have 
worked on issues of agriculture in developing countri es for more than 15 years, including four years 
living in sub-Saharan Africa.    
10. From 1998 to 2000, I led a German-funded stud y of the impact of agricultural reforms on 
farmers in Benin.  In collaboration with a local resear ch firm, we carried out four  surveys in Benin:  
surveys of farmers, traders, market managers, and village cooperatives.  In 2002, I was contracted by 
the World Bank to use these survey data to exam ine the impact of falling world cotton prices on 
poverty in Benin.  My co-author, Lisa Daniels, and I fi nished the report later that year and a version of 
it was  distributed as an IFPRI working paper in November.   
 11. Cotton prices are affected by competition with synthetic fibres, weather-related supply shocks, the rate of growth in the global economy,  and government policies, among other factors.  
Cotton prices are pushed below what they otherw ise would be by government support to cotton 
growers.  The International Cotton Advisory Comm ittee estimates that worldwide direct assistance to 
cotton growers was US$ 4.9 billion in 2001/02.  Of this amount, the United States accounted for 
US$2.3 billion,  equivalent to 24 cents per pound of  cotton produced.  Other sources, using a broader 
definition of assistance, estimate that the government  provides US$ 3.9 billion to the cotton sector.   
 12. Until 2002, US cotton policy consisted of va rious programs, including two (the  marketing 
loan program and loan deficiency payments) that en sured that farmers receive at least 52 cents/pound.  
This has the effect of insulating US farmers from fa lling world prices.  In 2001, in spite of low world 
prices, the US posted record cotton production and near-record export volumes.  Furthermore, US 
subsidies to cotton have increased since these studies were carried out.  The 2002 Farm Bill 
introduced target prices for the major commodities and programs that effectively pay US farmers 
most of the difference between market prices and the target price.  For upland cotton, the target price 
is 72 cents/pound.  In addition, by  allowing farmers to update their “base acreage”, the new policy 
provides incentives for farmers to expand production.  13. Several recent studies have attempted to assess the impact of subsidies on world prices.  The Centre for International Economics in Canberra uses a five-region world  model of fibre, textile, and 
garment markets in 2000-01 to simulate the im pact of US and European subsidies on cotton 
production and export.  They find that removing  US and European subsidies to cotton growers would raise the world cotton price by 6 cents/pound or 11 per cent.  Another study, carried out by ICAC, estimates that  removing US production subsidies would have increased the world price by 11 cents/pound in 2001/02.  And most recently, Sumner estimates that, in the absence of US 
subsidies, the world cotton price would have been 12.6 per cent higher over 1999-2002.  
 
14. The adverse impact of lower cotton prices  on export revenue and GDP in cotton exporting 
ations is clear, but does this translate into higher in cidence of rural poverty?  If cotton is grown mainly 
by larger farmers with relatively high incomes, th en the effect of changes in cotton prices on rural 
poverty may be modest.  Even if cotton is grown pr imarily by small farmers, the magnitude of the 
effect on rural poverty will be small if few farmer s grow cotton or if it accounts for a small share of 
rural income.  Assessing the direct impact of changes in cotton prices on rural poverty requires 
detailed household-survey data on incomes and expenditures.  
 WT/DS267/R/Add.1 
Page F-30  
 
 15. The paper examined the impact of changes in cotton prices on rural poverty in Benin.  In 
particular, it had two objectives:   
 to describe the living conditions and level of poverty for cotton growers and other farmers in 
Benin;  and 
 
 to estimate the short and long-run impact of lower cotton prices on the income of cotton growers 
and on the incidence of poverty in rural Benin. 
 16. The Republic of Benin has a population of about  six million, 59 per cent of whom live in rural 
areas.  Its rural economy is based on maize, sor ghum, millet, yams, cotton, and livestock production.  
The per capita gross national product is US$380, placing Benin among the poorest countries in the 
world.  Indeed, the per capita income of  Benin is  lower than the average for sub-Saharan Africa.   
 17. In 1989, Benin entered a period of economic and political reform.  It made a peaceful 
transition from a military government to a constituti onal multi-party democracy.  It also began to 
move from a quasi-socialist economy to a free-market economy.  In the agricultural sector, state farms 
and cooperatives were disbanded, food crop prices a nd marketing were liberalized, and many state-
owned enterprises were privatized or closed.  In January 1994, the CFA franc was devalued by 50 per 
cent, effectively doubling the price of imports a nd the returns to exports.  Although this imposed 
hardship on manufacturing firms and urban consumer s, it stimulated the local production of cotton, 
rice, and other tradable goods.    
18. In the past two years, Benin has greatly redu ced the role of the state cotton marketing board, 
introducing competition in the distribution of inputs a nd the marketing of cotton.  The fall in world 
cotton prices has led to political pressure for the govern ment to support the domestic price or even to 
re-assume control of the sector to protect farmer interests.  Cotton represents 90 per cent of agricultural exports and around 70 per cent of its  total exports (excluding re-exports).   
 
19. Because the reliability of the results depends heavily on the quality of the survey data, it is 
worth briefly describing the survey methods.  The survey, called the Enquête des  Petits Agriculteurs 
(EPP) or Small Farmer Survey, was carried out in  1998 by the IFPRI and a local research firm, the 
Laboratoire d’Analyse Régionale et d’Expertise  Sociale (LARES).  The survey used a 24-page 
questionnaire covering 16 topics.  The households were selected using a two-stage stratified random 
sample procedure based on the 1997 Pre-Census of Agriculture.  In total, one hundred villages were 
selected.  In each village, nine households were ra ndomly selected using household lists prepared for 
the pre-Census of Agriculture.  Due to some va riation in the number of households interviewed in 
each village, the final sample was 899 rural households .   The interviews were carried out in local 
languages by two teams of Benin interviewers, s upervised by staff from LARES and IFPRI.    
 
20. In order to study poverty, we need to define it.  In this analysis, the poor are defined as those living in households whose per cap ita expenditure is below the 40
th percentile in rural areas.  
Expenditure is used instead of income because it is  more reliably measured and is a better measure of 
household well-being.  It includes cash spending on consumption goods, the value of home-produced 
food, and the rental equivalent of  owner-occupied housing.  The resulti ng poverty line is equivalent to 
US$123 per person per year.  It is worth noting that this is a low poverty line, far below the US$1 per 
day frequently used by the World Bank.  21. We simulated the impact of various percenta ge reductions in cotton prices on the incomes of 
rural households using the concept of producer surplu s.  The details of the calculation are shown in 
the paper, but these are standard formulas used in  economic analysis.  In the short run (before 
households respond to lower prices), the change in in come of each household is simply the percentage  WT/DS267/R/Add.1 
 Page F-31 
 
 
 change in the value of cotton production multiplied by the quantity produced.  In the long run, lower 
cotton prices will cause farmers to substitute away from cotton, so the impact is smaller.  We 
simulated the impact of these cotton price changes in the short and long run on each of the 899 
household in the sample to generate estimates of the impact on rural income and poverty.   
 
22. Before turning to the simulation results, I w ill describe the role of cotton in the rural economy 
and the characteristics of cotton growers.   Acco rding to the IFPRI-LARES survey, cotton is grown by 
roughly one-third of the farm households.  Cotton accounts for about 18 per cent of the area planted by farm households and 22 per cent of the gross va lue of crop production.  In value terms, cotton is 
the second most important crop, after maize.   Am ong cotton farmers, the average area planted with 
cotton is 2.3 hectares, producing 2.7 tons of seed cotton.  The value of this output is US$ 901 per 
cotton farm.  Cotton accounts for about one-third of  the value of crop sales (these figures are shown in 
Table 2 of our paper).    23. Cotton growers tend to have farms that are larger  than other farmers, but they are  similar to 
other farmers in terms of the poverty rate and aver age per capita expenditure.  The larger farms do not 
translate into a higher standard of  living because cotton production is concentrated in the north, which 
is more arid and has fewer opportunities for non-farm  employment.   It is not that cotton farmers are 
poorer than average, but rather that almost all fa rmers in Benin, including cotton farmers, are quite 
poor.    
24. Turning to the simulations, the short-term im pact of a 40 per cent reduction in the farm-gate 
price of cotton reduces the income of cotton growers 21 per cent.  Taking into account the incomes of non-growers, which do not change in this simulati on, the average income of rural households falls 
7 per cent.  Smaller reductions in the cotton pr ice cause roughly proportional changes in income, as 
shown in Table 3 of our paper.   
 
25. With a 40 per cent fall in the cotton price, the average incidence of poverty, including both cotton growers and other farmers rises 8 percentage  points, from 40 per cent to 48 per cent.  In 
absolute terms, this implies that about 334 thou sand people would fall below the poverty line.   A 
40 per cent decrease in the price of cotton results in  a 40  per cent increase in the depth of poverty (P
1) 
and a 61 per cent increase in the severity of poverty (P 2).  
 
26. Does it matter what poverty line we use?  By looking at the cumulative distribution of income with and without the price change, we can evaluate the sensitivity of the results to alternative poverty 
lines.  As shown in Figure 2 in our paper, simila r results  would have been obtained for higher and 
lower poverty lines.  The results are not ve ry sensitive to the elasticity assumption.  
 
27. In summary, our paper analyzed the impact of changes in world cotton prices on farmers in 
Benin.  Both quantitative measures of per capita  expenditure from household surveys and qualitative 
responses to our 1998 survey suggest that ru ral living conditions im proved over the 1990s.  
Furthermore, farmers tended to attribute  this improvement in rural living conditions to economic 
factors such as crop prices, availability of food , and access to non-farm employment.  Although the 
causal link is difficult to establish with certainty , it appears the economic reforms of the 1990s 
(including the 1994 devaluation) and the growth of cotton production dur ing this period contributed to 
a noticeable improvement in rural standards of living.    28. The link between world cotton markets and rura l living conditions can, however,  work gainst 
farmers as well.  The analysis in this paper is based on the 39 per cent decline in the world price of 
cotton between January 2001 and May 2002.  We  combined farm survey data from 1998 with 
assumptions about the decline in farm-level prices to estimate the short- and long-term direct effects of cotton price  reductions on rural inco me and various measures of poverty.   
 WT/DS267/R/Add.1 
Page F-32  
 
 29. The results indicated that there is a str ong link between cotton prices and rural welfare in 
Benin.  A 40 per cent reduction in farm-level prices of  cotton is likely to result in a reduction in rural 
per capita income of 7 per cent in the short-run and 5-6 per cent in the long-run.  Furthermore, poverty 
rises 8 percentage points in the short-run, equivalent  to an increase of 334 thousand in the number of 
people below the poverty line.  In the long run, as ho usehold adjust to the new prices, the poverty rate 
settles down somewhat, remaining 6-7 percentage points higher than it was originally.  
 30. Furthermore, these estimates may well underestim ate the actual effect of lower cotton prices 
on rural poverty in Benin.  First, in an econom y with unemployed resources and excess capacity, an 
external shock affecting income (s uch as a change in cotton prices) has a multiplier effect.  Changes 
in cotton farmer income result in changes in demand for goods and services produced by their non-
cotton-growing neighbours, which in turn influe nces their income and their demand for goods and 
services.  Estimates for four countries in sub-Sahara n Africa suggest that the multiplier is in the range 
of 1.7 to 2.2, meaning that the total effect on inco me (positive or negative) is 1.7 to 2.2 times greater 
than the direct impact.   
 
31. Second, we assume that farm prices change  by the same proportion as world prices.  In 
competitive markets with a fixed marketing margin, the percentage change in  farm prices will be 
greater than the percentage change in world prices.   Until recently, the effect of changes in world 
prices on farm-level prices in Benin was muted by government regulation of the market which 
stabilized prices.  Under market reforms  being carried out in Benin and elsewhere in West Africa, 
markets are becoming more competitive and chang es in farm prices will closely match changes in 
world prices.    32. Third, our estimates do not take into account other indirect effects associated with declining 
cotton production.  An earlier analysis of the Sm all Farmer Survey data from Benin indicated that 
cotton farmers are three ti mes more likely to apply fertilizer to  their maize crops compared to non-
cotton farmers.  This is because growing cotton  gi ves farmers access to fertilizer on credit, some of 
which they “divert” to their maize fields.  The im plication is that lower cotton prices will indirectly 
reduce the yields of food crops.   33. Overall, the results in this paper challenge the stereotype of the rural poor in developing 
countries as consisting of subsistence farmers that are relatively unconnected to, and thus unaffected, 
by swings in world commodity markets.  At least in  the case of Benin, to the extent that fluctuations 
in world cotton prices are transmitted to farmers, th ey will have a significant effect on rural incomes 
and poverty.  The broader implication is that policies that subsidize cotton production in the 
United States and elsewhere, dampening world prices,  have an adverse impact on rural poverty in 
Benin and (by extension) other poor cotton-expor ting countries.   Thank you, Mr. Chairman and 
members of the Panel.  Mr. Laourou:  34. Thank you for allowing Dr. Minot to present his paper, and for allow Benin to present its 
views. 
 35. This concludes our oral statement. We r espectfully ask this Panel to find that the 
United States is in breach of its WTO obligations, including by causing serious prejudice to the interests of Benin and other Members.  We woul d be pleased to answer any questions that you may 
have.  WT/DS267/R/Add.1 
 Page F-33 
 
 
 ANNEX F-7 
 
 
ORAL STATEMENT OF CHAD 
 
8 October 2003 
  Mr. Chairman, members of the Panel,  
 I am Abderahim Yacoub N’Diaye, the Ambassador  of Chad to the WTO.  The other members 
of my delegation are Mr. Mouata Nanrabaye, as we ll as our legal advisers,  Mr. Brendan McGivern 
and Mr. Stefan Ramel, both from White & Case.     Chad stands by its written Third Party submissi on of 3 October 2003.  In addition, I wanted to 
supplement this by reading to the Panel a recent statement by Mr. Ibrahim Malloum, who is both the 
President of the Société Cotonnière du Tchad, as well as the President of the African Cotton Association.  Given his unique qualifications, I asked him to prepare a statement for this third party session.  Unfortunately, however, he could not attend the hearing, since he had to be in Chad this 
week.  However, his statement is of direct relevanc e to the issues facing the Panel, and so with your 
permission, Mr. Chairman, I would like to read it to you. 
 
“Statement by Mr Ibrahim Malloum 
 
Introduction 
 1. My name is Ibrahim Malloum.  I am the President of the Société Cotonnière du Tchad, 
commonly known as Cotontchad.  Cotontchad is a public/private organizati on that controls the 
production and marketing of cotton in Chad.  Cotont chad is responsible for supplying farmers with 
inputs on credit, purchasing and collecting the harvested seed-cotton, ginning the crop into upland cotton lint, as traded internationally, and finally se lling the finished product.  Cotontchad is required 
to purchase all cotton produced by Ch ad cotton farmers.  In addition,  Cotontchad is responsible for 
selling and marketing the cotton produced by more than 2.5 million people in Chad involved in the 
production of cotton.  2. I am also currently President of the A frican Cotton Association (ACA).  The ACA was 
formally created during a summit meeting of Af rican cotton producers in Cotonou, Benin, in 
September 2002.  It includes all the West, Central an d East African producers, ginners and merchants. 
Many international merchants, shipping companies, a nd banks are also members of this Association.  
The ACA’s goals are to defend and promote Africa n cotton in the world market and to encourage 
knowledge sharing among African cotton producers.   
 
3. I have been involved with selling and marketing cotton for more than 18 years for Cotontchad, during which time I have been involved in all the cotton activities: 
 
 I was in Memphis Cotton School in 1985. 
 
 From the end of 1997 to 1999 I was the General Manager of Cotontchad. 
 
 When I was General Manager I was in charge of  supplying the farmers with fertilizers, and 
pesticides; we buy all the production from farmers,  we gin the cotton, we classify and export the 
cotton. WT/DS267/R/Add.1 
Page F-34  
 
  
 Today I am in charge of marketing all Chad co tton production around the world. I am thus selling 
in more than 30 countries (Europe, Far East, Africa and South America.). 
 
 Our selling prices are based on the international prices driven by the New York Cotton Futures 
Market and the Liverpool “A” Index. 
 
Cotton in Chad 
 
4. Cotton is essential to the livelihood of more than  2.5 million people in Chad.  It has been the 
major cash crop and driver of Chad’s economy dating back to the 1920s and continues to be today.  
Cotton represents 25 per cent of Chad’s export earnings and 5.1 per cent of its GDP.  
 
5. Chad has about 8.1 million inhabitants of whic h over 2.5 million are in one way or the other 
involved in the production of cotton.  Cotton is typi cally produced on small family farms that lack 
mechanization and modern equipment, and electricity .  Irrigation is completely reliant on rain and all 
harvesting is done by hand.  Many farms are not  even accessible by road.  Despite these handicaps, 
production costs are approximately between 54 and 58 cents per pound.  This is approximately one-
half of the costs of producing cotton in the United States.   6. In order to streamline the production of co tton, farmers are organized into roughly 5,000 
Village Associations (Associations Villageoises), each comprising about 100 households of both 
cotton and non-cotton producers.  These Associati ons Villageoises also provide some basic social 
structure for about 80 per cent of Chad’s eight m illion people who live in rural areas and that depend 
on subsistence farming.  Normally  cotton production in each Association Villageoise is a group effort 
with everyone in the community contributing to the production process.  The cotton harvest and the 
amount produced is a source of both pride and prestige in each Association Villageoise. 
 The Role of Prices for Chadian Cotton 
 
7. As already mentioned, Cotontchad plays a cen tral role in the production of cotton in Chad.  
The production cycle of cotton in Chad starts when each Association Villageoise requests input 
supplies from Cotontchad’s field agents or “int erface”, based on their planned land cultivation. 
Cotontchad then allocates inputs to each Associati on Villageoise on credit using future cotton harvests 
as collateral.  The amount of inputs acquired and distributed is influenced directly by the prices that are able to be obtained by Cotontchad in its intern ational sales.  When prices are low, as they were 
during 2001-2002, Cotontchad cannot afford to provide all of the imports demanded by the 
Associations Villageoises.  This in turn reduces the amount of cotton produced by each Association 
Villageoise and in Chad in general.  When pri ces increase, more inputs are purchased which are then 
provided to each of the Association Villageoi se and causes cotton production – and incomes 
generated by those Associations – to increase.  T hus, higher prices obtained in international markets 
directly impacts the amount of present and future income received by co tton producers in Chad. 
 8. Cotontchad purchases upland cotton from each Association Villageoise at its 2,500 nation-
wide weigh stations.  The price received by the prod ucers is a countrywide uniform price that is set 
each year by a committee representing both farmers a nd Cotontchad.  The price determined by the 
committee is a function of the price received by Co tontchad in its physical sales of cotton.  
Cotontchad can only offer a price to the farmers that is  consistent with the international market price.   
 9. Cotontchad then transports the upland cotton to  its nine ginning stations to be sorted, ginned 
and commercialized.  Finally Cotontchad sells the fi nished cotton in physical markets on the spot and 
forward market. Cotontchad markets its cotton on bo th an immediate (spot) and on a forward contract  WT/DS267/R/Add.1 
 Page F-35 
 
 
 basis.  I am the principal negotiator for sales of  Chad cotton.  In marketing cotton, I provide 
information to a number of purchasers concerning the availability of Chad cotton.  In some countries 
(Europe, Japan, and partially India) Cotontchad uses th e agent channels to sell directly to the spinning 
mills. In other countries, we sell directly to the inte rnational merchants.  We fix prices in relation with 
New York Future prices, Liverpool “A” index and also  in relation to the competition prices offered in 
the market.  Everyday we inform our agents and me rchants of the available quantities and the prices 
of the different qualities we are offering.    10. In negotiations for the spot market or imme diate shipment of cotton, the price negotiation 
involves reference to the current N.Y. futures cont ract price as well as the A and B-index prices.  I 
will always make reference to the N.Y. futures price if prices are increasing and the N.Y. futures price 
is higher than the A-index price.   11. The New York Cotton futures market is the ma in cotton market place in the world.  It goes 
without saying that the cotton price is dictated by New York.  All the business men can forecast the 
index “A” by looking to what New York did the night before. 
 12. The vast majority of cotton produced in  Chad is exported (about 95 per cent).  Cotton 
produced in Chad is in direct competition with ot her regional and foreign exporters of cotton.  The 
extremely small world market share of Chadian cotton exports (about 1 per cent) invariably makes Chad a price taker.   
 
The United States and Its Influence on World Cotton Prices 
 
13. The United States’ production of upland cott on has a large influence on the world market 
price for cotton.  All traders of upland cotton keep a close watch on developments in the 
United States.  As the largest exporter of cotton, the United States supplies more than 40 per cent of 
cotton sold in international sales.  The United States  is by far the largest exporter of upland cotton.  
Because of the large size of the US production and exports, when stocks of US cotton for sale 
decrease because of weather problems in the Unite d States, then the world price of upland cotton 
invariably increases.  This is normally first reflecte d in increased N.Y. futures prices and then later by 
increases in prices in the A-Index.  On the other hand, when US production of upland cotton increases 
because of increased land planted to cotton or because of favourable weather conditions, then the 
increased stocks of US upland cotton in the world ma rkets press world prices lower.  I have seen this 
process repeatedly over the years that I have been  trading upland cotton on world markets.  In my 
view, it is obvious that if the US producers did not have access to very large subsidies, they would 
plant less cotton and world upland cotton prices would increase.  There is no doubt in my mind that 
the large US subsidies keep world prices lower.  This includes prices received by Chad cotton.    
 14. To give the Panel some idea of the impact of the large US exports, I frequently encounter 
during negotiations purchasers who indicate that they  can purchase US cotton at a price lower than 
what I am seeking to obtain in negotiations.  These purchasers frequently tell me that US upland 
cotton is available to them at a lower price becau se of the US Step 2 payments.  These payments are 
well known in the industry and are reported in trad e publications. The Step 2 payments for US cotton 
allows exporters selling US cotton to underbid my bi ds when I am in direct competition for sales.  
This has happened to me on a number of occasions.   Again, the result is lower prices for cotton that I 
am able to negotiate for Cotontchad.   WT/DS267/R/Add.1 
Page F-36  
 
 Suppressed Cotton Prices and Their Effect on Chad 
 
15. I would tell you that the low prices receive d by Chad producers contributes to poverty in 
Chad.  The description of what happened in Benin is  the same as what has been happening in Chad.  
Cotton for most Associations Villageoises in Chad is the only source of outside income.  Therefore 
Chadian schools, hospitals and local governments rely  directly on money received from cotton sales.  
The cotton industry in Chad is still trying to r ecover from record low prices from 2001-2002.  While 
prices are now increasing, prices will have to increase considerably more to make up for the unprecedented crisis caused by extremely low prices l ast year.  In my view, the continuing high levels 
of US production are still depressing world prices.  I look forward to the day when I do not have to 
compete with US upland cotton for every sale.  In creased prices will allow Chad producers and Chad 
communities to obtain additional income and improve the life of our very poor people”.     Thank you for your attention.  I would be ha ppy to answer any questions you may have.    WT/DS267/R/Add.1 
 Page F-37 
 
 
 ANNEX F-8 
 
 
ORAL STATEMENT 
OF THE EUROPEAN COMMUNITIES 
 
8 October 2003 
  
1. Introduction  
 
1. The European Communities (the “EC”) welcomes  this opportunity to submit orally its views 
to the Panel.  2. The EC has already submitted in writing its view s with respect to Brazil’s further submission 
of 9 September 2003. Today, the EC will provide its comments on the further submission of the 
United States of 30 September 2003.  Many of the i ssues raised in the US submission concern factual 
matters.  The EC will limit itself to address three of questions of legal interpretation. Specifically, the 
EC will argue in this Statement that:  
III. the crop insurance payments made by the United States would be “specific” in so far 
as it can be established that different insura nce policies result in different benefits 
being conferred with respect to different products; 
 
IV. the issue of whether green box payments can cause “serious prejudice” within the 
meaning of Article 5(c) of the Agreement  on Subsidies and Countervailing Measures   
(the “SCM Agreement”) does not arise in this dispute; 
 
V. the term same market  in Article 6.3 (c) may refer to any geographical market, 
including also the world market, provided th at there is such a world market for the 
product under consideration. 
 
3. Before addressing these issues, the EC would like to put on record its agreement with the 
United States with respect to a number of ques tions on which it does not consider it necessary to 
submit additional arguments:   
VI. the EC agrees with the US interpretation of the term “world market share” in 
Article 6.3(d) of the SCM Agreement ; 
 
VII. the EC endorses the U.S. interpretation of the term “more than equitable share” in 
Article XVI:3 of the GATT; 
 
VIII. the EC also agrees with the US position th at Brazil’s first standard to establish the 
existence of “threat of serious prejudice” for the purposes of Article 5(c) of the SCM 
Agreement  is incorrect; 
 
IX. finally, the EC agrees with the United States that the Agreement on Agriculture  (the 
“AA”) excludes the application of Article III: 4 of the GATT and of Article 3.1 (b) of 
the SCM Agreement   to subsidies “in favour of agricultural producers” which are paid 
to the processors.  
 WT/DS267/R/Add.1 
Page F-38  
 
 4. On the other hand, the EC would like to r estate its disagreement with the US position that 
Article 10.1 of the AA does not apply to export credits and guarantees.   
2. Specificity of crop insurance payments 
 5. The United States contests Brazil’s claim that th e subsidies allegedly provided in the form of 
crop insurance payments are specific.  The United States argues that crop insurance is not “specific” 
because it is available, in one way or another,  with respect to all agricultural products.
1 
 6. The EC understands, however, that different  crop insurance policies apply to different 
agricultural products.
2  If such differences had the consequence that some agricultural products will 
receive a benefit in circumstances where other pr oducts will receive no benefit, or only a smaller 
benefit, the difference would be clearly “specific”.   
3. Green Box subsidies  
 
7. The United States argues that Brazil has failed to make a prima facie case that the payments 
for which it claims green box status cause seri ous prejudice.  The United States recalls that 
paragraph 1 of Annex 2 of the AA makes clear that green box payments have no, or at most minimal, 
trade-distorting effects and that, under Article 21.1 of the AA, the SCM Agreement  applies “subject 
to” the AA.
3 
 
8. This is correct. But this argument does not appear to be relevant in the context of this dispute. 
If the payments at issue meet all the criteria of Annex 2, they would be exempted from action under 
the SCM Agreement  in accordance with Article 13 (a)(i) AA.  If not, the United States could not 
invoke their conformity with Annex 2 and Article 21.1 in order to argue  that they have no or minimal 
trade-distorting effects. Logically, the issue raised  by the United States could arise only in the absence 
of the peace clause, or if the peace clause ha d expired at the initiation of this dispute. 
 
4. The meaning of “same market” in Article 6.3 (c) 
 
9. The United States contends that the term “same market” in Article 6.3 (c) cannot be 
interpreted to include the world market, becau se that would render redundant the word “same”.4  The 
EC disagrees.  In accordance with its ordinary meaning, the term “market” may refer to any 
geographical market, including not only national or  regional markets but also the world market, 
provided that there is such a world market for the product under consideration.  
10. The US argument is based on the assumption that  there will always be a world market for any 
given product.  That assumption is incorrect. In order to characterise a certain geographical area, 
whether it is the territory of one or more Members or the entire world, as a “market” it must be shown that the conditions of competition prevailing w ithin that geographical area are sufficiently 
homogenous.  If there are significant trade barriers between Members, or between groups of Members, with the consequence that conditions of  competition are significantly different within each 
Member or group of Members, it will not be possible to consider that there is a world market for the 
purposes of Article 6.3(c), but only national or regional markets.  
                                                      
1 US further submission, para. 14. 
2 Ibid., para. 15. 
3 Ibid., para. 72. 
4 Ibid., paras. 90-92.  WT/DS267/R/Add.1 
 Page F-39 
 
 
 ANNEX F-9 
 
 
ORAL STATEMENT OF INDIA 
 
8 October 2003 
  1. We thank you for givi ng us the opportunity to present India’s views in this third party session. 
India is the third largest producer of cotton in the world and has the highest area under cotton 
cultivation in the world.  India has a substantial trad e interest as well as systemic interest in this 
dispute. In the first part of this session on 24 July  2003, we had presented some views on the three US 
subsidy programmes that we consider as violative of the Agreement on Subs idies and Countervailing 
Measures (SCM Agreement).  Today we wish to present our views on the term ‘serious prejudice’ used in Article 6.3 of the Agreement. 
 
2. The measures challenged by Brazil in its claims of present serious prejudice include the 
payment of subsidies through various programmes wh ich include marketing loan payments, counter-
cyclical payments, direct payments, production flex ibility contract payments, market loss assistance 
payments, crop insurance subsidies, Step 2 paym ents, and GSM 102 export credit guarantees.  The 
legal instruments providing these subsidies incl ude the 1996 FAIR Act, the 2002 FSRI Act and the 
2000 ARP Act as well as various appropriations bills for Marketing Years (MY) 1999-2002.  
 3. The subsidies given by US at issue are explic itly limited to certain enterprises or industries.  
None of the subsidies at issue are widely available throughout the US economy across industries.  
Eligibility for the domestic support and export subsidies at issue in this dispute is either “explicitly” 
limited to the subset of the US industry producing agricultural crops , to subgroups of industries 
producing certain  agricultural crops, or to only upland cotton.  None of the subsidies are available for 
any non-agricultural product.  Thus the subsidies given by US to cotton are “specific” as understood 
under the SCM Agreement.   Mr. Chairman, Members of the Panel, 
 
4. For establishing serious prejudice caused by the subsidies given by the US to cotton, Brazil 
has provided numerous facts that independently as well as collectively demonstrate the causal link 
between these subsidies and significant price suppressi on in upland cotton markets in MY 1999-2002.   
 
5. It has been demonstrated, inter-alia  through the analysis of Professor Daniel Sumner, details 
of which are available in Section 3.3.4.8.2 of Braz il’s Further Submission to the Panel, that in terms 
of significant price suppression, removal of the subsidies given by the US would increase the A-index prices by an average of 12.6 per cetn or 6. 5 cents per pound between MY  1999 and 2002. Brazil has 
demonstrated that the subsidies given by the US during MY 1999-2002 cause present  significant price 
suppression within the meaning of Article 6.3(c) of the SCM Agreement in the Brazilian and world 
markets, including in markets where both Braz ilian and United States producers export, and thus 
cause serious prejudice.   6. The average rate of subsidisation of cotton in the US during MY 1999-2002 as revealed in the Table at page 4 of Brazil’s Further Submission was as high as 95 per cent.  These subsidies, therefore, 
almost entirely constitute the farmers’ incomes and have a major impact on farmers’ production 
decisions.  Producers of upland cotton in the Un ited States are thereby largely insulated from the 
effects of the market.  Thus, even when prices fo r upland cotton were falling, and the value of the 
United States dollar and costs of production were rising, production and exports of upland cotton by WT/DS267/R/Add.1 
Page F-40  
 
 the United States increased significantly. Similarl y, the acreage under upland cotton in the US 
increased by 13.5 per cent between MY 1998 and MY 2001.  Thus, in our view, Brazil has made a 
prima facie case of having suffered “serious prejudic e” on account of the subsidies given by the US to 
cotton.   
7. In its Further Submission, the United States has argued that after Brazil demonstrates that one 
or more of the effects of the subsidy mentioned in Article 6.3 is applicable, Brazil must then further 
demonstrate that the “prejudice” caused by the ef fects of the subsidy were “serious” enough to 
constitute “serious prejudice” within the meaning of the term in that Article.  The argument of the 
United States appears to be based on the use of the words “may arise” in Article 6.3 as against the use 
of the words “shall be deemed to exist” in Article  6.1.  The US seems to conclude that serious 
prejudice need not arise even if one or more of the e ffects of the subsidy listed in Article 6.3 is found.  
The United States goes on to infer from this difference in language that a complainant, in addition to 
demonstrating the existence of one of the listed effects, must also meet a separate “serious prejudice” standard – the content of which is  undefined by the SCM Agreement.  
 
8. In India’s view nothing more than the demons tration that one of the effects enumerated in 
Article 6.3 exists is necessary to arrive at a finding of “serious prejudice”.  Subsidies listed under 
Article 6.1 are deemed to cause serious prejudice, hence su ch a presumption is rebuttable under 
Article 6.2 if the subsidy does not result in any of the effects enumerated in Article 6.3.  No such 
rebuttal is envisaged under Article 6.3.  There is, thus, no obligation under the SCM Agreement to 
demonstrate serious prejudice separately after establishing that one of the effects of a subsidy listed 
under Article 6.3 applies, as the effects listed in Ar ticle 6.3 themselves equate to serious prejudice.  
This interpretation is also confirmed by a reading of Article 6.2, which equates serious prejudice to 
effects listed under Article 6.3. India disagrees with the US interpretation of Article 6.3. 
 
9. In conclusion, Mr. Chairman and Members of  the Panel, India holds the view that the 
subsidies given by the US on upland cotton are speci fic, causal link exists between these subsidies and 
the significant price depression, and these subsidies given by the US have caused serious prejudice 
within the meaning of the term in Article 6.3 of the SCM Agreement.  
 
  WT/DS267/R/Add.1 
 Page F-41 
 
 
 ANNEX F-10 
 
 
NEW ZEALAND’S ORAL STATEMENT 
 
8 October 2003 
  
1. Mr Chairman, Members of the Panel, New Zealand’s Further Submis sion to the Panel of 
3 October outlines New Zealand’s support for the cl aims made by Brazil and its views on the issues 
raised in the Further Submission of the United States.  The evidence brought by Brazil in support of 
its claims is overwhelm ing and conclusive.   
 2. New Zealand’s submission, and our statement today, focuses in particular on Brazil’s demonstration that the United States subsidies cau se significant price suppression within the meaning 
of Article 6.3(c) of the Agreement on Subsidies and Countervailing Measures  (or the SCM 
Agreement ).  Evidence brought by Brazil shows that the United States subsidies suppressed A-index 
prices by an average of 12.6 per cent over MY 1999-2002 .  That means a total amount of lost revenue 
for Brazilian producers of $478 million and suppr essed revenue worldwide of $3.587 billion. 
 3. The United States has produced no evidence or argument to rebut this claim.  Instead the 
United States points to a number of factors that it says caused prices for upland cotton to fall.  
However, those factors are entirely irrelevant to th e issue of whether the United States subsidies cause 
significant price suppression.  Nothing in the SCM Agreement  requires a complainant to show that the 
subsidies at issue are the sole or major cause of prices falling in order to demonstrate serious 
prejudice.   
 
4. In fact, the SCM Agreement  does not even require prices to fall for there to be price 
suppression.  As demonstrated by Brazil, price suppr ession can occur even when prices are rising.  All 
a complainant is required to show to satisfy Artic le 6.3(c) is that significant price suppression is 
caused by the subsidies at issue. Brazil has done that, and the econometric models Brazil has used 
have not been challenged by the United States.   Fu rthermore, those models isolate the effects of the 
subsidy from other factors, and thereby ensure that the effects of other factors affecting cotton prices 
are not attributed to cotton subsidies.    5. By contrast, the United States advocates an interpretation of Articles 5 and 6 that would completely undermine their objective, which is of course to allow WTO Members to act when 
adversely affected by other Members’ use of subsidies.   
 6. In particular the United States draws the wrong conclusion from a comparison of Article 6.1 
and Article 6.3, namely that it is not sufficient for a complainant to show that one of the effects set out 
in Article 6.3 exists for there to be serious prejudi ce.  A closer look at the substance and nature of 
those provisions in the broader context of Article s 5 and 6 makes it clear that once a Member has 
demonstrated the existence of significant price suppr ession within the meaning of Article 6.3, there is 
serious prejudice.  We note that the EC agrees w ith this interpretation in its Further Third Party 
Submission.  New Zealand has described in detail in its Further Submission why the United States 
interpretation of Article 6 should be rejected.   
7. The United States takes a similar approach to interpretation of the phrase “significant” in 
Article 6.3(c).  The United States approach would require “significant price suppression” to be demonstrable solely by reference to some arbitrary level of numeric significance.  Yet the United States does not suggest what level of signi ficance would be appropriate in the present case, nor WT/DS267/R/Add.1 
Page F-42  
 
 does the United States go so far as to  suggest that 12.6 per cent is not  “significant”.  The United States 
offers no explanation at all of how “significance” is  to be determined under its proposed approach.  
This is perhaps because such an appr oach is unworkable in practice.   
 8. Whether or not price suppression is significan t within the meaning of Article 6.3(c) will 
depend on the circumstances of the case.  And such a determination must be anchored in the overall 
context of consideration of the adverse effects of the subsidy if the Agreement  is to operate as 
Members intended it to.  Thus Brazil’s approach of considering whether the level of price suppression is “meaningful” in its effect is entirely appropria te and workable, and offers the best means of 
ensuring that Article 6.3(c) is eff ectively and consistently applied. 
 
9. These are but two examples of attempts  by the United States to read into the SCM Agreement  
additional requirements that are simply not there and distort the requirements that are there.  If 
accepted, such interpretations would make it virtua lly impossible for Members to show the existence 
of serious prejudice.  Such an erosion of the rights negotiated by Members under the SCM Agreement  
cannot be permitted. 
 
Threat of Serious Prejudice  
 
10. New Zealand’s Further Third Party Submissi on also outlines why the Panel should find that 
the United States subsidies create a threat of serious prejudice to the interests of Brazil in the future.  
The fact that Brazil’s interests are already sufferi ng serious prejudice as a result of the United States 
subsidies leads to a strong presumption that they will continue to do so.  United States legislation 
requires the continued provision of the subsidies ir respective of whether or not they have adverse 
effects on other Members.  The present case involves a level of subsidisation of, on average, 95 per cent, with a dollar value of US$12.9 billion, being provided by a country that currently has a 41.6 per 
cent share of the world market for upland cotton  The threat of future serious prejudice is therefore a 
real one.    11. In addition to the points addressed in New Z ealand’s Further Submission, New Zealand takes 
this opportunity to record its views on two further issues raised by the United States. 
 Crop Insurance 
 
12. The first is the United States argument that  crop insurance payments fail to meet the 
requirement for specificity in Article 2 of the SCM Agreement . As demonstrated by Brazil, the crop 
insurance subsidies to upland cotton producers e nhanced United States upland cotton production.  The 
payments act as a direct production stimulant by k eeping marginal upland cotton land in production.  
Professor Sumner’s analysis concludes that in the period MY 1999-2002 United States crop insurance 
subsidies resulted in suppression of world prices by 1.2 per cent.    13. Brazil has demonstrated that the crop insuran ce programme is limited to certain enterprises 
and thus is not generally availabl e but is effectively available only in respect of crops.  The crop 
insurance programme is therefore specific within the meaning of Article 2 of the SCM Agreement . 
 
Step 2 domestic payments 
 
14. Second, New Zealand wishes to elaborate its vi ew in support of Brazil’s claim that the Step 2 
domestic payments are prohibited subs idies under Article 3.1(b) of the SCM Agreement  and GATT 
Article III.4.  There is no basis upon which to claim that the Agreement on Agriculture  gives Members 
a right to use whatever domestic support they wi sh with complete impunity from action under other 
WTO Agreements.  The Agreement on Agriculture  is silent on the issue of local content subsidies.  
Such silence cannot be taken as creating an “entitlement”.    WT/DS267/R/Add.1 
 Page F-43 
 
 
  
15. Nor does New Zealand accept that Members c ould have so encroached on the fundamental 
GATT principle of national treatment any way other than explicitly and expressly.  The United States 
has been unable to demonstrate th at Members intended, through the Agreement on Agriculture , to 
effectively waive their rights under GATT Article III in  respect of agricultural products.   Nor is there 
any evidence that Members traded those rights in  return for reduction commitments on domestic 
support.  Where there was a trade-off was between the application of Articles 5 and 6 of the SCM 
Agreement  (for a limited period of time) and reduction co mmitments, as set out explicitly in the peace 
clause.  There is no such trade-off in the peace clause for Article 3.1(b) of the SCM Agreement .  
 
16. Paragraph 7 of Annex 3 of the Agreement on Agriculture , relied upon by the United States 
and EC as evidence that the Agreement  authorises the use of local content subsidies, provides no basis 
for such a conclusion.  All paragraph 7 does is r ecognise that it is possible for measures directed at 
agricultural processors to benefit the producers of  basic agricultural products.  For example, a 
government may pay a subsidy to a processor whic h it is required to pass on to the domestic 
producers.  This can occur without affecting the competitive relationship between imports and 
domestic production.  The measure would be consistent with Article 3.1(b) of the SCM Agreement  
and GATT Article III, and the support rightly count ed against the Member’s  AMS.  Nothing in 
paragraph 7 suggests that it should be interpreted as referring to domestic content subsidies, let alone 
that it authorises them in contravention of Article 3.1(b) of the SCM Agreement  or GATT Article III.   
 Conclusion 
 
17. In conclusion, New Zealand considers that  Brazil has presented the factual evidence 
necessary to substantiate its claims under the SCM Agreement .  Brazil has also demonstrated that the 
United States cannot avail itself of protection under the peace clause.  The interpretation advanced by 
the United States of the provisions of the SCM Agreement  would render actionable subsidies 
inactionable, thereby undermining the carefully ne gotiated balance of rights and obligations in the 
SCM Agreement  and the Agreement on Agriculture .  New Zealand therefore requests the Panel to 
make the findings and recommendations requested by Brazil.  WT/DS267/RAdd.1 
Page G-1 
 
 
  
   
ANNEX G 
  
FURTHER REBUTTAL SUBMISSIONS OF PARTIES 
  
Contents Page 
Annex G-1 Executive Summary of Brazil's Further Rebuttal Submission G-2 
Annex G-2 Executive Summary of th e United States' Further Rebuttal 
 Submission G-8 
 WT/DS267/R/Add.1 
Page G-2    
 
  
  
ANNEX G-1 
 
EXECUTIVE SUMMARY OF BRAZIL'S 
FURTHER REBUTTAL SUBMISSION 
 
 1. Brazil responds in its Further Rebuttal Submissi on to various arguments  raised and evidence 
presented by the United States in earlier stages of this proceeding.    2. Brazil presents new evidence in rebuttal of US ass ertions that it has failed to demonstrate that 
contact payments were paid to cu rrent producers of upland cotton in MY 1999-2002.  This evidence is 
in the form of USDA payment data obtained and analyzed by the Environmental Working Group (EWG) concerning, inter alia , upland cotton and other crop base contract payments between MY 
2000-2002, as well as upland cotton marketing loan payments.  The EWG database matches the 
upland cotton recipients and farms receiving each type of  payment.  It shows that the great majority of 
upland cotton producers grew upland cotton on upland cotton base acreage.  It also shows that upland 
cotton producers received approximately three-quart ers of all upland cotton contract payments 
between MY 2000-2002.  Additional contract payments supporting upland cotton are found by 
attributing contract payments on non-cotton base ac reage.  While the EWG data underestimates the 
amount of contract payments in support of up land cotton, it nevertheless corroborates and supports 
Brazil’s “14/16” methodology.  Moreover, this data is  also consistent with the large body of evidence 
demonstrating that upland cotton producers recei ve, rely on, and need upland cotton contract 
payments to make “ends meet.”  3. Better evidence of the amount of contract paym ents in support of upland cotton would come 
from an examination of the amount of upland co tton currently planted on upland cotton (or other) 
contract acreage.  This evidence is collected and ex clusively in the control of the United States.  
Brazil rebuts the US assertions that it does not collect  or maintain information permitting it to respond 
to the Panel’s Question 67bis or to Brazil’s repeat ed requests for information regarding the amount of 
contract payments received by current producers of upland cotton.  In fact, the United States has 
access to all of the farm-specific and commodity specific commodity acreage and payment data from 
both current upland cotton producers as well as  holders of crop base under contract payment 
programmes that would permit it to (1) provide a close approximation of the PFC and market loss 
assistance payments to current upland cotton producer s in MY 1999-2001, and (2) provide the precise 
amount of direct and counter-cyclical payments to current upland cotton producers in MY 2002.  Brazil requests the Panel to ask the United States, for the third time, to produce this information.    
 
4. In the absence of information within the ex clusive control of the United States, the 
information on marketing loan and contract paym ents in the EWG database, together with the 
considerable other evidence presented by Brazil, is th e best information available to assist the Panel in 
making the determination concerning the amount of “support to upland cotton” for the purposes of the 
peace clause. 
 
5. Regarding Brazil’s price suppression and increase in world market share claims under 
Articles 6.3(c) and 6.3(d) of the SCM Agreement,  Brazil first responds to US arguments that only 
variable costs are relevant to any cost of production analysis.  This is the wrong legal as well as economic benchmark. Brazil notes the A ppellate Body’s decisions in the Canada – Dairy (21.5) 
disputes held that a cost of production analysis should focus on total, not variable , costs.  That is, only 
an analysis of the total cost of production takes account of the economic resources the producer 
 WT/DS267/RAdd.1 
Page G-3 
 
 
 invests in the product. The Appellate Body’s jurisp rudence on this issue refl ects the economic reality 
that, over the long term, producers have to recover all their costs and make profits to stay in business.  
To the extent that the producer ch arges prices that do not recoup the total cost of production, over 
time, it sustains a loss which must be financed from some other source.   
6. USDA cost data shows that US producers would have lost $871 per acre if they had grown 
upland cotton without subsidies between MY 1997- 2002.  With subsidies, these upland cotton 
producers made a per-acre “profit” of $120 over the si x-year period.  Further, most of the fixed costs 
of US producers must be covered over a long-term six-year period, or upland cotton producers would 
be forced to halt production.  This evidence supports  the close causal link between US subsidies and 
continued high levels of US upl and cotton production a nd exports, as well as suppressed prices. These 
facts demonstrate the veracity of the National Co tton Council’s Chairman’s statement that US upland 
cotton producers “can’t exist without subsidies”.  7. The United States’ argument that a cost of pr oduction analysis may be limited to variable 
costs defies all economic logic.  This is particularly  true in light of the items that the United States 
counts towards fixed costs, including hired labour, opportunity cost of unpaid labour, capital recovery 
of machinery and equipment, opportunity cost of  land, taxes and insura nce, and general farm 
overhead.  These facts confirm the common sense noti on that without the US subsidies, a significant 
portion of the US upland cotton production would not be economically viable and would not be 
produced.   
 
8. Brazil rebuts US arguments that US subsidies had no price-suppressing effects by 
demonstrating the close relationship between increases or decreases in world cotton stocks and A-Index prices.  USDA’s own economists estimate that US subsidies increased US upland cotton world supply by 1.9 million bales in MY 2000 and 4.3 million bales in MY 2001.  Because the United States 
has admitted that the injection of 11.6 million bal es of Chinese government stocks into world supply 
between MY 1999-2001 depressed prices, it is not  surprising that USDA economists, as well as 
Professor Sumner, found that the addition of simila r quantities of US subsid y-generated upland cotton 
had similar price-suppressing effects.  Moreover, if Chinese Government sales of stocks significantly depressed prices, as the US claims, then withdrawing a similar amount of US upland cotton during the same period certainly would significantly increase prices.   
9. In addition, market experts predict that a 14 million bale US crop in MY 2004 (resulting from 
a potential crop failure) would have a significant impact in MY 2004 on increasing the New York futures price – and the world (and Brazilian) price of cotton. Brazil demonstr ated the interconnected 
nature of world upland cotton market and the dir ect relationship between large US subsidies in 
sustaining US production and in lo wering world and Brazilian prices. 
 
10. Brazil rebuts US arguments that the appreciation of the US dollar does not demonstrate any 
causal link between US subsidies and increased US world market share and suppressed prices.  Using 
data from Exhibit US-69, Brazil demonstrates that  there has been a dramatic increase in the 
appreciation of the US dollar against a cotton-trad e weighted basket of currencies of other world 
cotton producers by 154 per cent between the period 1996-2003.  US exports – instead of falling as 
predicted by USDA economists – almost doubled.   
 11. The impact of the subsidies on international cotton trade is best assessed by analyzing the 
cotton trade-weighted exchange rate for cotton-ex porting countries in general.  This where the 
competition exists and where the impact of exch ange rate movements on the competitiveness of 
countries should be found.  With their currencies de preciating dramatically against the US dollar, US 
competitors should have been able to increase their market share and their exports compared to high-
priced and high-cost US exports of the same commo dity product. But since these competitors do not WT/DS267/R/Add.1 
Page G-4    
 
 have access to subsidies averaging 95 per cent of the value of their production, as a result, these 
competitors saw their exports and world market share reduced.  12. Brazil responds to US arguments that US pr oducers are responsive to changes in futures 
prices at the time of planting.  Brazil demonstrat es that average January -March futures prices declined 
between MY 1998-2002, while  US planted acreage increased.  This is exactly o pposite of what would 
be expected without the effect of US subsidies (that increased significantly during the same period).  
All of the analysis presented by Brazil is consis tent with Congressional testimony by USDA’s Chief 
Economist Keith Collins that there is little supply (i.e., planted acreage) response from US upland 
cotton farmers because of the subsidies they receive. 
 
13. Further, the 72.4 cents target price support le vel available to US upland cotton producers in 
MY 2002 meant that US producers could not expect to  receive higher revenue even if prices increased 
throughout MY 2002.  In fact, US planted acreage  declined in MY 2002 because some US upland 
cotton producers had suffered significant losses even  with US subsidies, as they could not recover 
their cost of production.   
 
14. Brazil responds to US legal arguments seeki ng to impose countervailing duty concepts in 
adverse effects claims by demonstrating that there is  no textual basis in either Article 1 or Part III 
(adverse effects) of the SCM Agreement for th e imposition of “pass-through,” “value of subsidy ”, 
“subsidized product” or “tied-untie d”  methodologies.  Unlike a count ervailing duty investigation, it is 
the cumulative effects of the US subsidies that  are the focus of price suppression and increase in 
world market share claims under Articles 6.3(c ) an d (d) of the SCM Agreement.  The current US 
position is directly contrary to its arguments in  Indonesia – Automobiles, where the United States 
rejected Indonesian efforts to have the Panel ex amine each subsidy of the National Car Programme” 
individually.  
15.  The focus of Articles 5 and 6 of the SCM Agreement is on the effect of the subsidies in 
suppressing prices or increasing world market share.  These cumulative effects of a variety of US subsidies caused price suppression and an increase in  the US world market share between MY 1999-
2002, and will continue to do so through the end of MY 2007.  16. Contrary to the US argument to sustain its serious prejudice claims, Brazil does not have to 
prove “that the ‘prejudice’ caused by the effects of the subsidies were ‘serious’”.  Brazil’s 
interpretation of the chapeau of Article 6.3 of the SCM Agreement does not read “may” to mean 
“shall”.  Rather, the term “may” refers to various situations in which the four enumerated types of 
serious prejudice exist but are not actionable. 
 
17. Brazil highlights the collective effects of the US subsidies by noting that numerous 
econometric studies that Brazil has presented to the Pa nel, all conclude that US subsidies significantly 
increase US production and suppress US and world prices. Moreover, no study has ever found that the US subsidies to upland cotton would not have a significant production and export-enhancing as well 
as a price-suppressing effect.   
18. Furthermore, Brazil rebuts US arguments that Professor Sumner’s results, using the 
November 2002 FAPRI baseline misrepresent the real e ffects. Brazil demonstrates that using the most 
recent January 2003 FAPRI baseline, Professor Sumner’s results also show significant production and export-enhancing and price-suppressing effects.  Br azil further argues that a USDA study and an IMF 
study that the United States claims show that Professo r Sumner’s analysis was inflated are, in fact, 
consistent with Professor Sumner’s findings.  
 WT/DS267/RAdd.1 
Page G-5 
 
 
 19. Therefore, the US assertion that Professor Sumn er’s results are grossly overstated due to the 
use of a baseline projecting artificially low upland cotton prices is false.  Whether the results of the modified or the original model and whether th e November 2002 or the January 2003 baseline are 
used, continue to fully support that the US s ubsidies cause significant price suppression and an 
increase in the US world market share, as well as th at those subsidies caused the United States to have 
more than an equitable share of world export trade. 
  
20. Brazil further demonstrates the causal link be tween US subsidies and price suppression and 
increased exports by showing that the individual effects of the various US subsidies increase US 
production and exports, and result in suppressed prices.  USDA and other economists are unanimous 
in finding that marketing loan payments to upland cotton created significant production- and export-
enhancing and price-suppressing effects during the period of investigation.   The effect of this subsidy 
alone caused serious prejudice to the interests of Brazil in MY 1999-2002.  21. Furthermore, USDA economists also found that crop insurance subsidies for upland cotton 
have far more production-enhancing effects than for other crops.   
 
22. The National Cotton Council and cotton market experts have repeatedly emphasized the 
importance of the Step 2 subsidy in stimulati ng US production and exports.  Brazil has provided 
compelling evidence that the Step 2 subsidies are trade- distorting and have caused increased US 
upland cotton exports and suppressed world prices.  
23. Lastly, Brazil rebuts the United States so-called “literature review” for contract payment 
subsidies by pointing out that none of the studi es addresses the specific situ ation of upland cotton 
during the period of investigation, none focuses on the impact of the restrictions on planting fruits and 
vegetables, none examine the impact of the updatin g of the base acreage and yield in 2002, and none 
focuses on the production effects caused when CCP paym ents are triggered by lower prices, or the 
production effects of more than $1 billion paid to  producers of upland cotton in MY 2002.  Finally, 
the studies do not explain the much higher per acre cotton payments than other base acres or the fact 
that US average upland cotton producers could not have covered their total costs without contract 
payments during MY 2000-2002.    24. Therefore, the evidence submitted to the Pane l demonstrates that the decoupled payments 
have production-enhancing effects.  While these eff ects are smaller than the effects of the marketing 
loan payments, they are an important part of the co llective effects of the US subsidies in creating price 
suppression and increased and inequitable world market share.  
   
25. Brazil demonstrates that crop insurance subsidies are specific within the meaning of Article 2 
of the SCM Agreement.  There are different crop in surance policies that are available for only limited 
products, as well as groups of policies available for certain crops.  Therefore, the US crop insurance 
system is simply not the “one size fits all” progr amme as argued by the United States.  Furthermore, 
Brazil rebuts US arguments concerning the specificity  of crop insurance subsidies by showing that 
there are no crop insurance policies available fo r livestock, with the exception of four pilot 
programmes.  Even these pilot programmes are very limited in terms of recipients, and have only a 
total budget of $20 million, a tiny fraction of the crop insurance subsidies paid for crops.   
 26. Additionally, the US – Softwood Lumber CVD panel report endorsed a finding by USDOC 
that subsidies paid to only a handful of industri es in an economically diverse economy are “limited” 
(and therefore “specific”) within the meaning of Ar ticle 2.1 of the SCM Agreement.  The record 
continues to demonstrate that agricultural produc ts representing approximately 50 per cent of the 
value of US agricultural commodities are not covered by crop insurance subsidies.  This, together 
with the evidence submitted of specific policies and groups of coverage that are provided to only WT/DS267/R/Add.1 
Page G-6    
 
 selected crops such as upland cotton, highlight th e fact that only certain enterprises receive the 
benefits of these subsidies.  
 
27. Regarding Brazil’s Article 6.3(d) claim, the United States is incorrect in claiming that Brazil’s 
claims relate only to MY 2001.  As discussed in S ection 3.9, those claims also include claims for MY 
2002, 2003 and the period from 2004-2007. 
 
28. Furthermore, the United States argues that the term  “world market share” in Article 6.3(d) of 
the SCM Agreement means “world consumption share”.   Contrary to the US arguments, the “world 
market share” does not refer to “all the markets in  the entire ‘world’, including the market of the 
subsidizing Member. Brazil has demonstrated that the ordinary meaning of “world market share” 
refers to the share of a Member in the world export trade.   
 29. This interpretation is further supported by the context of Article 6.3(d), which includes the 
reference to the word “trade” in footnote 17.  Additional context can also be found in the close 
similarity between the concepts used in Article  6.3(d) and Article XVI:3, second sentence (both 
involve primary products, increase in exports, represen tative periods, effects of any subsidy).  Given 
the similarities between these provisions, the use of  the terms “world market share” and “share of 
world export trade” does not state that both prov isions deal with separate situations, as the 
United States argues.  Instead, both terms refer to a share of export transactions in the world market.  
Therefore, the phrase “world market share” me ans the world market share of exports, not 
consumption.   
 
30. In sum, Brazil has demonstrated that the US  subsidies caused serious prejudice and threat 
thereof to the interests of Braz il, because for each marketing year between 2001-2003 the US world 
market share in upland cotton increased over its previous three-year average.  These increases 
followed a consistent trend, within the meani ng of Article 6.3(d) of the SCM Agreement. 
  
31. Brazil rebuts US arguments that GATT Article XVI:3 only applies to export subsidies and, 
thus, has been superseded by Article 3.1(a) of  the SCM Agreement.  GATT Article XVI:3 is an 
actionable subsidy provision that applies to all subs idies having the effect of increasing exports.  The 
phrase “which operates to increase the export” is  quite different from the phrase “subsidy on the 
export”.  Furthermore, the phrase “operates to in crease the export” does not contain any export 
contingency requirement.  Therefore, read in the context of the SCM Agreement and GATT 1994, 
Article XVI:3, second sentence refers  to export-related subsidies, wh ich is a far broader notion than 
subsidies that are “contingent upon export performance”.   32. In sum, GATT Article XVI:3 is not supersed ed by the export subsidy provisions of the 
Agreement of Agriculture and the SCM Agreement.   Instead, it provides obligations concerning any 
form of subsidy, independent of the obligations set forth in Article 3 of the SCM Agreement.  
 33. Brazil also conclusively demonstrates that US upland cotton subsidies violate GATT 
Article XVI:3 by causing the United States to have a more than equitable share of world export trade 
in upland cotton. 
 
34. With respect to Brazil’s threat serious prej udice claims, Brazil argues that the appropriate 
standard for serious prejudice claims is not the “imminent threat” standard argued by the United States, but rather whether the unlimited and mandatory US subsidies create a structural and permanent source of uncertainty in suppressing pri ces, increasing world market share, and securing an 
inequitable share of world trade.   
 WT/DS267/RAdd.1 
Page G-7 
 
 
 35. Brazil has demonstrated that it is appropriate for the Panel to rely on the standard proposed by 
the GATT EC-Sugar Exports  panels to determine whether the mandatory and unlimited US subsidies 
on upland cotton create a permanent source of uncerta inty in the world upland cotton market.  The 
facts of this dispute meet that standard.  The Un ited States has admitted that the US subsidies are both 
mandatory and unlimited.  Given the large US world market share and share of total world 
production, the US subsidies will have the effect of  locking in large amounts of US production, of 
creating an ongoing significant threat of suppressed prices, and of securing an increasing and inequitable US world market share throughout MY 2003-2007.    36. The “imminent threat” sta ndard is not found in the text of Part III of the SCM Agreement, and 
is only applicable to investigations by investig ating authorities in countervailing duty, anti-dumping, 
or safeguard contexts.  It is inconsistent with the remedies provided for in Article 7.8 of the SCM 
Agreement, which are imposed well after the peri od of investigation examined by a Panel.   
 37. Therefore, the collective effects of the ma ndated and unlimited US subsidies in MY 2003-
2007 threaten to maintain a large US upland cotton production, to increase and maintain US exports, 
and to significantly suppress world upland cotton prices during MY 2003-2007, in violation of 
Articles 5(c), 6.3(c), and (d), and GATT Articles XVI:1 and 3.  38. In sum, the mandatory and unlimited US upla nd cotton subsidies cause threat of serious 
prejudice to the interests of Brazil.  They constitut e a structural and permanent source of uncertainty 
in the world upland cotton market, in which the United States enjoys a dominant position.  This 
conclusion is further supported by the trade-distorti ng nature of the US subsidies, their effects in 
causing present serious prejudice in MY 1999-2002.   39. Finally, with respect to export credit guarantees,  Brazil offers the Panel a recounting of its 
evidence and argument in support of its claims ag ainst the CCC export credit guarantee programmes, 
along with footnote citations to all of the places in  its various submissions in which it makes those 
arguments and offers that eviden ce.  Brazil also responds to particular points raised by the 
United States that Brazil has not yet addressed.  The GSM 102, GSM 103 and SCGP export credit guarantee programmes constitute export subsidies that circumvent, or threaten to circumvent, the US 
export subsidy reduction commitment, within the me aning of Articles 10.1 and 8 of the Agreement on 
Agriculture.  They also constitute prohibited export subsidies within the meaning of Articles 3.1(a) 
and 3.2 of the SCM Agreement and item (j) of th e Illustrative List of Export Subsidies.   WT/DS267/R/Add.1 
Page G-8    
 
 ANNEX G-2 
 
 
EXECUTIVE SUMMARY OF THE UNITED STATES 
FURTHER REBUTTAL SUBMISSION 
 
 1. Brazil has failed to establish all of the elem ents necessary to establish its subsidies claims  
 
1. For the Panel to make the findings Braz il requests, Brazil must adduce evidence and 
arguments sufficient for the Panel to identify the produc t(s) that a particular subsidy benefits.  This 
requirement of identification can come up in a variety of ways, but the two most frequently encountered questions are:  Which product(s) benef its from the subsidy? and Should the benefits of a 
subsidy be allocated to future production and sales of the product in question, or should such benefits 
be "expensed" – that is, allocated only to current production and sales during the time period in which the subsidy is received?  Brazil has not provided a basis for a clear and unambiguous explanation on 
its conclusions for each of these points in order for the Panel to fulfil 
its obligations under Article 12.7 of the DSU. 
 
2. With respect to the first question – which produc t(s) benefits from the subsidy? – Annex IV to 
the Subsidies Agreement provides guidance.  A nnex IV provides guidelines for calculating total 
ad valorem  subsidization for purposes of the now-expired Article 6.1(a).  A subsidy not "tied to the 
production or sale of" cotton ("a given product") ca nnot be regarded as subsidizing merely "that 
product";  rather, the subsidy benefits all of the "recipient firm’s sales".  In the Negotiating Group on 
Rules, Brazil has proposed that Members adopt a " guideline" on calculating the amount of the subsidy 
precisely along these lines.  3. Implicit in both paragraphs 2 and 3 of Annex IV is the principle that a subsidy provides a 
benefit with respect to products that the recipient produces.  A corollary of this principle is that a 
subsidy does not provide a benefit with respect to products that the recipient does not produce.  Thus, 
a subsidy provided to a recipient who does not produce upland cotton cannot be said to provide a benefit to upland cotton.  Such a subsidy cannot be regarded as having one of the effects described in 
Article 6.3 insofar as upland cotton is concerned.  
4. The foregoing analysis suggests that, for each  challenged subsidy, Brazil must identify (as 
would the Panel in its report) the product that bene fits.  In the case of product-specific support – that 
is, a payment that is linked to production of a sp ecific product – such as the marketing loan payments 
and Step 2 payments, the issue is not difficult.  In  the case of a payment in which the subsidy is not 
"tied to the production or sale of a given product", the product subsidized by that payment is all the products produced by the recipient.  To determin e the portion of a payment not tied to the production 
or sale of a given product that benefits upland cotto n, the value of the payment must be allocated over 
the "total value of the recipient firm’ s sales".   5. With respect to the second question – how should subsidies be allocated over time? – Annex IV also provides guidance.  Paragraph 7 provid es that:  "Subsidies granted prior to the date of 
entry into force of the WTO Agreement, the benefits of which are allocated to future production , shall 
be included in the overall rate of subsidization" (emp hasis added).  A corollary of this principle – that 
the benefits of certain subsidies should be allocated to  future production –  is that if subsidy benefits 
are not allocated to future production, they must be e xpensed – that is, allocated to production in the 
time period during which the subsidy is received.  Thus , in the context of this dispute, a subsidy the 
benefits of which are expensed to production/sal es in 2001 cannot be said to be causing serious 
prejudice in 2002 because the subsidy has ceased to exist.  The "benefit" – one of the constituent WT/DS267/RAdd.1 
Page G-9 
 
 
 elements of a "subsidy" under Article 1 – was used  up in 2001.  Once the benefit was exhausted, the 
subsidy ceased to exist.  6. The Subsidies Agreement does not expressly iden tify those subsidies "the benefits of which 
are allocated to future production".  However, gui dance is available on this question, and it suggests 
that subsidies that are "non-recurring" should be allocated over time, while subsidies that are 
"recurring" should be expensed to the year of receipt.
1   For example, the Informal Group of Experts 
recommended to the Subsidies Committee that, as  a general proposition, recurring subsidies be 
expensed and non-recurring subsidies be allocated .  The Group also specifically recommended that 
price support payments generally be expensed.  In making these recommendations, the Group follows 
the logic noted above: where there are not reasons to allocate subsidy benefits to future production, 
the subsidy must be expensed, a nd once the benefit was exhausted in  the time period during which the 
subsidy is received, the subsidy ceased to exist.  The analysis presented above and the conclusions 
and recommendations of the Group are not cont roversial.  The domestic countervailing duty 
regulations of various Members, including those of Brazil and the European Communities, reflect this 
very approach.  
 7. Thus, it is appropriate for th e Panel to expense the value of these payments – that is, allocate 
them to production in the time period during which th e subsidy is received.  No payment at issue is 
made for the acquisition of fixed assets.  Rather, th e challenged payments are recurring.  Brazil’s own 
arguments endorse the notion of expensing these paymen ts.  That is, for purposes of its Peace Clause 
arguments, Brazil expenses these payments by allocating the total value of each of these payments to 
the marketing year for which the payment is received.  For purposes of Brazil’s actionable subsidies claims, Brazil adopts the identical approach and expenses these payments to the marketing year for 
which the payment is received .  Thus, despite Brazil’s silence on the issue of expensing recurring 
subsidies, its actions and arguments reveal that it accepts and applies the concep t to the challenged US 
subsidies. 
 8. The United States has explained, and Brazil t acitly accepts, that the payments challenged in 
this dispute are recurring subsidies that 0are expens ed – that is, allocated to production in the time 
period during which the subsidy is received.  It fo llows that a recurring subsidy provided in marketing 
years 1999, 2000, or 2001, respectively, cannot be said to be causing serious prejudice in marketing 
year 2002.  Because the payments in each of tho se prior years was allocated to production in those 
years, no "benefit" exists after each of those years – a benefit could only exist in a subsequent year if 
the payment had been allocated to future production and not expensed.    9. Because the recurring subsidies provided in  each of marketing years 1999, 2000, and 2001 
ceased to exist when the benefit was used up for production in those years, the effect of those 
subsidies cannot be the subject of subsidies claims  in marketing year 2002.  Under Article 5(c) and 
6.3, Brazil must demonstrate what "the effect of the subsidy is".  Similarly, under GATT 1994 
Article XVI:3, Brazil must demonstrate that the Un ited States grants or maintains export subsidies 
"which operate[] to increase the export of any prim ary product," resulting in a more than equitable 
                                                      
1 First, Article 2.2.1.1 of the Agreement on Implementation of Article VI of the General Agreement on 
Tariffs and Trade 1994  ("Anti-Dumping Agreement"), which deals w ith the calculation of cost of production, 
singles out " non-recurring  items of cost which benefit future and/or current  production" (emphasis added).  
Second, the Appellate Body has acknowledged that non-recurring subsidies may be allocated over time.  In US - 
Lead Bar II , the Appellate Body found that it was permissible for an investigating authority in a countervailing 
duty proceeding to rely on a rebuttable presumption "tha t a ‘benefit’ continues to flow from an untied, 
non-recurring  ‘financial contribution’" (emphasis added).  Third, the Report by the Informal Group of Experts 
to the Committee on Subsidies and Countervailing Measures , G/SCM/W/415/Rev.2 (15 May 1998), 
recommends that certain subsidies be ex pensed to the year of receipt and th at the benefits from other subsidies 
be allocated over time. WT/DS267/R/Add.1 
Page G-10    
 
 share of world export trade.  Subsidies that were  expensed and benefited historical production in 
marketing years 1999, 2000, and 2001cannot also benefit current production.  Thus, these past 
payments would not form part of Brazil’s subsidies claims nor the Panel’s analysis.  Serious prejudice 
has to be based on findings for the 2002 marketing year.  2. Brazil's legal interpretive errors also de monstrate that it has failed to make a 
prima facie case on its subsidies claims 
 
10. As complainant Brazil must identify properl y the measures within the Panel’s terms of 
reference – that is, "subsidies provided to US produ cers, users and/or exporters of upland cotton" in 
respect of upland cotton, the subsidized product.  The challenged measures are subsidies, or 
payments, and in order to assess their effect, one needs to know, inter alia , how large the subsidy is.  
Brazil has not properly identified th e size of each challenged subsidy.
2  
 
11. Brazil Misinterprets Article 6.3(c) on Price Suppression or Depression .  Brazil has not 
alleged any facts to establish that US and Brazilia n cotton are found "in the same market" pursuant to 
Article 6.3(c) – that is, in each of the markets id entified by Brazil (at various times, the United States, 
Brazil, Argentina, Bolivia, India, Indonesia, Ital y, Paraguay, Philippines, and Portugal).  Brazil has 
not identified the extent of subsidization of the US  cotton in each market (the subsidized volume) –  
that is, which exports benefit from which cha llenged subsidy.  Brazil has also not shown a 
price-suppressing effect by those US imports in each ma rket.  Brazil simply asserts that prices in those 
markets are correlated to the NY futures and A-index prices.  This allegation of a generalized price 
effect cannot satisfy Brazil’s burden of showing a price effect by the subsidized product of a like 
product of another Member "in the same market".    12. Brazilian price quotes in fact consistently u ndercut US price quotes for delivery CIF Northern 
Europe.  It is also the case that in most of the ma rkets identified by Brazil (A rgentina, Bolivia, India, 
Indonesia, Italy, Paraguay, Philippines, and Portuga l), Brazilian prices have been consistently lower 
than US prices.  Thus, rather than US upland cotton suppressing Brazilian prices, the data suggests 
that it is Brazilian cotton that is undercutting US prices.   13. Article 6.3(c) does not establish that serious prejudice may arise if the effect of the subsidy is 
any price suppression or depression.  Indeed, were th e term "significant" omitted from Article 6.3(c), 
it would be the case that any production subsidy that  was granted on a per-unit basis could be deemed 
to result in serious prejudice:  any increase in production resulting from the subsidy would 
theoretically lead to some price effect.  The use of the term "significant" prevents such theoretical or 
minor effects from rising to the level of serious prejudice. 
 
14. Because "significant" modifies "price suppression" or "depression", it is the level of price suppression or depression itself that must be significant.  One way of examining whether any alleged price suppression is significant would be to examine th at degree or level in light of the price of the 
product itself.  Another analytical tool that suggest s itself is to look at the nature of the product’s 
price.  Strong or frequent fluctuations in price w ould themselves tend to cut against a finding that any 
alleged suppression or depression is "significant", esp ecially if the variability frequently brings the 
                                                      
2 For example, Brazil includes payments made to recipients that do not produce upland cotton and fails 
to allocate non-product-specific payments across the total value of the recipient firm’s sales.  Brazil has not 
reduced the value of decoupled inco me support payments to  account for the capture by landowners of those 
payments made to farms on which cotton cropland is rent ed (65 per cent of total cotton cropland).  Further, 
Brazil has Brazil has not identified the value of th e cotton export credit guara ntees under the GSM-102 
programme, conceding that it "is not in a position to quan tify the benefit to the recipients that has arisen from 
the application of the GSM 102 export credit guarantee programme to exports of US upland cotton between MY 
1999-2002". WT/DS267/RAdd.1 
Page G-11 
 
 
 price of the product to a level at which the alle ged suppression or depression (judged in light of that 
price) would not be significant.  The United States notes that the price of upland cotton is highly variable, with frequent swings of  substantial degree.  Thus, this evidence relating to the price 
variability of upland cotton must be taken into ac count in any analysis of whether alleged price 
suppression or depression is "significant". 
 
15. Brazil Misinterprets Article 6.3(d) on an Increase in World Market Share .  Brazil 
misinterprets the phrase "world market share" in Artic le 6.3(d) as the share of world export trade.  The 
plain meaning of the phrase "world market share" is not limited to export trade in products but includes all worldwide consumption –  that is, the aggregate of all markets that make up the world.  
The United States is a "market" for upland cotton and part of the "world";  therefore, its domestic 
consumption forms part of the "world market" for upland cotton.    16. Context supports this reading of "world market  share".  For example, Article 6.3(a) identifies 
the "market of the subsidizing Member" as a rele vant market from which a complaining Member’s 
exports can be displaced or impeded.  Logically, then, the market of the subsidizing Member should 
also be relevant for determining the "world market  share".  Various provisions also provide context 
for not reading "world market share" as relating to "world export trade".
3  Given repeated examples of 
the use of the terms "trade," "world trade," and "w orld export trade" in the covered agreements, the 
choice of the phrase "world market share" must be given meaning in accordance with the plain 
meaning of those terms.  
 17. The challenged US payments were only introdu ced in marketing year 2002; therefore, there 
can be no "trend" in US world market share with respect to those payments.  Nonetheless, were the 
Panel to examine US world market share using data under the 1996 Act (consumption data, not the 
export data presented by Brazil), the criteria of Article 6.3(d) are not met.
4  
 18. Brazil Has Not Demonstrated a Clear and Imminent Likelihood of Future Serious 
Prejudice .  Although Brazil has presented evidence afte r the date of panel establishment (indeed, 
after conclusion of its three-year period of inv estigation), it advises the Panel to consider more 
probative, for purposes of explaining price developm ents in marketing year 2003, the conditions in 
marketing year 1999  than the actual price developments in marketing year 2003 .  Brazil’s approach 
carries with it a high potential for erroneous findings by the Panel.  Given current high market prices 
and the expectations embodied in futures prices that  such high prices will remain through the course 
of the 2003 marketing year, it would appear that US price-related payments (m arketing loan payments 
and counter-cyclical payments) will decline dramati cally, contrary to Brazil’s assertions.  In such a 
circumstance, it is difficult to see how challenge d US payments would pose a clearly foreseen and 
imminent likelihood of future serious prejudice. 
 
                                                      
3 First, footnote 17 to Article 6.3(d) provides an exception to the provision where "[o]ther multilaterally 
agreed specific rules apply to the trade in the product or  commodity in question".  This exception applies only to 
"trade" because "multilaterally agreed specific rules" would be unlikely to apply exclusively to domestic 
consumption; however, the use of the world "trade" in the footnote  to Article 6.3(d) but not in the text of the 
Article itself suggests that "world market share" does not merely encompass shares in world "trade".  Second, 
Article 27.6 speaks of a developing country Member reac hing export competitiveness when its "share . . . in 
world trade of that product" reaches a certain level.  This  use of "world trade" stands in contrast to the phrase 
"world market share" in Article 6.3(d).  Third, GATT 199 4 Article XVI:3 uses the phra se "world export trade", 
which also stands in contrast to the phrase "world market share". 
4 While US share of world consumption in MY2002 was projected to be higher than the preceding 
three-year average, that increase has not followed "a consistent trend over a period when subsidies have been granted" – in this case, for purposes of argument, since the 1996 Act came into effect.   Reversing direction 
every year since marketing year 1996 ca nnot constitute "a consistent trend". WT/DS267/R/Add.1 
Page G-12    
 
 19. Brazil Has Misinterpreted GATT 1994 Article XVI:3 .  Contrary to Brazil’s arguments in 
this dispute, Brazil has previously agreed  in a GATT plurilateral setting that GATT 1994 
Article XVI:3 is limited in scope  to export subsidies.  Both the United States and Brazil were 
signatories to the Tokyo Round Agreement on Interpretation and Application of Articles VI, XVI, and 
XXIII of the General Agreement on Tariffs and Trade , commonly known as the Subsidies Code.  
Article 10 of the Subsidies Code is  entitled "Export subsidies on certain primary products" and states 
(in paragraph 1): " In accordance with the provisions of Article XVI:3  of the General Agreement, 
signatories agree not to grant directly or indirectly any export subsidy on certain primary products  in 
a manner which results in the signatory granting such  subsidy having more than an equitable share of 
world export trade in such product . . . ."  Thus, Article 10.1 of the Subsidies Code makes clear the 
understanding of both the United States and Braz il that GATT 1994 Article XVI:3 applies only to 
"export subsid[ies] on certain primary products ".  Therefore, Brazil has not made a prima facie  case 
under Article XVI:3 on the basis of its arguments relating to all challenged US payments. 
 20. Brazil Errs in Asserting that Threat of Serious Prejudice Includes "More than an 
Equitable Share" under GATT 1994 Article XVI:3 .  There is no textual basis to assert that a claim 
of "threat of serious prejudice" under GATT 1994 Ar ticle XVI:1 may be founded on the "more than 
equitable share" language of GATT 1994 Ar ticle XVI:3.  Neither Brazil nor the EC – Sugar Exports  
GATT panel report on which it relies cites any and th at panel report does not appear to explain the 
basis for its decision to read the standard of Artic le XVI:3 into Article XVI:1.  By way of contrast, 
footnote 13 to Article 5(c) of the Subsidies Agreemen t states that "[t]he term serious prejudice to the 
interests of another Member" is used in this Agreem ent in the same sense as it is used in paragraph 1 
of Article XVI:1 of GATT 1994, and includes threat  of serious prejudice".  This footnote does not 
reference Article XVI:3, and as there is no "more th an equitable share" prong to Article 6.3, there 
would not appear to be any basis to advance a thr eat of serious prejudice claim using that standard 
under Article 5(c) of the Subsidies Agreement.  Footnote 13 states that "serious prejudice" in the 
Subsidies Agreement and GATT 1994 Ar ticle XVI:1 should be read "in the same sense".  Therefore, 
footnote 13 provides a further textual basis for finding that a threat of serious prejudice claim under GATT 1994 Article XVI:1 may not be based on th e "more than equitable share" language of 
Article XVI:3.   
3. Brazil has failed to demonstrate the cha llenged US subsidies caused the effects 
complained of 
 
21. The "Temporal Proximity" of US Payments and Low Cotton Prices Fails to 
Demonstrate that US Subsidies Caused Low Prices .  Brazil has failed to make a prima facie  case 
based on the assertion that large US outlays during marketing years with low prevailing upland cotton 
prices necessarily establishes causation.  Brazil makes selective use of data to present a number of 
erroneous claims about US producti on or exports during a period of lo w and declining cotton prices.  
Brazil repeatedly begins the period of comparison w ith marketing year 1998 or ends it with marketing 
year 2001.  Such comparisons are inappropriate  for several reasons and can produce misleading 
results.
5  The fact that high US payments were made when cotton prices were low does not establish 
causation. 
                                                      
5 First, to use either marketing years 1998 or 2001 as one end of a period for comparison contradicts 
Brazil’s own argument that the "period of investiga tion" should be marketing years 1999-2002.  Second, 
marketing year 1998 was a year in which US harves ted acreage and production were severely impacted by 
weather conditions, in particular, drough t.  The record shows record abandon ment during that year (that is, the 
difference between planted acres and harvested acres).  Thus, to begin a comparison of harvested acreage or 
production with marketing year 1998 will overstate any resulting increase.  Third, marketing year 2001 was a 
year in which US produ ction increased, primar ily because of record yields (a s Brazil has acknowledged).  That 
is, while planted acreage increased over marketing year 20 00 in large part due to the decline in expected returns 
from competing crops, production increased by a much greater percentage  because of uncom monly favourable WT/DS267/RAdd.1 
Page G-13 
 
 
  
22. Brazil Erroneously Alleges Production Effect s from Decoupled Payments, Contrary to 
the Economic Literature .  A fundamental error made by Brazil throughout its submissions and 
statements is to assert that decoupled payments are production-distorting.  Brazil’s conclusion that 
decoupled payments have had a large effect on cotto n prices appears to be a direct consequence of 
Dr. Sumner’s faulty analysis – one that is inconsis tent with the empirical and theoretical literature on 
such payments.  Economic theory suggests that, if  producers are seeking to maximize profits, the 
decision of which crop to plant is based on expect ed returns offered by the market or government 
payments above operating (variable) costs.  Decoupl ed income support payments do not figure in this 
decision because such payments will be paid to the producer regardless of the programme crop that is 
planted or whether any crop is planted at all.6   
 
23. The main impact of decoupled payments is  likely on land values.  In well-functioning 
markets, asset prices reflect expectations about the future returns from their ownership.  The direct 
link between base acres for decoupled payments and the known programme benefits allowed the 
future stream of payments to be efficiently capitali zed into land values.  Thus, much of the increase in 
wealth from farm payments accrues to non-operator landlords (Burfisher a nd Hopkins, 2003).  Thus, 
the effects of increased wealth la rgely accrue to non-operators, an d any theoretical production effects 
are further minimized.  In fact, land values set by sales and rental markets have diverged from commodity prices, suggesting that land markets have  additionally capitalized the present and expected 
future value of government payments. 
 
24. Data also indicate that decoupled payments , by increasing income and wealth, have allowed 
households to increase their leisure and reduce thei r work hours.  If the downturn in labour comes 
from agricultural activities, the effect  of such payments could be to decrease  the household’s 
agricultural production, which would support world commodity prices.  Data indicate that farm 
households that received decoupled payments in 2001 consumed more than farm households with 
similar incomes not participating in the progra mme.  Thus, these data suggest that decoupled 
payments allow recipients to consume more out of  income and may allow them to draw down savings 
that they typically carry as a precau tion against income shortfalls.  
 25. Empirical studies have generally concluded that the effects of decoupled payments are 
minimal.  For example, using an intertemporal Co mputable General Equilibrium model, Burfisher et 
al. (2003) estimate that production flexibility cont ract payments had "no effects on agricultural 
production in either the short run or  the long run".  These and other results are fully consistent with 
the fundamental requirement of Annex 2 of the Agreement on Agriculture that green box decoupled 
income support have no or at most minimal trade or production effects. 
 
26. The available data also show large shifts in  cotton acreage.  Based on a preliminary review of 
a sampling of marketing year 2002 acreage reports, th e United States estimates that nearly half (47 per 
cent) of farms receiving direct and counter-cycli cal payments in 2002 for upland cotton base acreage 
in fact planted no cotton at all.  Preliminary estim ates from the Farm Services Agency indicates that 
cotton producers enrolled upwards of 2 million acres for the 2002 Direct and Counter-Cyclical 
Programme that had not been enrolled under the 2002 Production Flexibility Contract programme.  
Marketing year 1999 planted acreage deviated substa ntially from base acreage, both by region and by 
                                                                                                                                                                     
weather conditions.  Thus, to end any comparison of pr oduction with marketing year 2001 will overstate any 
resulting increase. 
6 Brazil has alleged that increased income can induc e producers to take riskier choices, thus potentially 
increasing production and distorting markets.  The economic  literature suggests any su ch effects are empirically 
trivial.  Recipients of decoupled payments use many market mechanisms to reduce their risk exposure in their farm operation.  These strategies to manage risk reduce the extent to which changes in risk attitude due to 
decoupled payments, if any, will be evidenced in  their production levels or demand for inputs. WT/DS267/R/Add.1 
Page G-14    
 
 State.
7  Thus, the data indicate that recipients of " upland cotton base acreage" decoupled payments 
plant alternative crops or no crops at all, and other farmers who do not hold upland cotton base acres 
choose to produce upland cotton.   27. Third-Party Economic Studies Have No t Properly Modeled Cotton Production 
Decisions and Therefore Cannot Assist in Determining the Effect of US Subsidies on Cotton 
Production .  Brazil has pointed to various third-party economic studies which find price effects from 
US payments.  Upon review, the United States conc ludes that they do not present relevant results 
because they generally suffer from two conceptual flaws.  These fundamental flaws establish that 
these papers do not provide a basis to find a causa l link between US payments and the effects of 
which Brazil complains. 
 28. First, several of these studies do not mode l the marketing loan programme appropriately.
8  
Simply put, if Dr. Sumner and FAPRI’s understanding of producer decisions is correct, then Brazil 
would have to agree that these pa pers do not prope rly model farmers’ pro duction decisions and any 
potential impact of marketing loans on those deci sions.  As a result, th ese models do not provide 
insight into the question this Pa nel has been asked to examine. 
 29. Second, most of these studies do not distingui sh between payments linked to production and 
payments decoupled from any requirement to produ ce, instead treating them as having equal impacts 
on production.  Again, Brazil’s own expe rt recognizes that decoupled payments do not have the same 
impact as, for example, product-specific market ing loan payments.  Thus, Dr. Sumner’s own 
modelling of the impact of decoupled payments (with  which the United States disagrees as contrary to 
the economic literature in ascribing any impact on production to these payments) indicates that these 
papers treat decoupled pa yments inappropriately.  
 
30. Brazil’s "Total Costs of Production / Re venue  Gap" is Meaningless and Cannot 
Establish Causation .  Brazil’s so-called "gap" between the average total cost of production per 
pound of cotton for US cotton producers and the reve nue such producers received from the market is 
an economically meaningless measure and is based on a simplistic calculation that misstates both the revenue and cost sides of the calculation.  Braz il’s revenue calculation is based on an erroneous 
representation of government support, especially cr op insurance, decoupled payments, and Step 2 
payments, and of market revenue.
9  More fundamentally, the existen ce of a "gap" does not establish 
                                                      
7 Comparing marketing year 1999 planted acreage to base acreage, th e ratio of planted to enrolled 
acreage, by region, in 1999 ranged from only 51% in the West to 141.25% in the Southeast.  In the Southeastern 
United States (Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia), for example, upland cotton planted acreage  exceeded  base acreage by over 1 million acres .  In each of the other three regions, 
planted acreage was between 879,000 and 1 million acres less than  base acreage.  The variations by State are 
even more extreme. 
8 (a) Specifically, several of these papers simply remove the full outlay of the marketing loan 
program.  This implies that farmers at the time of plantin g knew what actual prices would be at harvest time.  
Brazil’s own expert recognizes that it is producers’ expectations of harvest season prices that drive planting decisions.  Thus, using the full outlays will overstate the influence of the marketing loan programme on the 
planting/production decision when actual prices turn out to be below the expected prices at the time of the 
planting/production decision. 
9 In three different submissions, Brazil presents three different per pound revenue figures derived from 
market revenue and US support progra mmes, and purports to represent this  figure as averag e revenue received 
by upland cotton farmers in that year for every pound of cotton produced.  This combined per pound figure in no way represents what a cotton farmer would have received  – or even could have expected to receive – in the 
specific year in the way of government support.  In addition, Brazil’s measure of revenue for upland cotton 
producers – revenue from sales of cotton lint and cottonseed – is incomplete.  Revenue from all sources – commodity sales, contracts in futures markets, off-farm employment, investment income – are needed to put the 
costs into perspective. WT/DS267/RAdd.1 
Page G-15 
 
 
 that US production would necessarily decline wit hout the US payments Brazil has decided to 
challenge.  For example, Brazil concedes that a s ubstantial amount of US upland cotton in recent 
years was grown on non-upland cotton base acreage, at  the same time that government payments were 
allegedly "necessary" for US producers to remain in  business.  Brazil fails to explain how it accounts 
for these inconvenient facts that do not support its cost-revenue gap theory.   
 
31. On the cost side, Brazil’s use of average to tal cost of production for US cotton to make its 
revenue gap argument is the wrong figure to measure co sts – it is operating costs, not total costs, that 
figure in production decisions.  Brazil also has made no effort to update cost data that is based on a 
1997 survey and so does not take into account any technological or structural changes that have 
occurred in the interim.  Since 1997, significant technological changes have occurred in US cotton 
production, changes which are not reflected in the estimated costs of production, such as increased 
production in low-cost regions and the introduction a nd adoption of genetically modified varieties of 
cotton with significantly increased yields  while reducing pest control costs. 
 
32. Finally, Brazil has used data from the In ternational Cotton Advisory Committee (ICAC) to 
compare costs of production across countries arguing that the United States is a higher-cost producer than many other countries.  Even when good survey data are available for one country, using cost of 
production data to draw valid econom ic conclusions is fraught with difficulties.  The comparison of 
costs across countries poses greater difficulties, rende ring such comparisons invalid.  The ICAC itself 
notes that the cost data it presents is not appr opriate for making these kinds of cross-country 
comparisons.  
 33. Brazil Has Failed to Make A Proper Analys is of Conditions Actually Faced by 
Producers in Making Production Decisions Using Futures Prices, Which Reveals No Expected 
Impact from Marketing Loans Except for MY2002 .  An analysis of the effect of marketing loan 
payments must begin with an understanding of farm ers’ planting decisions.  The United States agrees 
with Mr. MacDonald, Brazil’s expert on cotton market s, that the New York futures price provides the 
principal indicator of how market participants expect cotton prices to develop in the future.  
Unfortunately, Brazil’s other expert, Dr. Sumner , has ignored Mr. MacDonald’s testimony in 
modelling producers’ expectations of harvest season ma rket prices by using "lagged prices" instead of 
futures prices.  Had Dr. Sumner conferred with Mr . MacDonald, Dr. Sumner would have learned that 
"[t]he ‘ New York futures price’ is a key mechanism used by cotton growers . . .  in determining the 
current market values as well as the contract prices for forward deliveries ." 
 34. Comparing the planting-time (February) New York futures price for the following harvest 
season (December delivery) to the marketing loan rate for upland cotton for each marketing year 
reveals that in every year but marketing year 2002, the planting time futures price was above the 
marketing loan rate .  That is, New York futures prices indicat ed to producers that in every year but 
marketing year 2002 the return from the market would exceed  the marketing loan rate.  Thus, the 
marketing loan programme in marketing years 1999-2 001 would not be expected to have had an effect 
on the decision to plant.  
35. Only in marketing year 1999 does Dr. Sumner’s  "lagged price" approach result in a value for 
producers’ expectations that equals or exceeds the futures price.  In every other marketing year, the 
"lagged price" method significantly understates th e harvest season price expected by producers  and 
thus would distort an analys is of the effect of US subsidies.  In  fact, the use of "lagged prices" would 
lead to the erroneous conclusion that expected pr ices in every year but marketing year 1999 were 
below  the applicable marketing loan rate.  Howeve r, market price expectations actually were above  
the loan rate in every year but marketing year 2002.  Thus, the use of "lagged prices" instead of 
futures prices to gauge producers’ price expectations  at the time of planting in the specific years in 
which Brazil has alleged effects from US subsidies w ould seriously overstate the expected impact of WT/DS267/R/Add.1 
Page G-16    
 
 US marketing loans.  To the extent Brazil relies on Dr. Sumner’s analysis, which uses lagged prices 
rather than futures prices, Brazil’s analysis is fundamentally flawed. 
 36. The futures price data and "lagged price" data above also reveal that, despite declining market 
prices over the course of marketing years 1999-2002, market participants persisted in expecting 
prices to recover.
10  Thus, Brazil’s reliance on actual market year prices to claim that US cotton 
plantings should have been declining ignores the fa ct that harvest season cotton futures prices at the 
time of planting were fairly stable from marketi ng year 1999 through marketing year 2001, even as 
futures for other competing crops fell in value.  
37. In marketing year 2002, harvest season futur es prices at the time of planting had fallen below 
the loan rate.  In this marketing year, there is a least the possibility that producers were planting for 
the loan rate and not for the harvest season expected price.  However, the dec line in US planted cotton 
acreage was within the range of expected values gi ven the decline in the harvest season futures price 
from the previous year.  Had US producers been planting for the 52 cents per pound marketing loan 
rate, one would have expected to see only one-tenth  of the decline in plan ted acreage that actually 
occurred from marketing year 2001 to 2002.  38. Moreover, the per cent decline from marketi ng year 2001 to 2002 in US harvested acreage 
was very similar to (but larger than) the change in harvested acreage in the rest of the world.  Despite 
the theoretical possibility that the marketing loan rate could have had some impact on planting 
decisions in marketing year 2002, the actual decline in US planted and harvested acreage suggests 
that US acreage levels were entirely consistent w ith price expectations and world market conditions.  
Thus, even in marketing year 2002, there is no evid ence on this record that the marketing loan rate 
serves to insulate US producers’ planting decisions from market price movements.  To the contrary, 
the evidence suggests that US producers do respond to  changes in expected prices (for cotton and for 
other competing crops) and are as responsive if not  more so than producers in other countries. 
 
                                                      
10 The marketing year 2000 harves t season futures price at planting time was 61.31 cents per pound, 
suggesting that the market ex pected prices in marketing year 2000 to recover from the previous year’s levels.  
For marketing year 2001, the harvest season futures price at planting time was 58.63 cents per pound (nearly the 
same as futures in marketing years 1999 and 2000), once ag ain indicting that market pa rticipants expected prices 
in marketing year 2001 to recover from their marketing year 2000 levels. It is only in marketing year 2002 that 
persistent lower-than-expected farm pri ces translated into a lower harvest s eason futures price at planting.  For 
marketing year 2002, the February av erage futures price for December deliv ery fell to 42.18 cents per pound.  
However, even in marketing year 2002, market participan ts expected prices to rec over and run higher than the 
"lagged price" of 29.80 cents per pound suggested.  WT/DS267/R/Add.1 
 Page H-1 
 
 
 ANNEX H 
 
 
ORAL STATEMENTS OF  PARTIES AT THE 
SECOND SUBSTANTIVE MEETING 
 
 
Contents Page 
Annex H-1 Executive Summary of the Opening Statement of Brazil H-2 
Annex H-2 Executive Summary of the Closing Statement of Brazil H-7 
Annex H-3 Executive Summary of the Openi ng Statement of the United States H-12 
Annex H-4 Executive Summary of the Closing Statement of the United States H-17 
 WT/DS267/R/Add.1 
Page H-2  
 
 ANNEX H-1  
 
 
EXECUTIVE SUMMARY 
STATEMENT OF BRAZIL AT THE SECOND SUBSTANTIVE 
MEETING OF THE PANE L WITH THE PARTIES 
 
 
The United States Has Invented Threshold Burden s for Serious Prejudice Challenges that Do 
Not Exist in the Text of Articles 5 and 6.3 of the SCM Agreement 
 
1. The United States’ has raised a number of thr eshold burdens that an Article 6.3 complainant 
allegedly must meet to establish a claim which ar e not based in the text of the serious prejudice 
provisions of the SCM Agreement.  
2. First, the United States incorrectly asserts that under Article 6.3, Brazil must show an 
ad valorem  subsidy rate and the amount for each of the challenged US subsidies.  The only textual 
basis the United States provides is Annex IV of th e SCM Agreement, which has expired with the text 
of Article 6.1(a) that contained the now-expire d presumption of serious prejudice from a 5 per cent 
ad valorem  subsidization.  The United States further relies on countervailing duty  measure procedures 
and interpretations of Brazil and the EC.  Bu t these allocation methodologies are irrelevant to 
Article 6.3 claims because unlike the expired Article  6.1(a) or Part V of the SCM Agreement, the 
focus of Articles 5(c) and 6.3 is on an examination of the effects  of subsidies that are provided either 
directly or indirectly to producers of a product, such  as cotton.  In any event,  Brazil has demonstrated 
a collective subsidization rate averaging 95 per cen t and subsidies in the amount of $12.9 billion.  
 
3. Second, the United States makes the sweeping argument that there is a legal prohibition on 
bringing adverse effects claims against subsidies th at it alleges cannot be “expensed” or allocated to 
future years.  The United States argues that all s ubsidies to cotton are “recurring” and therefore, as a 
matter of law, “cannot be said to be causing serious  prejudice” except in the year in which they are 
provided.   In fact, there is no textual basis in Part III or Article 6.3 of the SCM Agreement (or 
Article XVI:3 of GATT 1994) for distinguishing between the adverse effects of “recurring or non-
recurring” subsidies.  Nor is there any basis for “expe nsing” subsidies in one year or another year, as 
is often done in a countervaili ng duty investigation.  Because Article 5 requires Members to prevent 
effects , a breach of Article 5 does not necessarily ari se when a subsidy is granted, but only when 
actionable adverse effects occur.    
4. The US argument is also inconsistent w ith the object and purpose of the SCM Agreement 
which is to protect Members from any subsidy causing serious prejudice.  Under the US 
interpretation, a Member can permanently avoid an y liability under Article 6.3 simply by carefully 
constructing the form of the payment as a recu rring annual subsidy.  Brazil has also presented 
evidence of continuing effects from subsidies provided in MY 1999-2002.   
 
Brazil Has Established the Existence of Price Suppression in the US, World, Brazilian, and 
Other Markets Where Brazilian Producers Export  
 
5. The United States now asserts that even thoug h there may be evidence that New York futures 
market and A-Index prices as well as prices in ot her countries are suppressed by a “generalized 
effect,” the “in the same market” language in Article 6.3(c) requires that US exports be present in the 
same geographical markets in which Brazilian cotton is present.    WT/DS267/R/Add.1 
 Page H-3 
 
 
 6. Brazil has established, consiste nt with the requirements of Article 6.3(c), that the effects of 
the US subsidies were to suppress prices in the “s ame market” in which Brazilian producers marketed 
their “like” cotton – i.e., in the worl d’s, Brazil and in third countries.  First, Brazil demonstrated the 
impact of US overproduction on the US and the “world market” prices (A-Index and New York 
futures market prices).  Brazil then demonstrated  that prices in Brazil and the countries to which 
Brazilian exporters shipped their cotton betw een MY 1999-2002 were suppressed and heavily 
influenced by US subsidies.  The effects of tho se subsidies are communicated world-wide via a global 
price discovery mechanism.  The pa rties agree that US, Br azilian and other countries’ cotton are “like 
products”.  Throughout the world, prices for this fungible, price-sensitive commodity are determined by reference to the New York futures market and A-Index prices.  Thus, Brazil established that the 
effect of the US subsidies is significant price suppression in the United States and Brazil, and in 
countries to which Brazilian producers exported their cotton.  Further, the evidence shows that US 
subsidized cotton was present and contributed to th e suppression of prices in 37 of the countries in 
which Brazilian producers marketed their cotton.  Brazil Has Established the Causal Link between the US Subsidies and Significant Price Suppression, Increased US World Market Shares, and the Inequitable US Share of World 
Trade 
 
7. Brazil has properly analyzed both US re venues and costs using USDA’s own data and 
conclusively demonstrated that the US industry producing cotton is heavily dependent on all US 
subsidies to cover total costs over the short a nd long run.  This finding provides a key economic 
rationale for the large production-enhancing effect s from the US cotton subsidies found by USDA, as 
well as by US and international economists.    8. Over the long term, even the United States ag rees that producers must recover all of their 
costs and make a profit to stay in business.  USDA’s own cost and planted acreage data shows that US 
producers’ long-term costs from MY  1997-2002 were $12.5 billion greater than their market revenue 
received.  The United States argues that off-farm income should have been included in Brazil’s 
revenue calculations.  This US approach is con ceptually as well as legally wrong.  The relevant 
question is whether the “US cotton industry” is profitable from market revenue, not whether this 
industry is kept alive by cross-financing from ot her (non-subsidy) sources, such as social security 
payments.  
 9. US cotton producers would have suffered a cu mulative loss of $332.79 per acre of cotton 
during MY 1997-2002 if they did not receive cont ract payments.  But USDA’s own data in the 
Environmental Working Group database demonstrates that almost all US producers of cotton did 
receive contract payments.  And as a result, they made cumulative 6-year “profit” of $106 per acre by 
MY 2002, allowing them to plant significant acreage to cotton in MY 2002 and 2003.   10. Finally, the United States criticizes Brazil’ s comparison of costs of production among various 
countries.  While Brazil agrees that the ICAC “dat a must be used carefully”, the problems with 
ICAC’s data do not render them unusable.  Comp aring ICAC “Variable Cash Costs” – which the 
United States does not challenge – demonstrates that it is much cheaper to produce a kilogram of 
cotton in Brazil than the United States.    11. The United States has argued that “in no year from marketing year 1999-2001 would the marketing loan rate be expected to have much of  an impact, if any, on producer planting decisions,” 
and that it did not affect producer decisions in  MY 2002.  This new US argument contradicts 
numerous USDA studies. In assessing the credibility of  the new US argument that marketing loans 
provided no production incentives, the Panel should consider that USDA’s own economists Westcott 
and Price found considerable effects of the marke ting loan programme on US cotton production.  The 
results of the Westcott and Price study are ne ither unique nor unexpected.  Numerous other WT/DS267/R/Add.1 
Page H-4  
 
 economists have found similar results .  Looking at futures prices also reveals that US producers are 
unresponsive to price changes at planting time.  12. Moreover, the basic US assumption is that if the futures  price (minus five cents) is above the 
marketing loan rate of 52 cents  per pound, then “economic logic” de mands that the marketing loan 
can have no impact on planting decisions.   
 13. The United States’ analysis of the marke ting loan programme is based on a completely 
irrelevant comparison between the “expected cash  price” and the marketing loan rate.  Cotton 
marketing loan payments are based on the difference be tween the loan rate (52 cents) and the adjusted 
world price (“AWP”) not the price received by US fa rmers.  The AWP is typically far lower than the 
price received by U.S. farmers.  The average spre ad between the December contract futures price 
during the period January-March and the adjusted world price of the following marketing year was 18.5 cents per pound.  Thus, even using the US “futures price” methodology at planting time, for 
every year between MY 1999-2002, there was the expectation at planting time that significant 
marketing loan payments would be made.    
 14. Even if the expected AWP is above the loan rate, this does not mean that farmers expect a 
zero marketing loan payment.  If the expected AWP lies above the loan rate, farmers would still 
expect, with a certain likelihood, that the actual AWP could be below the loan rate because the 
expectations about the AWP is a probability distri bution.  Thus, they would still expect a positive 
marketing loan payment. 
   15. Brazil emphasizes that the US futures pr ice approach suffers from several significant 
shortcomings.  Both farmers’ decisions about plan ting and marketing of cotton are more complex.  
Planting decisions take place between January-March and the marketing of cotton takes place during 
the whole marketing year.  Thus, just the February quote of the December futures contract does not 
properly address the complexity of farmers decisions.  16. The evidence is that the US cotton industry is sceptical of relying too heavily on present 
futures market prices as an accurate guide to future prices.  Farmers have seen such volatility in the 
past as well as today.  Therefore, any cotton farmer planting in the MY 1996-2002 period who 
actually relied on futures prices would know that th e futures market is far from constituting a perfect 
predictor of future prices.  Thus, as Professor Sumner  correctly stated, “it is impossible to know what 
precisely individual farmers expect;” price e xpectations are “fundamentally unobservable”. 
 17. The record supports a finding by the Panel th at more than $4 billion in contract payments 
were provided to current  producers of cotton in MY 1999-2002.  Brazil has demonstrated that the 
publications listed in the US review literature we re largely irrelevant because they are not cotton-
specific, as they do not address the re-coupling of  production due to the base acreage updating for 
direct and CCP payments, or the huge target price CCP payments provided to cotton producers.  Brazil has also shown that the US subsidies do not m eet the criteria of paragraph 6 of Annex 2 of the 
Agreement on Agriculture, and are therefore not “decoupled”. 
  
18. The record supports a finding by the Panel that  the “other effects” apart from increased rental 
costs include significant production effects tied to upland cotton.  First, the large majority of current cotton producers receive much higher per-acre paymen ts for cotton than for other programme crops.  
The Panel must ask why much higher per acre dire ct and CCP payments are made to cotton base 
acreage if these payments are totally de-connected fro m current production?  If that were the 
intention, as the United States argues and USDA presume s, then all contract payments in the same 
state or county would provide the same per acre be nefit.  The reason for the higher payments, of 
course, is that cotton is a high-cost crop and that  cotton farmers insisted they were not receiving 
enough payments during MY 1999-2001 “to make ends meet”.   WT/DS267/R/Add.1 
 Page H-5 
 
 
  
19. Second, the United States has now admitted th at two million additional cotton base acres were 
added to the total contract “base” acreage.  This me ans that in MY 2002, an additional $227 million in 
payments were made to farmer s producing cotton during MY 1998-200 1.  This is not “decoupling” 
payments from production, but re-cou pling to reward farmers for increasing their recent production.  
And the prospect of future updates will keep many  farmers planting cotton in order to protect and 
even increase future bases.  Even USDA economists agree that this creates a link to current 
production.    20. Third, the 72.4 cent target pr ice triggers CCP payments when cotton  prices are lower – not 
corn, or soybeans prices – but cotton .  Why is that?  Because the NCC argued and Congress agreed 
that given the high costs of producing cotton in the United States, current  and future  cotton farmers 
will need high payments when prices decline.  Th ere would be no reason to set a “target price” to 
protect against low cotton prices if Congress expect ed that most farmers with upland cotton base 
acreage would start planting apple trees.   
 
21. Fourth, Brazil presented the Panel with information from USDA’s own electronic payment data showing that during MY 2000-2002 at least 71.3  to 76.9 per cent of tota l so-called “de-coupled” 
cotton base acreage payments were paid to producer s of cotton.  The data further shows that, in 
MY 2002, these producers of cotton received 85 per cent of their contract payments from cotton base 
acreage.   
  
The US Subsidies Increase Exports, in Violat ion of Article 6.3(d) of the SCM Agreement 
 
22. Brazil has demonstrated that, in violation of Article 6.3(d) of the SCM Agreement, the effect 
of the US subsidies played a significant role in  the increase of the US world market share in 
MY 2001-2003 over its previous three-year average,  following a consistent trend since MY 1996.   
 23. The US argues that “[u]nder Brazil’s reading,  a Member would be free to provide subsidies 
that increased the share of its own domestic c onsumption that its producers supplied without any 
disciplines under Article 6.3(d)”. But this argument ignores the fact that Arti cle 6.3(a) disciplines 
subsidies that increase domestic production in the market of the subsidizing Member.  Further, 
Article 6.3(b) addresses any export displacement or impedance effects of subsidies in third country 
markets.    24. Second, the United States now argues exp licitly that Article 6.3 has superseded 
Article XVI:3, second sentence.  Assuming arguendo  that the United States is correct, the effect of the 
US interpretation of “world market share” as meani ng “world market share of  consumption” would be 
to eliminate any WTO disciplines on production-enhancing subsidies that increase a Member’s world market share of exports.  As Brazil has pointed out , this would be contrary to the fact that the 
language and scope of both Article XVI:3, second sente nce and the text of Article 6.3(d) are very 
closely related.    
25. Finally, the entire concept of a “world mark et share of consumption” is flawed for the 
purposes of Article 6.3(d) as it results in double co unting.  The United States argues that “the US 
share of the world market for upland cotton should be defined as US consumption plus US exports 
over world consumption”.  However, the ordinary meaning in a trade remedy context of “domestic 
consumption” is total domestic “shipments” (i.e., net use from production or stocks) plus imports 
minus  exports.  Total “world consumption” is the sum of each country’s domestic shipments plus 
imports minus exports.  But the US methodolo gy addresses as “consumption” both imports and 
exports and thus, double counts.  WT/DS267/R/Add.1 
Page H-6  
 
 CCC Export Credit Guarantee Programmes 
 
26. The United States considers that Article 10.2 exempts export credit guarantees from the disciplines included in Article 10.1.  In Article 10.2, the negotiators reached a good faith agreement to 
work toward specific disciplines on export credits .  That need for a good faith commitment to 
negotiate explains the difference between the Draft Final Act and the final version of Article 10.2.  
Given the “magnitude” of those programmes, the United States argues that no Member could possibly 
have intended for its agricultural export credit progra mmes to be subject to Article 10.1.  But, among 
others, the EC and Canada, both massive users of expor t credits, have told the Panel that they consider 
export credits to be subject to Article 10.1 if they  meet the definition of an “export subsidy”.  The 
United States did not think it needed to acc ount for the CCC programmes in its reduction 
commitments, since it did not consid er them to be export subsidies. 
 27. The United States says that it has offered “uncontroverted evidence” that for 12 of 13 
scheduled products, US exports under the CCC e xport credit guarantee programmes did not exceed 
the United States’ reduction commitment levels.  The correct question, however, is whether total US 
exports of a scheduled product exceed the quantit ative reduction commitments, which Brazil has 
demonstrated.  It is for the United States, under Article 10.3, to prove that those excess quantities did not receive export subsidies.    28. Whomever bears the burden, Brazil has dem onstrated that the CCC export credit guarantee 
programmes confer “benefits” per se , and also constitute export subsidies within the meaning of item 
(j).  The United States argues that even if th e CCC programmes constitute export subsidies, because 
“the quantities were within the applicable US export subsidy reduction commitments[,] they would 
conform fully to the provisions of Part V of the Agreement on Agriculture”.  The United States is in 
error. 
 
29. With respect to unscheduled  products, Brazil has establishe d both actual circumvention and 
the threat of circumvention.  Brazil’s Exhibits 73 and 299 and Exhibit US-41lis t the billions of dollars 
of CCC guarantee support that have been provided fo r exports of unscheduled products during fiscal 
years 1992-2003, thereby circumventing the US commitment not to provide export subsidies.  The mere availability of CCC guarantees for unschedul ed products threatens circumvention, since 
Article 10.1 prohibits any export subsidy for such products. 
 30. With respect to s cheduled  products, Brazil has demonstrated actual circumvention for US rice 
exports benefiting from CCC guarantees that have  exceeded the US quantitative export subsidy 
reduction commitment.  In its 18 November submi ssion, the United States argues that because CCC 
has not disbursed the minimum amounts (at least $5.5 billion in guarantees each year, plus an 
additional annual amount of at least $1 billion in di rect credits or guarantees for exports to “emerging 
markets”) there is no threat of circumvention.  Th e United States misunderstands the test set out by 
the Appellate Body in US – FSC.  The lack of a le gal mechanism that stems, or otherwise controls, 
the flow of CCC guarantees threatens circumvention.  There is no limit on the amount of CCC guarantees and CCC’s is exempt from the standa rd requirement of new Congressional budget 
authority for new guarantees.   WT/DS267/R/Add.1 
 Page H-7 
 
 
 ANNEX H-2  
 
 
EXECUTIVE SUMMARY 
CLOSING STATEMENT OF BRAZIL AT THE 
SECOND SUBSTANTIVE ME ETING OF THE PANEL 
WITH THE PARTIES 
 
 
1. The United States enjoys No Peace Clause Protection  
 
1. The record demonstrates that the United  States enjoys no peace clause immunity for its 
upland cotton subsidies.  Under any of three me thodologies – a “budgetary outlay/expenditure”, an 
“aggregate measure of support”, or a “rate of suppor t” methodology – the level of support provided in 
MY 1999-2002 exceeds the level of support deci ded in MY 1992.  The United States has 
acknowledged that all challenged US subsidies, ex cept PFC and direct payments, are non-green box 
(trade and production-distorting) subsidies.  Brazil and all third parties agree that direct payments 
under the 2002 FSRI Act are non-green box because of the updating of a fixed base period contrary to 
Annex 2, paragraphs 6(a) and (b) of the Agreement on Agriculture.  Further, PFC and direct payments 
are non-green box support because of the prohibition on fruits and vegetables contrary to Annex 2, 
paragraph 6(b).  Moreover, payments for cotton base acreage are higher than those for other crop base 
acreage.  The weight of evidence shows that all the challenged US subsidies are “support to” upland 
cotton within the meaning of Article 13(b)(ii) becau se they were received by current producers or by 
users and exporters of US upland cotton.  Braz il’s “14/16ths” methodology for estimating the amount 
of the four contract payments is reasonable a nd supported by the EWG database and considerable 
circumstantial evidence.    
2. Brazil has established the Elements to Suppo rt its Significant Price Suppression Claims 
under Article 6.3(c) 
 2. Upland cotton is a basic, widely-traded comm odity.  Both Brazil and the United States agree 
that Brazilian upland cotton and other upland cott ons are “like” subsidized US upland cotton.  
Because of this widespread interchangeability among world cottons, increases in world cotton supply 
by major cotton-producing countries have a major impact on discovery or establishment of world 
prices reflected in the A-Index and the New York cotton futures exchange.   
 3. The United States has made a great deal about  what it terms some “fundamental” issues about 
the nature and amount of subsidies.  Brazil has de monstrated the absence of any textual basis for 
incorporating various countervailing duty principles from Part V of the SCM Agreement into Part III 
and resurrecting Annex IV from the dead.  However,  Brazil used USDA’s own data to show both the 
amount and rate of subsidization for each of the subsidies.  To make up for US acreage and yield 
information the US has hidden from Brazil and the Panel for 16 months, Brazil has demonstrated 
through the EWG database and other circumstanti al evidence that its “14/16th” methodology is 
reasonable.  This methodology allocates payments only to current producers of upland cotton and does not “double count” payments provided to other producers of crops.  And since the peace clause 
phase of this proceeding, Brazil has demonstrated that  all the US subsidies are “tied” to the production 
of upland cotton and are “support to” upland cotton.     4. The US government has poured $12.9 billion over the past four years into a number of subsidy programmes specifically targ eted at US upland cotton.  No other US commodity has a Step 2 
programme and no other US commodity r eceived subsidies as high as 136 per cent ad valorem .  Even WT/DS267/R/Add.1 
Page H-8  
 
 the so-called decoupled contract payments for “h istorical” cotton base acreage are much higher than 
for any other crop except rice.  The subsidies provide  a specific “target price support” of 72.4 cents 
per pound for upland cotton – no t for other crops.  And Congress insisted that USDA has no 
discretion to limit any of the required payments, all of which are mandatory and place no limit on the amount of upland cotton that could be produced w ith the support of these subsidy programmes.   
 
5. The United States has agreed that all of th e challenged US subsidies are “specific” except 
crop insurance.  But USDA’s own evidence showed th at this programme is also specific since it is 
targeted at the industry growing crops, not livestoc k and thus covers only half of the value of US 
agricultural commodities and 38 per cent of farmland.   
 
6. While Brazil continues to wait for farm-s pecific acreage and yield information from the 
United States, the incomplete Environmental Work ing Group data based on USDA farm-specific data 
show almost $3 billion in contract payments paid to upland cotton producers in MY 2000-2002 alone.  
And the great bulk of the other evidence shows th at US upland cotton farmers are dependent upon, 
need and, in fact, receive such payments to “make ends meet” and “to survive”.   
     7. Having established the fungible nature of the product and the existence and specificity of the 
subsidies, Brazil must link the effects of the subsidies to significant price suppression.  The first important fact is that the United States is by fa r the world’s largest exporte r, with a world market 
share of 41.6 per cent, and the second largest producer of upland cotton in the world, with a 20 per 
cent share.  The US subsidization rate of 95 per cent provided by the second largest producer and 
largest exporter creates the potential of causing serio us prejudice to the interests of other Members, 
including Brazil.  It is useful to recall the size of these subsidies compared to the 5 per cent 
ad valorem  rate establishing a presumption of serious prejudice under Article 6.1(a) and compared to 
the amount, if any, of subsidies received by US competitors. 
 
8. But what was the impact of the large US  subsidies on production and world supplies of 
cotton?  One answer to this question is found in  the difference between market revenue and the US 
producers’ total costs.  While claiming that only va riable costs are important in the short term, the 
United States admits that in the long-term, US producers have to make a profit to stay in business.  Using only USDA’s data for the period MY 1997-2002, the average  US upland cotton producer 
received market revenue that was $872 dollars per acre less  than its total costs.  This means the 
cost/revenue gap for all upland cotton farmer s between MY 1997-2002 was $12.5 billion.   
 9. The United States has attempted to leave you with the impression that its upland cotton producers do not rely or need any subsidies between MY 1997-2002 to make up this $12.5 billion 
gap.  In assessing the credibility of  these claims, consider that during this same 6-year period, US 
cotton producers received $16 billion in US subsidies and ended up with a 6-year “profit” of $127 per 
acre.  The US claims that the PFC, market loss as sistance, direct payment and CCP payments were 
not support to cotton.  But without those 4 paym ents, US cotton producers would have lost $333 per 
acre between MY 1997-2002.  The US further claims that the marketing loan payments in MY 1999-
2002 made no difference to producers’ planting deci sions.  But this argument ignores the impact of 
the subsidies in those producers’ costs.  By MY  2002, the average US producer would have been 
faced with a 3-year loss of $372 per acre if they had not received marketing loan payments during 
MY 1999-2001.  This evidence confirms the conclusi on of the Chief USDA economist that by making 
marketing loan payments “ you don’t get cutbacks in production ”.  Clearly, the marketing loan 
programme kept many producers from reducing their planted acreage between MY 1999-2002.  
 
10. Indeed, US producers planted between 14.2 – 15.5 million acres of upland cotton between 
MY 1999-2002 as prices fell to record lows.  The combined revenue from all the US subsidies and 
market prices allowed producers to earn a long-te rm “profit” of $17.67 per year over the 6-year 
period.  What is most amazing is that after having received record low prices for their cotton in MY  WT/DS267/R/Add.1 
 Page H-9 
 
 
 2001 and with futures prices at the time of planting suggesting market prices would remain at record 
low levels, US producers still planted 14.2 million acres of upland cotton – a similar amount of acreage that was planted when prices were much  higher in MY 1996-1998.  However, even 135 per 
cent ad valorem  subsidies in MY 2001 were not sufficient to provide a profit to the highest-cost and 
lowest-yield US producers.  This explains why US planted acreage declined to 1996-98 levels in 
MY 2002. 
 11. Having established that the US subsidies pr evented production cutbacks, the Panel has to 
estimate how much of a cutback would have been  made without US subsidies.  USDA economists 
Westcott and Price estimate a 20 per cent cutb ack in MY 2001 from only the marketing loan 
programme.  Professor Sumner estimates an average production cutback of 28.7 per cent or a total of 
19.8 million bales between MY 1999-2002 from eliminating all subsidies.   
 12. The Panel then must estimate the effect of these estimated US production cutbacks on world 
prices.  First, Brazil demonstrated the impact of  US overproduction on the US and the “world market” 
prices (A-Index and New York futures market prices).   Brazil then demonstrated that prices in Brazil 
and the countries to which Brazilian exporters shi pped their cotton between MY 1999-2002 were also 
suppressed and heavily influenced by US subsidies.  The effects of those subsidies are communicated 
world-wide via a global price discovery mechanism.  Throughout the world, prices for this fungible, 
price-sensitive commodity are determined by refere nce to the New York futures market and A-Index 
prices.  There is a world market for upland co tton.  Subsidized US cotton and Brazilian cotton 
compete in this world market, i.e., “in the same market”, as used in Article 6.3(c) of the SCM 
Agreement.  Brazil established that the effect of  the US subsidies is significant price suppression in 
that world market.     13. There are numerous studies from a number of economists finding clear and identifiable 
amounts of price suppression ranging from 10-33 per cent for the US price and 10-26 per cent of the 
world A-Index price.  Professor Sumner responded to the US critiques of these studies by showing that they are not biased and correcting for some s hortcomings are consistent with his results.  The 
United States also claims these studies are useless fo r this dispute because they did not use “futures 
prices”, but then admits that USDA and FAPRI m odels also use “lagged prices” because it is not 
possible to use futures prices in models to judg e farmers’ revenue expectations.  Brazil also 
demonstrated that, using the US futures methodology, farmers expected significant revenue from 
marketing loan programmes in MY 1999-2002.    14. Finally, the Panel should judge the “significan ce” of the price suppression by the extent of the 
impact on Brazilian producers.  But even judged in relation to objective levels, any of the price 
suppression estimated in the various econometric studi es is sufficient to establish “significance”.   
 
3. Claims under Article 6.3(d) of the SCM Agreement 
 
15. The facts strongly support Brazil’s claims that US subsidies contributed  to an increased US 
world market share of exports.  USDA’s data show that US expor ts increased in MY 2001, MY 2002, 
and are projected to increase in MY 2003 to leve ls well above the previous 3-year averages as 
required by Article 6.3(d).    16. The US domestic subsidies played a major ro le in the increased US exports by maintaining 
high-cost US production.  Similarly, the Step 2 subsidy was paid in 188 out of 208 weeks and more 
than $1.6 billion worth of US upland cotton exports received GSM 102 export credit guarantee 
financing.  The NCC confirmed that both subsidies played a major role in the significant expansion of 
US exports, in particular against the backgr ound of a rapidly appreciating US dollar.  
Professor Sumner’s analysis estimates that on av erage, US exports would be 41.2 per cent lower 
without any of the US subsidies between MY 199 9-2002.  US world export market share expanded WT/DS267/R/Add.1 
Page H-10  
 
 rapidly from MY 1999 even as prices plunged to reco rd lows.  After reaching 41.6 per cent in MY 
2002, the US market share is projected to rema in very high at 39 per cent in MY 2003.    
 17. The United States response to this evidence is to argue that the term “world market share” 
means “world market share of consumption”.  Bu t USDA, Canada, and the EC agricultural experts, 
among others, use and interpret the phrase as “world ma rket share of exports”.  This is the correct 
meaning as confirmed by the use of the word “trade ” in the footnote qualifying Article 6.3(d), and by 
the close similarity between the scope and text of  Article 6.3(d) and Article XVI:3, second sentence, 
which also deals with world market share of exports .  Further, as we demonstrated yesterday, the US 
“consumption” interpretation is unworkable and illogical because US consumption is total domestic 
“shipments” (i.e. net use from production or stocks) plus imports minus  exports.  To count US exports 
as consumption means double counting other countries’ imports as consumption.   
 
4. Claims under GATT Article XVI:1 and 3 
 18. The facts strongly support a finding that the US  share of world export trade is inequitable.  
While world market prices plunged and the US dolla r appreciated rapidly, the huge US subsidies 
allowed US exporters to purchase a record high share of 41.6 per cent.  At the same time, the share of 
much lower cost and non-subsidized producers declined between MY 1999-2002.  The text of 
Article XVI:3, second sentence, covers any type of s ubsidy that “operates to increase the export” of a 
primary product such as upland cotton.  Contrary to the US arguments, nothing in the text of the WTO 
or GATT 1994 suggests that Article XVI:3, second senten ce, has been superseded by Article 6.3.   
 
5. Claims of Threat of Serious Prejudice 
 
19. Brazil has also established that there is a present threat of serious prejudice during the lifespan 
of the 2002 FSRI Act.  This threat covers the thr eat of significant price suppression, threat of a further 
increased US world market share and the threat that  the United States continues to have a more than 
equitable share of world export trade.  The ma ndatory and unlimited nature of the production and 
trade-distorting US upland cotton subsidies and th e absence of a legal mechanism that stems, or 
otherwise controls, the flow of these subsidies cons titutes the actionable threat of serious prejudice to 
the interests of Brazil.  The timing and nature of actionable subsidy cases, as well as the remedies 
available under the SCM Agreement compel that such  a threat need not be “imminent”, but instead 
“present” to be actionable.  20. Brazil has demonstrated that there is a presen t threat of serious prejudice from the existence 
of the US subsidies.  There is no dispute between  the United States and Brazil that the US marketing 
loan, Step 2, crop insurance and contract payments are mandatory subsidies.  There is no limit on the 
amount of upland cotton that can be produced, used and exported from farmers receiving these 
payments.  Brazil has also demonstrated that all of these subsidies are production and trade-distorting 
and have caused present serious prejudice between MY 1999-2002.  21. The most recent USDA and FAPRI baselines project continued high levels of US planting 
and continued high costs that will not be covered by ma rket revenue.  Therefore, the US subsidies will 
continue to have large production and export-enhancing a nd price-suppressing effects.  In particular, 
until MY 2007, the US subsidies threaten to cause  significant price suppression in the US, world, 
Brazilian and in third-country markets to which Brazil exports its upland cotton.   
 
22. Finally, the US subsidies mandated until th e end of MY 2007 will cause serious prejudice 
under any market conditions.  Thus, the provisions mandating marketing loan, Step 2, crop insurance 
and direct and counter-cyclical payments constitute per se violations of Artic les 5 and 6.3(c) and (d) 
of the SCM Agreement.   WT/DS267/R/Add.1 
 Page H-11 
 
 
 6. Brazil’s Claims regarding Step 2 Export and Domestic Payments under Article 3.1(a) 
and (b) of the SCM Agreement  
 
23. The Step 2 export and Step 2 domestic subsid ies are prohibited subsidies under Article 3.1(a) 
and (b) of the SCM Agreement.  The Step 2 export subsidies violate Article 3.1(b) because they are 
subsidies expressly contingent upon pr oof of export of US upland cott on and are paid only to eligible 
exporters.  The NCC describes the Step 2 programme as “export assistance” and the USDA 
acknowledges it makes U.S. exports of upl and cotton more “competitive”.     
 24. The United States acknowledges that Step 2 dom estic subsidies are local content subsidies 
within the meaning of Article 3.1(b) of the SCM Agr eement.  Local content subsidies to processors of 
agricultural commodities are not expressly exempted  from the disciplines in the SCM Agreement by 
either Agreement on Agriculture or by  the chapeau of Article 3.1.  In  particular, Anne x 3, paragraph 7 
and Article 6.3 of the Agreement on Agriculture do no t create rights and obligations that by necessity 
conflict with Article 3.1(b).  Brazil has demonstrated  the absence of any inherent conflict because it is 
possible to provide domestic support to processors of agricultural products without violating 
Article 3.1(b).  Further, Article 13(b)(ii) is properly read as meaning that even if a local content domestic support measure may conform to Article 6.3 of the Agreement on Agriculture, it is not 
exempted from claims under Article 3 of the SCM Agre ement.  If the drafters had intended to exempt 
agricultural local content subsidies from Article 3 claims, they would have included Article 3 in 
Article 13(b)(ii), the same way that they included Ar ticle 3 of the SCM Agreement in Article 13(c)(ii) 
for purposes of exempted export subs idies for scheduled products.   
 
7. Brazil’s Claims regarding the CCC Export Credit Guarantees 
 
25. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP export credit guarantee 
programmes administered by the CCC constitute export  subsidies within the meaning of Articles 10.1, 
1(e) and 8 of the Agreement on Agriculture, Artic les 1.1 and 3.1(a) of the SCM Agreement, and 
item (j) of the Illustrative List of Export Subsidi es.  Brazil has also demonstrated that those export 
subsidies circumvent, or threaten to circum vent, the United States’ export subsidy reduction 
commitments, in violation of Articles 10.1 and 8 of the Agreement on Agriculture.  Additionally, because they violate the Agreement on Agriculture , these programmes are not exempt from actions by 
Article 13(c)(ii) of the Agreement on Agriculture, and constitute prohibited export subsidies within 
the meaning of item (j) and Articles 1.1, 3.1(a) and 3.2 of the SCM Agreement.  
8. Brazil’s Claims regarding the ETI Act Subsidies  
 26. With respect to the ETI Act, Brazil and th e United States agree that the Panel should follow 
the precedent of the panel in India – Patents (EC) .  Indeed, the United States has effectively admitted 
the inconsistency of the ETI Act by repeatedly str essing to the Panel that it intends to implement the 
rulings and recommendations of the Dispute Settlement Body to bring the ETI Act into conformity with the Articles 10.1 and 8 of the Agreement on Ag riculture and Articles 3.1(a) and 3.2 of the SCM 
Agreement.   WT/DS267/R/Add.1 
Page H-12  
 
 ANNEX H-3  
 
 
EXECUTIVE SUMMARY 
OPENING STATEMENT OF TH E UNITED STATES AT THE 
SECOND MEETING OF THE PANEL WITH THE PARTIES 
 
 
I.   THE EFFECT OF US SUBSIDIES IS NOT SIGNIFICANT PRICE SUPPRESSION 
 1. Brazil’s theory of its case is that subsidi es result in greater production, increased exports, and 
suppressed world prices for upland cotton.  Brazil do es not, because it cannot, refute the fact that US 
producers have increased and decreased acreage commens urately with producers in the rest of the 
world.  Thus, there is no evidence that US pr oducers are insulated from market forces in making 
production decisions. 
 
2. In every year but one in which Brazil has a lleged price suppression, and in marketing year 
2003 in which it alleges a threat of price suppressi on, expected harvest season prices at the time of 
planting have been above  the US marketing loan rate.  In marketing year 2002, the only year in which 
expected harvest season price was below that rate, US harvested acres fell by a slightly larger  
percentage than the rest of the world.  In fact , US planted acres fell by th e amount expected from the 
decline in expected harvest season prices from marketing year 2001 to 2002 and by far more  than 
would have been expected had produ cers been planting for the marketing loan rate.  Therefore, rather 
than supporting Brazil’s argument – that the eff ect of US payments is to make US producers 
unresponsive to market price chang es –  the evidence contradicts it.
1 
 
3. Brazil’s allegation that the effect of US subs idies is price suppression is dispelled by the fact 
that Brazilian cotton undercuts the US price in various third-country markets.2  Aggregated data on 
average US and Brazilian upland cotton prices to various markets identified by Brazil unambiguously 
show that Brazilian cotton undercuts the US price in  these third-country markets.  Thus, these data 
demonstrate that it is not US upland cotton that has suppressed Brazilian upland cotton prices, but Brazilian cotton prices that have undercut US prices. 
 
II. THE EFFECT OF US SUBSIDIES IS NOT AN INCREASE IN WORLD MARKET 
SHARE 
 
4. The facts do not demonstrate any increase in US world market share.  While US world market 
share in marketing year 2002 was projected to be hi gher than the average of the preceding three-year 
period, the 2002 subsidies are different from the subsidies for prior marketing years, and 2002 payments were only introduced with the 2002 Act.  It is the effect of the 2002 subsidies that Brazil 
must demonstrate under Article 6.3(d) of the SC M Agreement establishes an  increase that follows a 
                                                      
1 We also recall that Brazil failed to properly an alyze marketing loan payments through its use of 
"lagged prices" instead of futures prices.  During marketing years 2000-2003, lagged prices significantly 
understate the harvest season prices expected by pr oducers, thereby inflating th e expected effect of the 
marketing loan rate. 
2 Brazil’s evidence under Article 6.3(c) must establis h the volume of subsidized US upland cotton that 
is "in the same market" as Brazilian upland cotton, the extent of subsidization, and the prices of those respective products sufficient to establish its claim of "significant price suppression".  Brazil has not even shown that for 
each foreign market, there have been any US exports of upland cotton.  WT/DS267/R/Add.1 
 Page H-13 
 
 
 "consistent trend."  One year does not make a "consistent trend".  Thus, there can be no "consistent 
trend over a period when subsidies have been granted".3   
 
III.  THE EFFECT OF US SUBSIDIES IS NOT A THREAT OF SERIOUS PREJUDICE 
 5. The facts do not support a finding of threat of  serious prejudice.  We submit that Brazil seeks 
to have the Panel reject the "imminent threat " standard, even though it was Brazil itself that 
previously suggested this standard to the Panel, b ecause market prices have recovered to the point that 
no marketing loan payments have been made since 18 September 2003 , and counter-cyclical 
payments are expected to be well below th eir statutory maximum for marketing year 2003.
4  
 
6. Brazil concedes that "market prices [may] increase to the point where the present effects of the subsidies are minimal".  Given current and e xpected prices for marketing year 2003, even Brazil 
might have to concede that the present effects of US  subsidies could be "minimal".  However, Brazil 
seeks to prevent the Panel from basing its threat of serious prejudice analysis on that same marketing 
year 2003 data.  If Brazil cannot demonstrate an imminent threat of serious prejudice in marketing 
year 2003, logically, neither can it demonstrate a threat of serious prejudice in farther off years, given that (in Brazil’s words) "market[] prices move up and down," and "[n]o Member . . . can predict the 
course of future prices".  
IV. BRAZIL HAS FAILED TO SHOW THE ELEMENTS NECESSARY TO ESTABLISH 
ITS SUBSIDIES CLAIMS 
 
7. Brazil has argued that no concepts or analys is drawn from other parts of the SCM Agreement 
or provisions from other agreements may be app lied to claims under Part III of the Subsidies 
Agreement.  This position is untenable.  The United States is not suggesting some radical 
methodology dreamt up for purposes of this dispute but instead is proposing methods based on 
principles set forth in the SCM Agreement and accepted and applied by other WTO Members, 
including Brazil, for purposes of their countervailing duty practice.  8. Brazil says there is no need for it to quantify the subsidy benefit attributable to the product at 
issue nor the rate of subsidization but does not ex plain how to evaluate the effect of the subsidy 
without identifying the amount or rate of support.  Further, Brazil has repeatedly alleged a subsidy 
amount and subsidization rate for the marketing y ear 1999-2002 period.  Presumably, then, the value 
of the subsidy and the subsidization rate of exporte d US upland cotton would be highly relevant to the 
Panel’s analysis of the effect of the challenged s ubsidies; Brazil’s position would deprive the Panel of 
that crucial element.   
                                                      
3 Even if one were to look to th e period since the 1996  Act when different subsidies were in place, 
there is no consistent trend over a period when those subsidies have been granted.  The facts demonstrate that since marketing year 1996, US world market share has increased and decreas ed in alternating years, and US 
world market share in marketing year 2002 is lower than in marketing years 1996-1997.  These data cannot 
support a finding of a consistent tren d.  Brazil seeks to evade these facts by ignoring the change in subsidies 
over the years and by interpreting "world market share" contrary to the ordinary meaning of those terms. 
4 The effect of such higher market prices is vividly suggested by Brazil’s use of the January 2003 
FAPRI baseline versus the November 2002 preliminary FA PRI baseline in Dr. Sumner’s new model.  We, of 
course, strongly disagree with what we  understand to have been the way in  which Dr. Sumner has most recently 
modeled all of the US payments at issue, but we note that a mere change in baselines that increased the baseline 
A-index price by an average of 4.24 cents per pound  per year over MY 2003-2007 reduced  the estimated impact 
of removal of all US subsidies on A-index prices by nearly one-third .  Price movements since January 2003 
would suggest that Dr. Sumner’s estimated impacts us ing more current data would be smaller still.  For 
example, the January 2003 FAPRI baseline projected a 2003 marketing year A-index price of 58.40 cents per pound while the year-to-date A-index price has been 68.73 cents per pound , an increase of more than 10 cents 
per pound over the January baseline. WT/DS267/R/Add.1 
Page H-14  
 
  
9. Brazil errs in asserting that it need not identify the "subsidized product", ignoring or selectively quoting various provisions – Subsidies Agre ement Articles 6.1(a), 6.3(c), 6.3(d), 6.4, and 
6.5  – that expressly mention the "subsidized product" .  Subsidies to products other than upland cotton 
would not be within the Panel’s term s of reference nor relevant to the Panel’s analysis of the effect of 
the challenged subsidies.  Again, Brazil’s position would deprive the Panel of a crucial element in 
determining, for example, whether and to what extent the US product in the same market as the Brazilian product was a subsidized product.  10. Brazil also errs in arguing that it need not attribute payments not tied to production across the 
recipient’s total value of production.  The methodology  of attributing subsidies not tied to production 
across the value of a recipient ’s production is spel led out in Annex IV to Part III of the Subsidies 
Agreement.  Attributing such non-tied payments acro ss the total value of the recipient’s production is 
necessary to avoid double-counting of the subsidy.   
11. The United States does not see how decoupled pa yments made with respect to non-upland 
cotton base acres would be within the scope of this dispute.  Given Brazil’s own explanation of the 
measures it has challenged
5, it cannot be possible that one set of measures was within the scope of the 
dispute at one point but that Brazil has the sole di scretion to change the scope of that dispute by 
changing its legal position as to what it is  challenging as support to upland cotton. 
 
12. Finally, Brazil says effects of subsidies can linge r, even if allocated to a particular year for 
countervailing duty purposes.  It is clear in Annex IV, paragraph 7, that Members took it for granted 
that some subsidies are allocated to future pr oduction and others are not .  Brazil, however, does 
violence to this principle by essentially asserting that  all subsidies – including so-called "recurring" 
subsidies that most experts and national authoritie s (including its own) would expense to current 
production – should be allocated to future production.  Brazil has now conceded that the subsidies at 
issue in this dispute are "recurring".6  Brazil cannot have it both ways: it cannot expense the entire 
value of a payment to a particular crop year but also claim that the subsidy continues to exist in a later 
year in which new recurring subsidies are made.  
III. BRAZIL’S HAS FAILED TO SHOW THE EFFECT OF THE CHALLENGED 
SUBSIDIES 
 
13. Decoupled Payments .  Brazil has fundamentally erred in  its explanation and modelling of 
decoupled payments by ascribing a production effect  to them that is based on little more than 
conjecture.  This assertion contradicts basic ec onomic theory, the economic literature on such 
payments, and the available data showing large shif ts in cotton acreage as recipients of decoupled 
payments plant alternative crops or no crops at  all and other farmers who do not hold upland cotton 
base acres choose to produce upland cotton.
7  Thus, there is no basis to ascribe production-distorting 
                                                      
5 For example, Brazil has repeatedly argued that the challenged US subsidies provided $12.9 billion in 
support over marketing years 1999-2002; this figure was based on payments made under specific programmes, 
including decoupled income support with respect to upland cotton base acres only.  Brazil also has argued that decoupled payments for upland cotton ba se acres (net of base acres not "planted to cotton") are all support to 
upland cotton irrespective of what is planted on the land now. 
6 See Brazil’s Further Rebuttal Submission, para. 208 n. 344 ("Brazil agrees that the recurring subsidies 
at issue would be allocated to the year in which they  are paid for purposes of a CVD analysis . . . ."). 
7 For example, the marketing year 2002 base acreage  increase means that, on  average over marketing 
years 1998-2001, 2.6 million acres of upland cotton were planted on farms without upland cotton base acreage or in excess of those farms’ upland cotton base acreage, suggesting that Brazil’s theory that upland cotton must 
be planted on upland cotton base acreage is not supported by the facts.  WT/DS267/R/Add.1 
 Page H-15 
 
 
 effects to decoupled payments.  In fact, most empirical studies have concluded that the effects of 
decoupled payments are minimal.8  
 14. Third-Party Papers .   Brazil cannot cite to results fro m papers that employ an approach 
fundamentally at odds with its own.  These thir d-party economic studies do not provide insight into 
the question this Panel has been asked to exam ine because they generally suffer from two crucial 
conceptual flaws.  First, most of the cited st udies do not distinguish between payments linked to 
production of upland cotton and payments decouple d from any requirement to produce, instead 
treating them as having equal production impacts.  Second, most of the third party studies do not 
model the marketing loan programme appropriate ly, simply removing revenue from the producer 
without focusing on the producer’s expected harvest season price at the time of planting.  Thus, Brazil 
would have to agree that these third party pa pers do not properly model farmers’ production 
decisions.  
IV. BRAZIL HAS ADVANCED ERRONEOUS LEGAL STANDARDS UNDER ITS 
CLAIM IN THIS DISPUTE 
 
15. Threat of Serious Prejudice/Article XVI:3 .  Brazil may not advance a claim of threat of 
serious prejudice using the "more than equitable share of world export trade" standard from GATT 
1994 Article XVI:3.  Nothing in the text of GATT 1994 Article XVI indicates that a threat claim under paragraph 1 may utilize the more than equitabl e share standard under paragraph 3.  Neither is 
there any analysis in the EC – Sugar Exports  GATT panel report that provides a textual basis to 
import that standard.  Further, Brazil’s interpre tation would also introduce a contradiction between 
GATT 1994 Article XVI:1 and SCM Ag reement Articles 5 and 6 even though the term "serious 
prejudice" is used "in the same sense" in these provisions.
9  
 
16. Threat of Serious Prejudice and Per Se  Serious Prejudice Standard .  Brazil’s argument is 
that "[c]onsistent with prior precedent [the GATT EC – Sugar Export Subsidies  panel report], the 
threat of serious prejudice is caused by the absence of any legal mechanism that stems or otherwise 
controls the flow of mandatory and unlimited US subsidies".  The GATT Sugar Export Subsidies  
panel report, however, provided no basis for selectin g that standard, and neither we nor Brazil find 
any basis for that standard in the text of th e Subsidies Agreement or GATT 1994 Article XVI:1.  
 
17. Brazil is simply wrong that US paym ents are "mandatory" and "unlimited".10  M o r e  
fundamentally, however, Brazil’s argument that "the  availability of a mandatory subsidy for an 
unlimited amount of production and exports will inev itably create a threat and support a finding of a 
per se violation" proves too much.  Brazil’s standard means that only way a Member could act 
consistently with its WTO obligations would be to have a cap on expenditures with respect to a 
                                                      
8 A recent study concluded that production flexibility payments had "no effects on agricultural 
production in either the short run or the long run".  USDA, ERS, Decoupled Payments:  Household Income 
Transfers in Contemporary US Agriculture, M.E. Burfisher  and J. Hopkins, Eds. (February 2003), at 23. (See 
Exhibit US-53).  Other studies cited in Exhibit US-23 and discussed in the US rebuttal and further rebuttal submissions suggest that the effects of decoupled payments on planted area are less than 0.5 per cent. 
9 Under Articles 5 and 6 a Member cannot claim thr eat of serious prejudi ce using the "more than 
equitable share" standard because that standard is not enumerated in SCM Agreement Article 6.3(c).  Therefore, 
under Brazil’s interpretation, a Member could show a th reat of "serious prejudice" (under GATT 1994 Article 
XVI:1) by showing a threat of something that is not "serious prejudice" within the meaning of Articles 5 and 6. 
10 The payments Brazil identifies as "mandatory" are "m andatory" only if price conditions are fulfilled.  
Thus, the likelihood  that price conditions will be satisfied must be taken into account.  The payments Brazil 
identifies are also not "unlimited".  For decoupled paym ents, the payments are set by multiplying fixed base 
acres times fixed base yields times the fixed or statutory maximum payment rate.  The challenged payments are also not unlimited because a "circuit breaker" in the 20 02 Act could result in these "mandatory" payments not 
being made. WT/DS267/R/Add.1 
Page H-16  
 
 particular product.  It is not at all clear at what level such a cap would have to be set.  But Members 
rejected product-specific expenditure caps in th e Uruguay Round, instead agreeing on a commitment 
across all commodities (the Total and Final A ggregate Measurement of Support).  
  V. BRAZIL'S SUBSIDIES AND PEACE CLAUSE ARGUMENTS MUST BE 
CONSISTENT 
 
18. Brazil’s arguments in this dispute must be c onsistent.  First, it is evident that Brazil has 
conceded that various payments it previously claimed were product-specific – namely, decoupled 
income support and crop insurance – are, in fact , non-product-specific support.  That is, these 
subsidies are provided to "agricultural producers in general", either because th ey do not specify any 
production that must occur for receipt of payment or because they are provided to producers of a wide range of products.
11  As non-product-specific support, they should not be included in the comparison 
under Article 13(b)(ii) of the Agreement on Agricultur e.  This contradicts the Brazilian approach, and 
is consistent with the US approach, to the Peace Clause. 
 19. Second, Brazil not only recogni zes that support to upland cotton may be measured in terms of 
a rate but also that this is the only  way to gauge  the support decided by the United States for future 
years; therefore, Brazil relies on the rate of support concept for its threat and per se  claims.
12  By 
advancing such arguments, Brazil has effectively con ceded the basis for the US  Peace Clause analysis 
– that is, that the only way for Members to know  whether US measures for any given year will 
comply with Peace Clause requirements is to examine the way in which they "decide" support: that is, 
the rate of support.  If Brazil makes arguments under its subsidy claims based on the rate of support, it 
cannot credibly assert that the rate of support is inapt in the context of the Peace Clause.  As demonstrated during the Peace Clause phase, the Un ited States disciplined itself to remain within 
those limits by deliberately moving away from produc tion-linked deficiency payments with a high 
target price to decoupled income support. 
                                                      
11 For example, if a recipient of decoupled income  support can choose to produce cotton, something 
else, or nothing at all, the payment is not tied to produc tion of a particular product.   There is nothing in the 
Agreement on Agriculture to suggest th at support may be at one and the same time "product-specific support" 
and "non-product-specific support".  Thus, in attributing part of the decoupled payments on upland cotton base 
acres to producers and part to non- producers, Brazil concedes that such  payments are non-product-specific 
support. 
12 Brazil’s Further Submission, para. 432 ("When US upland cotton farmers plant their crop in spring, 
farmers expect a certain price level.  But, by no means is it ensured that th is price level will be accomplished.  
However, given the US subsidies, that is irrelevant.  . . . . The single fact that these programmes exist ensures a 
guaranteed revenue amount from the production of upland cotton. ") (italics added).  WT/DS267/R/Add.1 
 Page H-17 
 
 
 ANNEX H-4  
 
 
EXECUTIVE SUMMARY 
CLOSING STATEMENT OF TH E UNITED STATES AT THE 
SECOND MEETING OF THE PANEL WITH THE PARTIES 
 
 
I.  CCC EXPORT CREDIT GUARANTEE PROGRAMMES ISSUES 
 
A. BRAZIL WRONGLY MINIMIZES THE SIGNIFICANCE OF ARTICLE 10.2 OF THE 
AGREEMENT ON AGRICULTURE 
 
1. Brazil’s assertions in its opening oral st atement regarding the CCC export credit guarantee 
programmes invite a brief response. 
 2. First, as discussed with the Panel during this meeting, Brazil asserts that Article 10.2 of the 
Agreement on Agriculture reflects merely a bana l compromise to accommodate potential "additional 
obligations regarding notification, consultation, and information exchange ".  Brazil implausibly 
asserts that the obvious transition between the langua ge of the Draft Final Act that would have 
imposed significant substantive disciplines on e xport credit guarantees and the absence of such 
language in the Article 10.2 ultimately adopted can be fully explained as reflecting merely an 
agreement to work on such pedestrian  disciplines as information exchange. 
 
3. Brazil asserts that the Members had agreed on the applicability of export subsidy disciplines 
to export credit guarantees and that Article 10.2 was an apparently insignificant "good faith 
agreement".  However, Article 10.2 did not arise onl y because "other participants were not willing to 
offer more than general disciplines included in Artic le 10.1".  It arose because part of the grand 
compromise of the Agreement on Agriculture was that export credit guarantees were excluded from 
the export subsidy disciplines. 
 
4. Ironically, however, Br azil’s statement further serves to illu strate that export credit guarantees 
were not considered export subsidies under the Agreem ent on Agriculture.  In December 1994, the 
Preparatory Committee for the World Trade Organization issued Notification Requirements and 
Formats Under the WTO Agreement on Agriculture .
1  These notification requirements remain in 
effect.  Elaborate reporting requirements are set forth for Members with respect to numerous aspects 
of the disciplines of the agreement, in cluding with respect to export subsidies.2  However, no 
reporting requirement is indicated for export credit gua rantees.  This is consistent with treatment of 
such programmes as outside export subsidy disciplines .  Had the parties agreed that all were "willing 
to offer" at least "the general disciplines incl uded in Article 10.1", as Brazil asserts, then it would 
have been logical to include reporting requirements fo r such purposes.  It is hard to imagine parties 
willing to make such an offer in the absence of the United States, among the largest providers of 
export credit guarantees.  In fact, the United States never offered to include export credit guarantees in 
Article 10.1, and the Members never so agreed.  In deed, the agreement reflected in Article 10.2 is 
expressly to the contrary.  
5. Article 10.2, furthermore, would be unnecessary  for mere "notification, consultation, and 
information exchange".  Had export credit guarant ees been subject to export subsidy disciplines, 
                                                      
1 PC/IPL/12, circulated 2 D ecember 1994 (e xhibit US-99). 
2 See, e.g., Exhibit US-99, paras. 1(c), 1(e), 1(i), 2; Table ES:1 and Supporting Tables ES:1 and ES:2. WT/DS267/R/Add.1 
Page H-18  
 
 Article 18 of the Agreement on Agriculture, to review the progress in the implementation of 
commitments negotiated under the Uruguay Rou nd reform programme, and the Notification 
Requirements, which are still in effect, could amply accommodate any "notification, consultation, and 
information exchange".
3  
 
B. BRAZIL INVENTS A STANDARD NOT REQUIRED UNDER ARTICLE 10.3 OF THE 
AGREEMENT ON AGRICULTURE 
 
6. Second, with respect to Article 10.3 of the Agreement on Agriculture, Brazil asserts that the 
only way for the United States to satisfy any burden applicable under that provision is "to demonstrate 
the absence of subsidization on a transaction-by-tra nsaction basis".  Such a standard would obviously 
be impossible to satisfy.  Perhaps more importantly , Article 10.3 requires no such demonstration.  
Brazil simply invents this.  The only authority it offers for this novel proposition is a Third Party 
Submission of Canada, which itself o ffers no authority for the assertion. 
 
7. Article 10.3 applies only to export subsidy reduction  commitments.  We believe that Brazil 
agrees at least with that.  Brazil has alleged that the United States  has exceeded only its quantitative 
export subsidy reduction commitments and only dur ing the period July 2001-June 2002.  The 
United States has demonstrated that with resp ect to 12 of the 13 commodities for which the 
United States has reduction commitments the respec tive exports during that period under the export 
credit guarantee programme did not exceed applic able quantitative reduction commitments.  Other 
than the Dairy Export Incentive Progr amme applicable to cheese and skim milk powder, with respect 
to which the United States previously noted in a pr ior submission the issuance of export subsidies, the 
United States provided no export subsidies for the ot her scheduled commodities.  To avoid any further 
ambiguity the United States submits a copy of its notification concerning export subsidy commitments 
for fiscal year 2001, which reflects no export subsidies provided by the United States other than for 
cheese and skim milk powder.4 
 
C. BRAZIL’S RECENT STATEMENTS CONC ERNING THE CORRECT ANALYSIS UNDER 
ITEM(J) ARE INCONSISTENT AND INCORRECT 
 
8. Third, with respect to item (j) Brazil directly  acknowledges its view that the relevant period of 
time for examination is 10 years.5  Yet Brazil disingenuously urges the Panel to examine allegedly 
"uncollectible amounts" on pre-1992 guarantees, a nd defaults of Iraq and Poland, which commenced 
in 1990 and the 1980’s, respectively.6  
 9. Brazil also mysteriously alleges that "acc ording to CCC’s 2002 financial statements, CCC has 
been relieved of what the United States argues ar e onerous government-wide accounting rules that 
‘compel’ projection of enormous losses".  CCC, howev er, has never been so "relieved".  It remains 
compelled to adhere to the requirements of the federal Credit Reform Ac t of 1990, and relevant 
provisions of the Office of Management and Budget Circular A-11, implementing that legislation.  
CCC remains subject to government-wide requirement s for subsidy estimates and the risk categories 
mandated by OMB with respect to exposure to debt  from different countries.  The government-wide 
rules continue to dictate the methodology for cal culation of estimates, and reestimates, and as the 
United States has previously noted, a principal r eason for overly high initial estimates is continuously 
overly optimistic projections of programme use.  Al so, as the United States has previously noted, the 
result of the estimate (and reestimate) process is  simply carried forward to the CCC financial 
statements;  Brazil continues to misrepresent th e $411 million figure in the 2002 financial statement 
                                                      
3 See, e.g., Article 18.5, 18.6, and 18.7. 
4 Notification , G/AG/N/USA/47, circulated 6 June 2003 (exhibit US-100). 
5 Statement of Brazil - Second Panel Meeting (2 December 2003), para. 81. 
6 Statement of Brazil - Second Panel Meeting (2 December 2003), para. 84.  WT/DS267/R/Add.1 
 Page H-19 
 
 
 as well as to mistakenly assert the inclusion of "e normous uncollectible amou nts . . . on post-1991 
guarantees".  
D. BRAZIL CONTINUES TO WRONGLY ASSERT THAT TH E ISSUANCE OF CCC EXPORT 
CREDIT GUARANTEES IS UNBOUNDED 
 
10. Fourth, with respect to Brazil’s circumven tion arguments, Brazil continues to insist that 
notwithstanding the myriad programmatic impedi ments to issuance of guarantees the export credit 
guarantee programmes are a runaway train, beyond the ability of CCC to "stem or otherwise control 
the flow of" CCC export credit guarantees.  With respect, this is simply not so.  11. Similarly, in its oral statement, Brazil ha s increased the supposed annual mandatory minimum 
dollar amount of guarantees to $6.5 billion from $5.5 billion.
7  As the United States has previously 
observed, CCC has never remotely approached issu ing any such fancifully large amount of export 
credit guarantees.8 
 
II. ACTIONABLE SUBSIDY ISSUES 
 
12. The United States has reviewed Brazil’ s evidence and arguments underlying Brazil’s 
actionable subsidy claims and found them lacking.  We will not repeat our criticisms of fundamental 
errors in Brazil’s legal interpretations.  We do  note that the evidence on the record does not 
demonstrate that US producers are unresponsive to market price signals, does not demonstrate 
significant price suppression in any "same market", do es not demonstrate an increase in world market 
share, and does not demonstrate a threat of serious  prejudice.  Our comments today go principally to 
the consistency, or lack thereof, in Brazil’s arguments.   
 
A. BRAZIL HAS FAILED TO ESTABLISH ALL OF THE ELEMENTS NECESSARY TO 
ESTABLISH ITS SU BSIDIES CLAIMS 
 
13. Consider the fundamental issue of identif ying the subsidized product and the subsidy. 
 
1. Brazil has not identified which products benefit from the subsidy 
 
14. If Brazil cannot distinguish the benefit to cotton provided by a subsidy from the benefit to 
other products – that is, attribute the subsidy to the recipient’s production – then it will lead to 
double-counting of the subsidy benefit.  Recall the example the United States provided in the opening 
statement with respect to soybeans and cotton.  If a producer grows both soybeans and cotton and 
receives a $1 payment not tied to the production of  any crop, according to Brazil’s approach, the 
entire  $1 payment is attributed to and support for up land cotton.  However, were Brazil to bring a 
dispute settlement proceeding against US support for soybeans (as was reported almost occurred 
roughly two years ago), under Brazil’s approach, the entire $1 payment would also be support for 
soybeans.  The same $1 payment cannot provide bot h $1 in benefit to cotton and $1 in benefit to 
soybeans – that’s double-counting.  Therefore, the pa yment must be attributed across the value of the 
recipient’s production.  As noted in the US further rebuttal submission, Brazil would  attribute the 
value of the payment across all of a recipien t’s production for countervailing duty purposes. 
 
                                                      
7 Compare  Statement of Brazil - Second Panel Meeting (2 December 2003), para. 91, with Answer of 
Brazil to Panel Question 142 (October 27, 1993) paras. 95, 100. 
8 US Further Rebuttal Submission (18 November 2003), para. 201. WT/DS267/R/Add.1 
Page H-20  
 
 2. Brazil has not quantified the subsidy benefit attributable to upland cotton 
 
15. If Brazil cannot properly quantify the amount of  subsidy benefit to upland cotton producers, 
how can the Panel analyze the effe ct of the subsidy?  Brazil cannot  both claim that it need not 
quantify the benefit and at the same time argue that  the subsidies provide $1 2.9 billion in aggregate 
support. 
 16. Similarly, if Brazil cannot properly identify th e level of subsidization of the exported product, 
the Panel’s analysis will be impacted.  Again, Brazil cannot claim that it need not identify the 
subsidization rate and at the sa me time claim a 95 per cent subs idization rate over the 1999-2002 
marketing year period. 
 
3. Brazil has not expensed the recurring paymen ts at issue, contrary to its countervailing 
duty practice and inconsistent with its arguments in this dispute  
 17. Finally, Brazil cannot both expense the entire  amount of these subsidies it admits are 
"recurring" to the year for which the payment w as received (for example, marketing year 1999) and 
also claim that the subsidy continues to exist in a la ter year in which new recurring subsidies are made 
(for example, marketing year 2002).  That is, if the subsidy continues to exist in a later year, it must  
have been allocated to future production.  Ind eed, Brazil would expense these recurring payments for 
purposes of countervailing duties. 
 
18. The Panel must demand consistency from Brazil.  It is not enough for Brazil to say that those 
concepts are for countervailing duty purposes, not for serious prejudice purposes.  We were not aware that the concept and definition of "subsidy" as used in Part III and Part V of the Subsidies Agreement 
were intended to have different meanings.  In f act, there is nothing in the Subsidies Agreement to 
suggest that they should mean different things. 
 19. Brazil not only rejects the Subsidies Agreemen t Annex IV methodology with respect to these 
issues, and not only rejects its own countervailing duty methodology, but does not provide any rational method of approaching these issues.  Braz il’s approach results in dramatically inflated 
quantities of support and dramatically inflated leve ls of subsidization.  The Panel should reject 
Brazil’s unprincipled approach to subsidy identification issues. 
 
B. BRAZIL’S APPROACH  TO ITS SERIOUS PREJUDICE CLAIMS AND THE PEACE CLAUSE 
MUST BE CONSISTENT  
 
20. Similarly, as indicated in the US opening st atement, the Panel must demand consistency from 
Brazil between its arguments for purposes of serious prejudice and the Peace Clause.  First, Brazil cannot rely on the rate of support in US. law and regulations for purposes of its threat and per se  
claims and deny  their relevancy to the Panel’s Peace Clause analysis. 
 
21. Second, with respect to decoupled payments (s uch as direct payments),  Brazil cannot attribute 
part of a decoupled payment to upland cotto n producers and part to non-producers, and 
simultaneously  claim that such decoupled payments are not non-product-specific support.  They are 
non-product-specific support because they are (in the la nguage of Article 1(a) of the Agreement on 
Agriculture) "support provided to agricultural produ cers in general" and because they are not (in the 
language of Article 1(a)) "support provided for an agricultural product   in favour of the producers of 
an agricultural product".  That is, Brazil has acknowledge d that some recipients of, for example, direct 
payments are not producers of upland cotton; they are, rather, "producers in general".  Under the 
Agreement on Agriculture, support (such as direct payments) cannot at the same time be both 
product-specific support and non-product-specific support.   Thus, these payments would not form part 
of the Peace Clause (Article 13(b)(ii)) analysis.  WT/DS267/R/Add.1 
 Page H-21 
 
 
  
22. Finally, it is clear that, under Brazil’s approach, there can be no non-product-specific support 
for purposes of the Peace Clause.  Th is results because a subsidy payment can always be traced to a 
final recipient and then can always be attributed  to whatever products he or she produces.  One 
problem with this result is that a Member can then have no certainty that it will be in compliance with 
the Peace Clause in any given year. 
 23. Consider a hypothetical: under Brazil’s outlay approach to the Peace Clause, if a Member 
gave only decoupled support to producers, but in a given year all the recipients of the payment 
decided only to produce one commodity, the support (outlays) attributed to that commodity in that 
year could exceed the 1992 support level.  But that  would purely be a function of the recipients’ 
decisions, not the decision of the United States.  Brazil’s approach therefore would rob Members of the ability to decide their support in a way to ensu re conformity with Peace Clause requirements, and 
it must be rejected. 
__________ 
  