Comments of the united states on the answers of brazil to further questions from the panel to the parties following the second panel meeting
A Methodology to Count Contract Payments Is Appropriate Based on the Text of Article 13(b)(ii) of the Agreement on Agriculture
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- 5. The Evidence in the Record Supports a Finding, under any Methodology, that the United States’ Level of Support Provided in MY 1999-2002 Exceeded the amount of Support Decided in MY 1992
- Cotton-to-Cotton Methodology 737
- Brazil’s Methodology
- Modified Annex IV Methodology
- US Annex IV Methodology
- Results of Brazil’s 14/16 th Methodology
4. A Methodology to Count Contract Payments Is Appropriate Based on the Text of Article 13(b)(ii) of the Agreement on Agriculture 33. The United States criticizes Brazil’s methodology (and presumably any other methodology) because it is not based in the “text” of the peace clause or the Agreement on Agriculture.723 Instead, the United States argues that the Panel should use Annex IV of the SCM Agreement as the basis for its calculation of the amount of the contract payments.724 34. Article 13(b)(ii) of the Agreement on Agriculture does not provide explicit guidance on how to count up the amount of support for contract or any other type of payments.725 But that does not mean that no counting methodology can be used. The absence of explicit guidance on implementing more general provisions has not stopped WTO panels or parties from proposing and using methodologies to tabulate the amount of subsidies, costs, and volumes of trade impacted. 35. The Panel only need to look as far as the export credit guarantee arguments in this dispute as an example. Item (j) establishes that export credit guarantee programmes constitute export subsidies if they are operated at premium rates that are inadequate to cover the long-term operating costs and losses of the programmes.726 There is no explicit methodology provided in the text of item (j) that would define how to apply this provision. Yet, the United States has repeatedly argued for the application of a cash-basis accounting methodology to tabulate the amount of costs and losses. 36. Similarly, DSU Article 22.7 requires any suspension of concessions to be “equivalent to the level of nullification or impairment”. As with Article 13(b)(ii) of the Agreement on Agriculture, this requires the tabulation of amounts – in the case of Article 22.7, the amounts of trade impacted through the non-implementation of WTO-inconsistent measures. Again, there is no methodology provided in Article 22.7 to assess the level of nullification or impairment. Nevertheless, arbitrators, at the urging, inter alia, of the United States, have applied DSU Article 22.7 using a variety of methodologies developed on a case-by-case basis to assess the level of nullification or impairment.727 37. Finally, other provisions of the WTO Agreement similarly require WTO Members, as a practical matter, to implement general obligations by applying different valuation and allocation methodologies under general Anti-Dumping Agreement and the SCM Agreement rules.728 38. The United States argues that only Annex IV of the SCM Agreement offers any useful context. While it derides Brazil’s methodology as being “invented”, a close look at the text of Article IV reveals that it is ill-equipped to address the tabulation of support issue before the Panel. Annex IV, which is entitled “Calculation of the Total Ad Valorem Subsidization (Paragraph 1(a) of Article 6)” deals – as the title indicates – with the calculation of subsidization rates, within the meaning of Article 6.1(a) of the SCM Agreement. However, the “support to cotton” question before this Panel is not establishing an ad valorem subsidization rate, but rather the calculation of the amount of support to upland cotton, within the meaning of Article 13(b)(ii) of the SCM Agreement. 39. But setting aside the problem that Annex IV deals with calculation of a subsidization rate, the US contract payments at issue in this dispute are de facto tied to upland cotton production. Thus, Annex IV paragraph 3 would be implicated, i.e., the subsidization rate is determined by dividing the total amount of the tied contract payment subsidies by the total value of upland cotton sales. But this presupposes that the amount of the payments subsidies is known. Thus, Annex IV does not answer the crucial question how to determine the amount of the de facto tied contract payments that constitute support to upland cotton. Instead, it only offers a methodology to calculate the subsidization rate for known amounts of subsidies. 40. Indeed, Annex IV itself recognizes that there are holes in its provisions, stipulating in footnote 62 to Annex IV that “[a]n understanding among Members should be developed, as necessary, on matters which are not specified in this Annex or which need further clarification for purposes of paragraph 1(a) of Article 6”. One such matter could have been the scope of the meaning of “tied to the production or sale of a given product”. Must the “tie to production” be de jure as the United States argues, or de facto as Brazil asserts? But no understanding or clarification of this, or any other issue relating to Annex IV, was agreed to by Members prior to the expiration of Annex IV in 2000. 41. Thus, Annex IV does not assist the Panel in determining the amount of support to upland cotton, within the meaning of Article 13(b)(ii) of the Agreement on Agriculture. Contrary to the US arguments, paragraph 2 of Annex IV is inapplicable because the subsidies at issue are de facto tied to upland cotton production. Further, paragraph 3 of Annex IV does not provide any guidance on how to calculate the amount of the subsidy which is the goal of the Article 13(b)(ii) exercise. 42. In conclusion, it is incorrect to assert that the absence of any specific methodology precludes the Panel from applying one for the purposes of Article 13(b)(ii). It is also incorrect to claim that Annex IV provides definitive guidance, because it could only be useful for establishing a rate of subsidization, and not for calculating the amount of the subsidy. Thus, as with its item (j) analysis, the Panel needs to adopt a reasonable methodology to be applied for purposes of the peace clause in assessing the amount of support to upland cotton from the four contract payment programmes. This methodology must reflect the facts in the record and be consistent with the text, context and object and purpose of Article 13(b)(ii). As Brazil has argued, its methodology – or some variant of its methodology such as the cotton-to-cotton methodology – is reasonable given the key role that contract payments played in the maintenance of upland cotton production during MY 1999-2002.729 5. The Evidence in the Record Supports a Finding, under any Methodology, that the United States’ Level of Support Provided in MY 1999-2002 Exceeded the amount of Support Decided in MY 1992 43. Brazil responds in this section to the US 11 February 2004 Comments asserting that Brazil has not established that the amount of “support to upland cotton” in MY 1999-2002 is greater than the support decided in MY 1992.730 Brazil’s basic response to these arguments is that even if the United States does not produce the farm-specific information by 3 March 2004, the Panel has before it sufficient evidence, including the evidence of any adverse inferences, to establish the amount of four contract payments for MY 1999-2002. The less-than-ideal data analyzed below confirms, in the first instance, Brazil’s 14/16th methodology. Moreover, even if the Panel were to rely directly on the figures generated below from the application of Brazil’s methodology, the US Annex IV methodology and a variation of each of those methodologies to the incomplete US data,731 these figures support a finding that the US support to upland cotton in MY 1999-2002 exceeded the level decided in MY 1992. 44. Brazil’s analysis of the data below is necessary because Brazil’s 28 January 2004 original analysis of the incomplete US data submitted on 18/19 December 2003 did not include additional data the United States recognized732 it failed to produce on 18/19 December 2003, and subsequently produced on 28 January 2004. Brazil has made certain adjustments to respond to criticisms of the United States. Further, to assist the Panel, Brazil presents the calculations from a minor variation of Brazil’s methodology and of the US Annex IV methodology. In the final analysis, these various methodologies are “tools” (not “claims”) that assist the Panel in making an objective assessment of the US data and other evidence before it for purposes of making a peace clause finding (and, if the Panel deems this necessary, the amount of subsidization for Brazil’s serious prejudice claims). 45. Below, Brazil presents its updated results of the two methodologies applied in Sections 9 and 10 of its 28 January 2004 Comments and Requests Regarding US Data. This update is based on the revised US data provided by the United States on 28 January 2004.733 For detailed calculations, Brazil refers the Panel to Annex A to this submission. Cotton-to-Cotton Methodology 46. Brazil first presents the results of using a slight variation of Brazil’s methodology. Brazil notes the US arguments that only upland cotton contract payments could be included in any “support to” upland cotton. Counting only upland cotton payments would undercount the amount of contract support, as Brazil argues in Section 9, infra. 734 But even though it undercounts the amount of support, a methodology that examines only “cotton-to-cotton” payments is supported by the evidence in the record described in Section 3 supra, including the fact that in MY 2002 96 per cent of upland cotton was planted on upland cotton base acreage.735 47. Brazil sets out the results of examining only the upland cotton contract payments received by producers planting upland cotton for MY 1999-2002 in Table 1.5 below:736 Annex A Table 1.5
48. As Brazil described in its 28 January 2004 Comments, the results of this analysis may be distorted somewhat because the revised US summary data does not control for aggregation problems.738 However, given the fact that the United States can be deemed to know the amount of payments from a cotton-to-cotton match, any continued refusal of the United States to produce the data should permit the Panel to infer that the data outlined above is accurate. Brazil’s Methodology 49. Brazil also presents the results of applying its proposed methodology. However, given the absence of farm-specific information, Brazil can present only a modified version of its proposed methodology, as discussed in more detail in its 20 January 2004 Answers to Additional Questions739 and applied in its 28 January 2004 Comments and Requests Regarding US Data.740 The data presented below updates Brazil’s earlier calculations by using the 28 January 2004 revised US summary data that includes information on contract payments to farms not holding upland cotton base but producing upland cotton.741 The following table shows the results of applying Brazil’s allocation methodology to the revised US summary data.742 Table 2.21
Modified US Annex IV methodology 50. Brazil also applied the revised US summary data to a modified “Annex IV” methodology allocating total contract payments to farms producing upland cotton over the value of contract payment crops produced on these farms. This methodology is based on two assumptions: first, contract payments are support only to contract payment crops; and second, contract payments are allocated pursuant to the value of these contract crops’ production on upland cotton producing farms. 51. Brazil believes that this methodology is not appropriate because it improperly undercounts the amount of support provided to maintain the production of upland cotton. Nevertheless, the analysis of this methodology permits the Panel to assess the impact of different assumptions on the amount of contract payments allocated. Further, because the “cotton-to-cotton” and “Brazil’s” methodologies are supported by the strong link between contract payments and maintaining upland cotton production, the same evidence would more than support the modified Annex IV methodology. The following table shows the results of this allocation methodology. Brazil notes these figures are understated due to the fact that the United States did not provide any data concerning soybean market loss assistance payments and peanut direct and counter-cyclical payments.743 Annex A Table 3.10
US Annex IV Methodology 52. Finally, Brazil has applied the revised US summary data to the US-proposed methodology – updating the calculations presented in Section 10 of Brazil’s 28 January 2004 Comments and Requests Regarding US Data. The data presented here updates Brazil’s earlier calculations by using the 28 January 2004 revised US summary data that includes information on contract payments to farms not holding upland cotton base but producing upland cotton.744 The following table shows the results of applying the US-proposed allocation methodology to the revised US summary data.745 Annex A Table 4.8
53. For purposes of comparison, Brazil reproduces the results of its “14/16th” methodology, as presented to the Panel at paragraphs 8 of Brazil’s 22 December 2003 Answers to Questions and Brazil’s 9 September 2003 Further Submission.
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