I. Terms of Reference 278 II. Economic Data 279 III. Domestic Support 291 IV. Export Credit Guarantees 293



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E. SERIOUS PREJUDICE
230. Please comment on Brazil's views on Article 6.3 of the SCM Agreement as stated in paragraphs 92-94 of its further submission. USA
123. Brazil’s arguments fail to convince. First, Brazil complains that "[t]here is no valid basis for the US interpretation that the word "may" in the chapeau of Article 6.3 of the SCM Agreement [to] mean[] that a complainant - in addition to demonstrating the existence of one of the effects listed in the subparagraphs, e.g., significant price suppression - must also make a separate showing of ‘serious’ prejudice."324 Brazil may choose to believe there is no "valid" basis, but there is a clear textual basis for the US interpretation: the ordinary meaning of the word "may."
124. The ordinary meaning of "may" is "have ability or power to; can."325 Therefore, the chapeau of Article 6.3 permits but does not require a finding that serious prejudice exists when one of the situations in Article 6.3 is demonstrated.
125. Second, Brazil argues that the use of "may" in Article 6.3 is merely intended to reflect that there are "situations in which the four enumerated types of serious prejudice exist but are not actionable." For example, Brazil points to Article 6.7, which delineates certain circumstances in which displacement or impeding of exports shall not arise, and Article 6.9, which states that Article 6 does not apply to measures that conform to the Peace Clause. Brazil’s argument is badly flawed. The ordinary meaning of the chapeau to Article 6.3 does not suggest that serious prejudice must arise if one of the situations in Article 6.3 exists. If the drafters had intended merely to suggest that exceptions to Article 6.3 exist, they succeeded instead in creating a provision that does not compel any finding of serious prejudice in a circumstance in which one of the criteria under Article 6.3 is met, even when the circumstances in Articles 6.7 and 6.9 are met.
126. Indeed, the text of Article 6 does reflect Members’ decision to create in Articles 6.1 and 6.2 exactly the sort of mandatory presumption / exception structure that Brazil attempts to read into Article 6.3. Article 6.1 states that "[s]erious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in [certain] case[s]" (emphasis added). Article 6.2 states that, "[n]otwithstanding the provisions of paragraph 1, serious prejudice shall not be found if the subsidizing Member demonstrates that the subsidy in question has not resulted in any of the effects enumerated in paragraph 3" (emphasis added). By way of contrast, Articles 6.3 and 6.7 do not use mandatory language (for example, "shall be deemed to exist" / "shall not be found") to establish a presumption / exception relationship. Rather, the language of Article 6.3 is permissive, and Article 6.7 is not expressed as an exception to a mandatory finding under Article 6.3.
127. Brazil’s reference to Article 6.9 is inapt. We note that Article 6.9 does not limit its application to situations under Article 6.3. Rather, it states: "This Article does not apply to subsidies maintained on agricultural products as provided in Article 13 of the Agreement on Agriculture" (emphasis added). The language of Article 6.9 indicates that it applies to all of the provisions under "[t]his Article." Thus, according to Brazil’s logic, every affirmative use of the word "shall" in Article 6 (for example, Article 6.1: "Serious prejudice shall be deemed to exist . . . ."; Article 6.4: "[D]isplacement or impeding of exports shall include . . . ."; Article 6.5: "[P]rice undercutting shall include . . . .") should have been written "may" to reflect the fact that "even where the requirements of [that provision] are fulfilled," the "subsidies are exempt from action by virtue of the peace clause of Article 13 of the Agreement on Agriculture." Those other provisions do use the term "shall," however, suggesting that the term "may" in Article 6.3 was used deliberately and according to its ordinary meaning.
128. Finally, Brazil asserts that "Article 6 is silent on the nature of the alleged additional requirements for a finding of ‘serious’ prejudice."326 This is not wholly accurate. For example, as Question 229 from the Panel to Brazil notes, the chapeau to Article 6.3 indicates that "[s]erious prejudice . . . may arise in any case where one or several of the following apply" (emphasis added). Therefore, the Panel could conclude that where more than one prong of Article 6.3 is satisfied, the likelihood that the result is "serious prejudice" increases. Furthermore, Brazil points to additional details provided in Article 6.4 on displacement or impedance and in Article 6.5 on price undercutting as suggesting that a finding of "serious prejudice" must result if one prong of Article 6.3 is satisfied. However, Brazil draws no consequence from the lack of" detailed definitions" capable of application for Articles 6.3(a), 6.3(c) (significant prices suppression, price depression, or lost sales), or 6.3(d).
129. Finally, Brazil claims that the United States did not assert and the panel in Indonesia - Automobiles did not find any separate "serious prejudice" requirement in Article 6.3. As the United States notes in its answer to Question 234, the permissive ("may") language of the chapeau to Article 6.3 would not preclude the Panel from concluding that a finding under one prong of Article 6.3 suffices to establish serious prejudice. As Article 6.8 suggests, "the existence of serious prejudice should be determined on the basis of the information submitted to or obtained by the panel" – that is, on a case‑by‑case basis. Thus, the Panel will be called upon to exercise its judgment on the quality of the evidence on causation and on the extent of any alleged effects. To reiterate one hypothetical example suggested at the second panel meeting, were a complaining party to make a prima facie case that one unit of its exports had been displaced from the market of the subsidizing Member, the situation in Article 6.3(a) would technically have been demonstrated. Such a situation, however, would lend itself to the exercise of the Panel’s discretion not to find serious prejudice. This is the type of flexibility that the chapeau to Article 6.3 gives the Panel and which Brazil ’s interpretation would read out of the Subsidies Agreement.
231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM Agreement are relevant context for the Panel's interpretation of Article 6.3? USA
130. The United States believes that both Article 6.1 and Annex IV of the Subsidies Agreement provide relevant context for interpreting "serious prejudice" within the meaning of Article 5(c) and Article 6.3. As the Panel’s question notes, Article 6.1 has expired pursuant to Article 31, which established that Article 6.1 would "apply for a period of five years, beginning with the date of entry into force of the WTO Agreement," unless the Committee on Subsidies and Countervailing Measures determined to extend its application. Annex IV is entitled, "Calculation of the Total Ad Valorem Subsidization (Paragraph 1(a) of Article 6)," and by its terms establishes a methodology to calculate "the amount of a subsidy for the purpose of paragraph 1(a) of Article 6." Thus, since the provision it is meant to implement is no longer in effect, Annex IV as well is no longer directly applicable.
131. The context provided by these provisions, of course, must be judged in light of the fact that Members did not agree to extend Article 6.1(a). That is, it is highly relevant that the provision establishing a rebuttable presumption of serious prejudice upon a showing of a 5 per cent ad valorem subsidization rate was allowed by Members to lapse. On the other hand, no decision on whether to extend Annex IV was contemplated or taken pursuant to Article 31. In addition, we note that in United States – Countervailing Measures (EC), the Appellate Body relied on Annex IV as context in interpreting another provision of the Subsidies Agreement.327 Thus, although the underlying provision attaching a consequence to a certain subsidization rate lapsed, it is appropriate to examine how Members agreed in Annex IV a subsidy not tied to the production or sale of a given product would be allocated across the total value of the recipient’s production.
132. The Panel must utilize some methodology to determine the benefit to upland cotton from a subsidy not tied to production of upland cotton. For example, Part V does not expressly set out an allocation methodology, but the same methodology of allocating an untied subsidy across the total value of the recipient’s production is applied by several Members (for example, the European Communities and the United States) for purposes of their countervailing duty law. Indeed, Brazil itself has proposed in the Negotiating Group on Rules that Members adopt a "guideline" on calculating the amount of the subsidy for countervailing duty purposes precisely setting out the methodology contained in Annex IV.328 The Panel should consider whether Brazil’s refusal to countenance any allocation of the decoupled payments it has challenged is credible given the fact that Brazil in its Rules proposal and Annex IV as agreed by Members both express the same approach to allocating non‑tied subsidies across production. Thus, the United States believes that Annex IV continues to provide useful context for the necessary task of identifying the products that benefit from a subsidy not tied to the production or sale of a given product.
234. Does "significant" price suppression under Article 6.3(c) necessarily amount to "serious" prejudice within the meaning of Article 5(c)? Could the level of "significance" of any price suppression under Article 6.3(c) determine whether any prejudice under Article 5(c) rises to the level of "serious prejudice"?
133. "Significant" price suppression under Article 6.3(c) does not necessarily amount to "serious prejudice" within the meaning of Article 5(c). This conclusion flows from the ordinary meaning of the text of Article 6.3(c): "Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply." The ordinary meaning of "may" is "have ability or power to; can." Therefore, the existence of one of the situations in Article 6.3 is a necessary condition for a finding of serious prejudice but may not be sufficient.
134. Brazil argues that the use of "may" in Article 6.3 is merely intended to reflect that Article 6.7 delineates certain circumstances in which displacement or impeding of exports shall not arise. However, the ordinary meaning of the chapeau to Article 6.3 does not suggest that serious prejudice must arise if one of the situations in Article 6.3 exists. Further, the text of Article 6 reflects Members’ decision to create just such a mandatory presumption / exception structure in Article 6.1 and 6.2. Article 6.1 states that "[s]erious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in [certain] case[s]" (emphasis added). Article 6.2 states that, "[n]otwithstanding the provisions of paragraph 1, serious prejudice shall not be found if the subsidizing Member demonstrates that the subsidy in question has not resulted in any of the effects enumerated in paragraph 3" (emphasis added). Article 6.3 and 6.7 do not use mandatory language ("shall be deemed to exist" / "shall not be found") to establish a presumption / exception relationship. Rather, the language of Article 6.3 is permissive, and Article 6.7 is not expressed as an exception to a mandatory finding under Article 6.3.
135. At the same time, the United States does not believe the text of the chapeau to Article 6.3 precludes a finding of serious prejudice where only "significant price suppression" by the subsidized product "in the same market" as a like product and no other situation in Article 6.3 has been demonstrated. Thus, it is conceivable that the effect of a subsidy could be price suppression so significant that it alone rises to the level of serious prejudice to the interests of another Member.
136. We recall that Brazil’s interpretation is that price suppression would be "significant" even at a level of 1 cent per pound because this could still "meaningfully affect" its producers.329 The use of the term "significant," however, would seem to be intended to prevent insignificant price effects from rising to the level of serious prejudice. For example, were the term "significant" omitted from Article 6.3(c), any production subsidy (for example, a per‑unit payment of 0.0001 cents per pound of production) would be deemed to satisfy Article 6.3(c) because any increase in production resulting from the subsidy would theoretically result in some price effect. Coupled with Brazil’s reading of "may arise" in the chapeau of Article 6.3, this would result in any production subsidy running afoul of Articles 5 and 6, effectively undermining the separation of Part III of the Subsidies Agreement on "Actionable Subsidies" from Part II on "Prohibited Subsidies."
236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2 December oral statement). Please provide a conceptually analogous chart to Exhibit US-63 with respect to data relating to the US interpretation of "world market share".

137. The graph shows the year‑over‑year percentage change in the world market share over 1996‑2002. US world market share is defined as in Exhibit US‑47 as the quantity of consumption of US cotton (domestic mill use + exports) relative to world cotton consumption.


138. The annual change in the US market share is relatively slight with the exception of 1998 when severe drought, primarily in Texas, caused US production to fall significantly.



237. Could a phenomenon that remains at approximately the same level over a given period of time be considered a "consistent trend" within the meaning of Article 6.3(d)? Do parties have any suggestions as to how to determine a "consistent trend", statistically or otherwise? BRA, USA
139. It would not appear that a phenomenon (world market share) that remains at approximately the same level over a given period of time could be considered a "consistent trend" within the meaning of Article 6.3(d). This follows from the text of Article 6.3(d) itself because the "effect of the subsidy" must be an increase in world market share (as compared to the preceding three‑year period), and "this increase [must] follow[] a consistent trend over a period when subsidies have been granted." Thus, if world market share remains at approximately the same level over a given period of time, the trend would not be an "increase" in world market share; hence, the trend would not be a "consistent trend" within the meaning of Article 6.3(d). And, in fact, the data do not demonstrate that US world market share has increased following a consistent trend over a period when subsidies have been granted.330
238. According to the US interpretation of the term "world market share":
(a) should the domestic consumption of closed markets be added into the denominator?
140. It is not clear from the Panel’s question what is meant by "closed markets," but the US reading of Article 6.3(d) is that "world market share . . . in a particular subsidized primary product or commodity" means just that: a Member’s share of the world market in, for example, upland cotton. There is nothing in the text of Article 6.3(d) that supports excluding any portion of the "world" from the analysis. For this reason, Brazil’s reading of this provision as solely relating to world export trade necessarily excludes any portions of the "world market" for upland cotton that do not import, no matter the size of that market. Such a result runs contrary to the ordinary meaning of the terms of the provision.
141. We note that excluding consumption from "closed markets" in the world market share calculation would increase the overall market share of the United States (and other suppliers) because the total world consumption figure would be lower. However, the variation in market share across years would not change appreciably assuming that the level of consumption in closed markets was relatively constant.
(b) if US production and consumption increased by the same percentage, whilst the rest of the world's production and consumption remained steady, would this imply an increase in the US "world market share" by a different percentage?
142. The United States interprets this question as asking whether the US market share would increase if an increase in US cotton consumption was completely supplied by increased US production without any changes to the consumption and supply patterns of the rest of the world. Under the US approach to "world market share," US world market share would increase.331 The amount of increase in the US world market share would depend largely on the size of US consumption relative to world consumption.
143. Under Brazil’s approach to Article 6.3(d), however, an increase in a Member’s cotton consumption that was completely supplied by increased production by that Member would result in no change in that Member’s world market share since there was no change in the Member’s exports. Brazil’s approach, therefore, would allow a larger or even dominant cotton consumer to provide huge per‑unit production subsidies that increased the share of its own domestic consumption that its producers supplied without any discipline under Article 6.3(d), regardless of the impact on other Members who could potentially supply that increasing domestic consumption. Such a result runs contrary to the ordinary meaning of "world market share" in Article 6.3(d) since the term "world market" would captures impacts both in the market of the subsidizing Member (as in Article 6.3(a)) and in third‑country markets (Articles 6.3(b) and 6.3(c)).
(c) does Saudi Arabia have a small world market share for oil?
144. The relevance of this question is not entirely clear since Article 6.3(d) does not speak of "large" or "small" world market shares. That is, it is only a certain increase in world market share, from whatever level, that follows a consistent trend over a period when subsidies have been granted that is relevant to the 6.3(d) analysis.
145. Nonetheless, we note that Saudi Arabia exports crude oil but also refines petroleum into products that it consumes and refines as well. Based on 2000 world petroleum supply and disposition data for 2000, Saudi crude oil exports account for about 16 per cent of total world exports. Using an analogous measure for consumption (exports plus domestic consumption–i.e., refining–divided by total world consumption) gives a market share of 12 per cent.
239. How does the US respond to Brazil's assertions that, under the US interpretation of the term "world market share":
(a) there would be no WTO disciplines on production-enhancing subsidies that increase a Member's world market share of exports? (see paragraph 64 of Brazil's 2 December oral statement);
(b) a Member's exports would have to be disregarded in calculating their "world market share" in terms of "world consumption"? (see e.g. paragraph 65 of Brazil's 2 December oral statement)
146. (a) We note that Brazil must repeatedly insert the term "export" into the phrase "world market share of export" or "world export share" in order to convey a meaning restricting the term "market share" to exports. That is because the ordinary meaning of "world market share" would be all those markets in which cotton is consumed. Further, Brazil’s argument is overstated. There would be disciplines on production‑enhancing subsidies, even those that increase a Member’s world market share of exports (even though that is not an WTO obligation in and of itself). Under Article 6.3(d), for example, a Member’s world market share is determined by its domestic consumption plus exports of the product it produces. If a subsidy increased the Member’s exports, and domestic consumption and world consumption remained the same, the increase in the Member’s exports alone would increase that Member’s world market share.
147. Further, production‑enhancing subsidies with export effects could be inconsistent with Article 5(a) (injury), Article 6.3(b) (displace or impede exports to third country markets), Article 6.3(c) (lost sales), or GATT 1994 XVI:1 (serious prejudice).
148. (b) It is interesting that Brazil, which roundly rejects the use of any concepts from Part V or Annex IV of the Subsidies Agreement or from the Safeguards or Anti‑Dumping Agreements when these are inconvenient for it, here tries to introduce "the ordinary meaning in a trade remedy context of ‘domestic consumption’." The Panel’s task is not to interpret the term "domestic consumption" but rather the "world market share of the subsidizing Member in a particular subsidized primary product or commodity". The United States has proposed that the US share of the world market for upland cotton must be measured by that portion of world consumption of upland cotton satisfied by US upland cotton. That necessarily must include US domestic consumption satisfied by US upland cotton. Again, we note that a relevant "market" for serious prejudice purposes is the market of the subsidizing Member under Article 6.3(a). There is no basis in the text or context of 6.3(d) to exclude that market from the "world market" identified in 6.3(d).
240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d) of the SCM Agreement? Do these provisions apply separately? If not, could it indicate that "world market share" is intended to mean the same as "share of world export trade"?
149. GATT 1994 Article XVI:3 provides some context to reading Article 6.3(d). Both provisions are addressed to subsidies that have effects on primary products. However, the context they provide also consists of the differences in their respective texts. GATT 1994 Article XVI:3 is limited to export subsidies, as Brazil acknowledged and agreed in the Tokyo Round Subsidies Code. (Brazil does not, because it cannot, deny that in the Tokyo Round it expressed its understanding that GATT 1994 Article XVI:3 applies only to export subsidies. The Panel can judge how credible it finds Brazil’s change of opinion in this dispute.) GATT 1994 Article XVI:3 relies on an "equitable share" concept that panels and Members found incapable of definition or application. Moreover, Brazil has not provided any objective definition in this dispute of the "equitable share" concept but to argue that anything other than a non‑subsidized level of exports is inequitable, a reading that would convert Article XVI:3 into a prohibition on domestic subsidies with production effects.
150. Article 6.3(d) of the Subsidies Agreement, on the other hand, applies to all subsidies and has objective criteria that are capable of application. This provision sets forward a mechanical test: a Member’s share of the world market for a product must be greater than preceding 3‑year average, and the increase must follow a consistent trend over a period when subsidies have been granted. Therefore, there is no "inequitable share" concept to deal with, and the consistency of a Member with its obligations is a straightforward matter to determine.
151. The United States does not see any basis to say that "world market share" was intended to mean the same as the "share of world export trade". The key difference is the use of the term "market" instead of "export". The term "market" can, of course, mean a domestic market; its meaning is not limited to markets in international trade. "Export" refers to cross‑border transactions; therefore, a more limited set of transactions would be of interest. As a result, the term "world market share" requires that one look at all places where upland cotton is consumed and determine what portion of world consumption of is satisfied with US upland cotton.
241. How does the US reconcile its data on consumption for 2002 in US Exhibit 40, Table 1 with the "consumption" data it refers to in its 30 September submission, paragraph 34, Exhibit US-47 or US-71? USA
152. In paragraph 34 of the 30 September submission and in the accompanying table, "consumption" is used to capture both the domestic use of raw cotton production (that is, the "mill use" figure), plus the raw cotton equivalent of textile imports (that is, how much raw cotton is incorporated into manufactured cotton textile imports). This point is crucial to understanding how the growth in cotton textile imports has contributed to the decline in consumption of US domestically produced raw cotton for domestic manufacturing, which has resulted in more US domestic cotton finding a home in off‑shore markets. That is, much US domestic cotton that is exported returns to the United States in the form of textiles and apparel.332
153. In Exhibits 40, 47, and 71, the data on consumption correspond to the "mill use" data described above. The only difference is that these data are on a crop year basis (August ‑ July). Therefore, the mill use figure in paragraph 34 of the US further submission will differ slightly from the consumption figure in the other exhibits. They are the same data, adjusted for different periods. The most recent domestic consumption (that is, mill use) figure is given in the response to Question 197.
242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land owners? If not all of the benefits go to land owners, what proportion goes to producers? USA
154. As noted in the US further rebuttal submission, the literature on direct payments suggest that a large portion of direct payments get capitalized into land values. As Burfisher and Hopkins (2003) note: "Not all operators can . . . be considered as true beneficiaries of the [PFC] programme, since competitive cropland rental markets work to pass through payments from PFC recipients who are tenants to the owners of base acres."333 Thus, the effects of increased wealth largely accrue to non‑operators, and any theoretical production effects are further minimized.
155. In well-functioning markets, asset prices reflect expectations about the future returns from their ownership. The PFC programme covered a fixed number of base cropland acres, established in 1996 when farmers enrolled in the programme, and benefits did not require current production. The direct link between base acres and the known programme benefits allowed the future stream of payments to be efficiently capitalized into land values:
Decoupled payments clearly increase the well‑being of the operators who receive them, but only when they are owners of base acres. Otherwise, land markets allow a pass‑through of payments from operators to landowners, via modified rental arrangements. Despite uncertainty over future policy, land values already reflect the market’s expectations about future programme benefits.334
156. Land values set by sales and rental markets can be examined to see whether they track commodity price trends. If these values diverge from prices, it suggests that land markets have additionally capitalized the present and expected future value of government payments. As the figure from Burfisher and Hopkins (2003) below demonstrates, commodity prices have fallen since 1996 due to a number of factors while land values have trended upward, consistent with land capitalization of payments. Land rent data, although more fragmented, follow the same trend as land values.

157. In its 27 October answer to Question 179 and in paragraph 57 of its oral presentation of 2 December, Brazil attempts to minimize the effects of direct payments on land by citing a recent study that showed that 34-41 cents per dollar of PFC payment were capitalized into land rents in MY 1997. However, in citing this study, Brazil effectively concedes the US analysis. The study cited by Brazil analyzes cash rent data in only the first year following implementation of the 1996 Act and the decoupled production flexibility contract payments. As the authors of the study acknowledge, cash rents may be "sticky" and adjust over the long run.335 For example, not all rental contracts would be year‑to‑year; as additional multi‑year rental contracts expire, landowners would be expected to adjust rents to capture the value of the decoupled payments made with respect to the base acreage on the land.


158. In the long run, only those upland cotton producers who are owners of upland cotton base acres will receive the benefit of those decoupled payments. Based on 1997 cost of production data, about 35 per cent of cotton production is grown by owner‑operators. Therefore, only 35 per cent of the value of decoupled payments would benefit upland cotton producers, and this subsidy benefit would then have to be attributed across the total value of the recipient’s production in order to determine the benefit to upland cotton.

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