Comments of the united states on the answers of brazil to further questions from the panel to the parties following the second panel meeting

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"Support to a Specific Commodity" 736 2.2 The US 11 February 2004 Comments Improperly Interpret the Phrase "Product Specific" 738
MY 1999-2002 and, thus, are Support to Upland Cotton 741 4. A Methodology to Count Contract Payments is Appropriate Based on the
the United States Level of Support Provided in MY 1999-2002 Exceeded the amount of Support Decided in MY 1992 747
is Baseless 754 8. Brazil Has Established, in the Alternative, the Amount of Contract Payments for Purposes of its SCM Serious Prejudice Claims 757
for Purposes of the Peace Clause 757 10. The United States Arguments concerning Various Issues Related to the Amount
11. The United States Comments Regarding the Appellate Bodys Japan – Agricultural Products Decision are Misplaced 760 Annex A 763
2. The US Critique of Brazil’s Methodology Is Based on the Flawed US Interpretation of “Support to a Specific Commodity” and, Alternatively, “Non-Product Specific Support”
2.1 US 11 February 2004 Comments Improperly Interpret the Phrase “Support to a Specific Commodity”
2.2 The US 11 February 2004 Comments Improperly Interpret the Phrase “Product-Specific”
3. Brazil’s Methodology is Supported by Undisputed Evidence that the Contract Payments were Essential to Maintain Upland Cotton Production Between MY 1999-2002, and, thus, are Support to Upland Cotton

1. Introduction 736

2. The US Critique of Brazil's Methodology is Based on the Flawed US Interpretation

of "Support to a Specific Commodity" and, Alternatively, "Non-Product Specific

Support" 736

2.1 US 11 February 2004 Comments Improperly Interpret the Phrase

"Support to a Specific Commodity" 736

2.2 The US 11 February 2004 Comments Improperly Interpret the Phrase

"Product Specific" 738

3. Brazil's Methodology is Supported by Undisputed Evidence that the Contract

Payments were Essential to Maintain Upland Cotton Production Between

MY 1999-2002 and, thus, are Support to Upland Cotton 741

4. A Methodology to Count Contract Payments is Appropriate Based on the

Text of Article 13(B)(ii) of the Agreement on Agriculture 745

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 747

6. The US Critique of Brazil's Allocation Methodology is Baseless 751

7. The US Critique of Brazil's Application of the Improper Annex IV Methodology

is Baseless 754

8. Brazil Has Established, in the Alternative, the Amount of Contract Payments

for Purposes of its SCM Serious Prejudice Claims 757

9. The United States Improperly Seeks to Limit the Scope of the Non-Green Box

Support Measures to be Examined for Determining the Amount of Support

for Purposes of the Peace Clause 757

10. The United States Arguments concerning Various Issues Related to the Amount

of Support "Decided" in MY 1992 Compared to the Amount Supported in

MY 1999-2002 are without Merit 759

11. The United States Comments Regarding the Appellate Body's Japan – Agricultural

Products Decision are Misplaced 760

Annex A 763

Annex B 794

Table of Cases

EC – Hormones (US, Canada)	Arbitrator Report, European Communities – Measures Concerning Meat and Meat Products (Hormones), WT/DS26/ARB and WT/DS48/ARB, circulated 12 July 1999.
EC – Bananas (Ecuador)	Arbitrator Report, European Communities – Regime for Import, Sale and Distribution of Bananas, WT/DS27/ARB, circulated 9 April 1999.
EC – Bananas (US)	Arbitrator Report, European Communities – Regime for Import, Sale and Distribution of Bananas, WT/DS27/ARB/ECU, circulated 24 March 2000.
Brazil – Aircraft	Arbitrator Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/ARB, circulated 28 August 2000.
Japan – Agricultural Products	Appellate Body Report, Japan – Measures Affecting Agricultural Products, WT/DS76/AB/R, adopted 19 March 1999.
US – FSC	Arbitrator Report, United States – Tax Treatment for “Foreign Sales Corporations”, WT/DS108/ARB, circulated 30 August 2002.
US – Sheet/Plate from Korea	Panel Report, United States – Anti-Dumping Measures on Stainless Steel Plate in Coils and Stainless Steel Sheet and Strip from Korea, WT /DS179/R, adopted 1 February 2001.
Canada – Aircraft II	Arbitrator Report, Canada – Export Credits and Loan Guarantees for Regional Aircraft, WT/DS222/ARB, circulated 17 February 2003.
US – Lumber CVD Final	Appellate Body Report, United States – Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS/257/AB/R, not yet adopted.

1. Introduction
1. Brazil sets forth its response to the US 11 February 2004 Comments on Brazil’s 28 January Comments and Requests regarding the US Data (“US 11 February 2004 Comments”). Brazil demonstrates in Sections 2 and 3 that the US critique of any methodology for tabulating “support to a specific commodity” is based on (1) a faulty legal interpretation that only subsidies tied to the production of a specific commodity can be counted for the purposes of Article 13(b)(ii) of the Agreement on Agriculture, and (2) a faulty factual assumption that the non-green box US contract payments did not provide support to maintain US production of upland cotton between MY 1999-2002. In Section 5, Brazil responds to the US 11 February 2004 Comments by demonstrating that applying Brazil’s and the US methodologies (along with two slight variations thereof) to the incomplete and inadequate US summary data (including the most recent 28 January 2004 data) demonstrates that the US budgetary expenditures in MY 1999-2002 exceed the level of support decided in MY 1992. Finally, Brazil responds to a number of other points raised by the US 11 February 2004 Comments in Sections 4, and 6-10.
2. The US Critique of Brazil’s Methodology Is Based on the Flawed US Interpretation of “Support to a Specific Commodity” and, Alternatively, “Non-Product Specific Support”
2. The United States’ 11 February 2004 Comments challenging Brazil’s methodology for counting contract payments are premised on a faulty interpretation of Article 13(b)(ii) of the Agreement on Agriculture. The US comments continue the US interpretation that the Panel can only count as “support” in MY 2002 those non-green box subsidies that require the production of upland cotton.^⁶⁷¹ But this leaves behind a number of subsidies that significantly and directly support production of upland cotton. As Brazil has previously argued, the Panel is required to count under Article 13(b)(ii) as “support to upland cotton” for MY 1999-2002 all identifiable non-green box support to upland cotton that supports, either directly or indirectly, the production or sale of upland cotton.^⁶⁷²
2.1 US 11 February 2004 Comments Improperly Interpret the Phrase “Support to a Specific Commodity”
3. The United States argues that no allocation methodology can be applied by the Panel under Article 13(b)(ii) of the Agreement on Agriculture. This US argument is based on the US 11 February 2004 Comments that “support to” means support “tied to” the production of a specific commodity.^⁶⁷³ In evaluating this argument the Panel should examine the ordinary meaning of the phrase “support to a specific commodity” in Article 13(b)(ii). The word “support” is defined as “the action of preventing a person from giving way or of backing-up a person or group; assistance, backing”.^⁶⁷⁴ “Support” does not mean or require, as the US comments suggest, an “incentive” or “encouragement” to produce. The SCM Agreement Annex IV, paragraph 3 phrase “tied to the production or sale of a [specific commodity]” is not found in Article 13(b)(ii). Rather, the word “support” has a more general sense of “backing up” a group of agricultural farmers producing a specific commodity. For example, subsidies that cover costs of production when a farmer chooses to grow a crop, “back up” or “support” that farmer. While some non-green box subsidies at issue in this dispute may create a greater incentive to produce (i.e., marketing loan, counter-cyclical payments, or crop insurance subsidies) than other subsidies (PFC or direct payments), all of these subsidies at issue in this dispute “support” production of upland cotton because they cover (or contribute to) the costs of production of a crop.

4. The distinction between “support for production” and “incentive for” (or “tied to”) production becomes relevant only when examining the effects these subsidies have in causing serious prejudice, within the meaning of Part III of the SCM Agreement. Brazil and the United States agree that the contract payments, which do not require production, create less direct incentives to produce than, e.g., marketing loan payments, Step 2 payments and crop insurance subsidies. But it is improper to impose an “incentive to” or “tied to” production test when counting up the non-green box “support” to a specific commodity under Article 13(b)(ii) of the Agreement on Agriculture. As noted above, the meaning of the phrase “support to” is a far broader concept. Indeed, the chapeau of Article 13(b)(ii) confirms this broader meaning of “support,” because it includes all types of non-green box measures, without regard to whether they create direct production incentives.

5. The United States’ comments continue to repeat the flawed mantra that “support to a specific commodity” means exactly the same thing as “product-specific support”.^⁶⁷⁵ Negotiators presumably knew what they intended when they used the very particular term “product-specific support”. They used the term repeatedly in the Agreement on Agriculture, and even defined “non-product-specific support” in Article 1(a) – yet they declined to use “product-specific support” in Article 13(b)(ii). Accepting arguendo the US narrow interpretation of “product-specific”^⁶⁷⁶, one reason may be that the “support to a specific commodity” phrase was not intended to mean only support that is tied to one product, but rather is intended to include all support that is provided, either directly or indirectly, to a product. The term “specific” clarifies that Article 13(b)(ii) focuses on any support to an individual commodity, not a group of commodities such as “grains”^⁶⁷⁷ or even all commodities. In fact, the notion of a “specific commodity” is very analogous to the “like product” in, inter alia, Articles 5 and 6 of the SCM Agreement and Article XVI of GATT 1994 – provisions that are expressly referenced in Article 13(b)(ii) of the Agreement on Agriculture.
6. The United States argues that the Panel is prohibited from even including as “support to” upland cotton, let alone applying any allocation methodology to, any non-green box domestic support measure.^⁶⁷⁸ This would be true even where a measure may provide billions of dollars of support to producers of a “specific commodity”. This, of course, is based on the US view that only support directly tied to the production of a specific product is covered by Article 13(b)(ii).^⁶⁷⁹ But because Article 13(b)(ii) captures all non-green box domestic subsidies that support a commodity, it may require the application of an allocation methodology for many trade- and production-distorting domestic support measures that may provide support to more than one commodity. The issue under Article 13(b)(ii) is whether a particular commodity receives “backing” or “support” from a domestic support measure. But the sole fact that multiple commodities are supported by a single type of (trade- and production-distorting) measure does not mean that the “support” or backing suddenly disappears when tabulating the amounts of support for the purpose of Article 13(b)(ii).
7. Applying a methodology such as that proposed by Brazil is consistent with the object and purpose of Article 13(b)(ii) – to capture all identifiable non-green box trade distorting subsides that “support” upland cotton production. To allow huge amounts of trade- and production-distorting support – such as the almost $1 billion in counter-cyclical payments received by almost every upland cotton farmer in MY 2002 – to remain uncounted renders any disciplines during the implementation period inutile. Were this the intention of negotiators, as the United States argues, then it would certainly have been stated explicitly – with language such as “exempt from actions … provided that measures which are paid upon the production of a specific commodity do not grant support to a specific commodity in excess of that decided during the 1992 marketing year”. Or with language such as “exempt from actions … provided that measures are directed only at a specific commodity do not grant support … .” It would have been simple to include these explicit phrases limiting support measures to only subsidies tied to production. But no such limitations were made in the sui generis provisions of Article 13(b)(ii).
8. In rejecting the narrow US “required production” test for “support to” in Article 13(b)(ii), the Panel must also reject the US criticisms of Brazil’s methodology for calculating support to upland cotton. This is because the US challenge to Brazil’s methodology is premised on incorporating into Article 13(b)(ii) the test that the only trade and production distorting support that can be counted is support that is de jure “tied to the production or sale of a given product”. Yet, this “tied to the production” language is found only in Annex IV, paragraph 3 of the SCM Agreement – not Article 13(b)(ii) of the Agreement on Agriculture.
2.2 The US 11 February 2004 Comments Improperly Interpret the Phrase “Product-Specific”
9. Brazil has argued, in the alternative, that the contract payments would also be considered to be “product-specific” support if the term “product-specific” had actually been used in the text of Article 13(b)(ii).^⁶⁸⁰ Brazil argued that the meaning of “product-specific” AMS must be governed by the only term providing some guidance to what it means – the definition of “non-product-specific support” in Article 1(a) of the Agreement on Agriculture.^⁶⁸¹ Because the United States raised this issue in its 11 February 2004 Comments,^⁶⁸² Brazil addresses it below, referencing Brazil’s earlier arguments.
10. As a preliminary matter, however, Brazil must correct an error in the US 11 February 2004 Comments. The United States falsely asserts that Brazil has “conceded that ‘support to a specific commodity’ refers to ‘product-specific support’”.^⁶⁸³ The alleged “concession” by Brazil^⁶⁸⁴ becomes the foundation for the US arguments in paragraphs 11-17 of the US 11 February 2004 Comments.
11. As the Panel knows, Brazil argued extensively – and correctly – in the peace clause phase of this dispute that the phrase “support to a specific commodity” is not the same as “product-specific support”.^⁶⁸⁵ Brazil’s earlier arguments noted that under the facts of this case, all of the non-green box support payments challenged by Brazil as “support to a specific commodity” would also be considered “product-specific support”, within the meaning of Article 1(a) of the Agreement on Agriculture.^⁶⁸⁶ However, this argument was only made in the alternative, to demonstrate that, even under the incorrect US theory, the amount of “product-specific” support for upland cotton in MY 1999-2002 exceeded the level of “product-specific” support for upland cotton decided in MY 1992.
12. The US 11 February 2004 Comments now go so far as to argue that any allocation methodology under Article 13(b)(ii) – which it argues means “product-specific” support – is prohibited by the Agreement on Agriculture.^⁶⁸⁷ One interpretative guide to determine whether support is “product-specific” is found in the definition of “non-product-specific support” in Article 1(a) of the Agreement on Agriculture. Brazil demonstrated that only non-product specific support is actually defined and that it includes “support provided in favour of agricultural producers in general”.^⁶⁸⁸ The United States asserts that Brazil’s definition of “general” is obsolete and that “general” means any support provided to more than one commodity.^⁶⁸⁹ But this is a tortured reading of the term “in general”. “Non-obsolete” definitions of “general” include “relating to a whole class of objects” and “not partial, local or sectional”.^⁶⁹⁰ As with the so-called “obsolete” definition criticized by the United States, these definitions fully support the ordinary meaning of “non-product-specific” support as support provided to a broad range of producers covering a wide variety of agricultural products, not simply more than one, as the United States argues.
13. Further context for the existence of some sort of an allocation methodology in the Agreement on Agriculture is Annex 3, paragraph 7, which provides that “[m]easures directed at agricultural processors shall be included to the extent that such measures benefit the producers of the basic agricultural products”. This use of the term “benefit” is very similar to the notion of “support” as used in Article 13(b)(ii). The assessment of the extent to which measures directed at agricultural processors benefit producers of a particular product necessitates a delineation of support that actually benefit upstream agricultural producers. This requires an allocation methodology.
14. Further, the narrow US interpretation is contradicted by Annex 3, paragraphs 7, 8, 12 and 13 of the Agreement on Agriculture, which include as “product-specific” many types of domestic support not tied to the production of a particular commodity.^⁶⁹¹ Nor do the Agreement on Agriculture citations in paragraph 12 of the US 11 February 2004 Comments provide guidance as to where to draw the line for “non-product specific support”.
15. While future negotiators may decide to clarify exactly what “product-specific” means in future revisions of the Agreement on Agriculture, the present text does not provide the “hard and fast” “production-requirement” subsidy rules advanced by the United States in this dispute. Indeed, Brazil notes that all commenting third parties in this dispute have stated their belief that the US counter-cyclical payments and crop insurance subsidies were “product-specific”.^⁶⁹² This suggests that the United States’ trading partners do not agree that there is a “production-requirement” test for “product-specific support”. Consistent with these third party views, there is nothing in the text of the Agreement on Agriculture to support a finding that “product-specific” is determined solely by the de jure form of the payment or by whether the payment is tied to the production of the crop. Nor does the Agreement on Agriculture support the US hard and fast “tied to production” test. Absent such guidance, the determination of whether agricultural support is specific or “general” is a factual issue that must be decided on a case-by-case basis.
16. The US 11 February 2004 Comments further state that “product-specific” and “non-product-specific” are disjunctive, and that Article 6.4 of the Agreement on Agriculture requires de minimis levels of support to be categorized into “product-specific” and “non-product-specific”.^⁶⁹³ This is true, but begs the question of how and when to draw the line between product-specific and non-product-specific support. For example, the United States has argued that MY 2002 counter-cyclical payments for upland cotton are non-product specific.^⁶⁹⁴ But in MY 2002, upland cotton counter-cyclical payments of almost $1 billion were received by producers holding only 1.7 per cent of US farmland.^⁶⁹⁵ Brazil agrees with the EC, New Zealand, and Argentina that such payments are “partial, local or sectional” to particular US producers.^⁶⁹⁶ They are not provided “in general” to a broad group of US producers. Thus, they should be allocated as “product-specific support,” including for purposes of an Article 6.4 de minimis analysis.
17. The United States argues that a single type of domestic support measure cannot be both “product-specific” and “non-product-specific” support.^⁶⁹⁷ Once again, the answer to this question would depend on the facts of the case. For example, if 95 per cent of the expenditures of a so-called decoupled payment ended up in the pockets of farmers producing a single commodity (such as upland cotton counter-cyclical payments), these facts would support the finding of product-specific support for that commodity. Whether the other nine commodities eligible to receive a similar type of payment were also receiving product-specific support would have to be decided on a case-by-case basis. Similarly, if a decoupled payment programme gave farmers the flexibility to grow four different crops, but these crops represented only 10 per cent of total commodity production in that Member, then the support for each of these crops might be considered to be “product-specific”.
18. In sum, the use of the term “in general” in Article 1(b) of the Agreement on Agriculture implies that this is a question of fact, the answer to which depends on a host of factors, not a simplistic and non-textually based “tied to production” rule, as advanced by the United States. Any other interpretation would write text into the Agreement on Agriculture that is not there and was not agreed to by Members. As the comments of the EC, New Zealand and Argentina in this dispute vividly illustrate, there is not an universal understanding that product-specific support means only domestic support that is de jure tied to production. By defining “non-product-specific support” using the “in general” language, Members provided flexibility to examine, on an case-by-case basis, whether the domestic support was so linked to a handful of products that it could not be considered “non-product specific support”.
19. Finally, Brazil does not believe that the Panel, in this dispute settlement proceeding, is required to interpret “product-specific” support to resolve the now-expired peace clause provisions of Article 13(b)(ii). The concept of “product-specific” continues to be a significant issue with respect to ongoing negotiations and in future interpretations of Members’ obligations to comply with their “total AMS” requirements. Brazil’s claims in this dispute do not challenge the “total AMS” of the United States. Brazil has never claimed that “AMS” must be interpreted in this dispute. The interpretative issues relating to the peace clause can and should be resolved by interpreting the terms actually used in that provision – “support to a specific commodity” – not by interpreting the term “product-specific” that the United States now seeks to substitute in place of a carefully negotiated text.
3. Brazil’s Methodology is Supported by Undisputed Evidence that the Contract Payments were Essential to Maintain Upland Cotton Production Between MY 1999-2002, and, thus, are Support to Upland Cotton
20. The US critique of Brazil’s methodology rests not only on an incorrect legal interpretation of “support to a specific commodity,” but more fundamentally on its false assumption that contract payments do not support the production of upland cotton. This factual assumption permeates all of the 32 pages of the US 11 February 2004 Comments. It is articulated by asserting that the contract payments are “decoupled” or “not tied to” the production of upland cotton. Ultimately, the combination of these flawed legal interpretations and factual assumptions result in the equally flawed US assertion that its Annex IV methodology is the only way to allocate contract payments (albeit only for purposes of Part III of the SCM Agreement).
21. In evaluating which methodology to use to count contract payment as “support to cotton”, the starting point is the necessary fact that all the contract payments at issue are non-green box support.^⁶⁹⁸ For example, direct payments and counter-cyclical payments are not properly considered “decoupled income support”, within the chapeau of paragraph 6 of Annex 2 of the Agreement on Agriculture.^⁶⁹⁹ This means that each of the contract payments is linked (or coupled), to some extent, to the production of one or more agricultural commodities. In addition, prior to applying the methodology, it must have been determined that the non-green box measures are “support to a specific commodity”.
22. Having demonstrated these first two steps, the next question is the “amount of the support” to a specific commodity. This is a factual question and requires assessing to what extent a particular non-green box subsidy supports or maintains the production of a specific commodity or commodities. This initially requires an examination of the legal structure of the support mechanism. But more importantly, it requires an examination of the record evidence concerning the extent to which the payments de facto support or maintain the production of a specific commodity. Applied to this case, it means that the stronger the requirement for the contract payments to maintain (i.e., cover the costs of) production of upland cotton, the more appropriate it is to use a methodology that treats each dollar of payments received directly by producers of upland cotton as “support to” upland cotton.
23. The US “Annex IV” methodology assumes that all four contract payments are not tied in any significant way to the production of upland cotton. The primary evidence relied on by the United States are the legal provisions of the 1996 FAIR Act and the 2002 FSRI Act, which permit “producers” to grow other crops (except fruits, vegetables and wild rice) and still receive the contract payments. The United States argued that the legally permitted “decoupled” form of the support requires the payment to be spread out over the entire value of a farm’s production.^⁷⁰⁰ It is this assumption that underpins the US Annex IV methodology.
24. Calculating the amount of contract payments that is “support” to upland cotton by allocating the benefit of those payments across total production of farms receiving the payments might make sense if the four contract payments had, in fact, no significant role in maintaining the production of upland cotton. But the US methodology runs headlong into the overwhelming weight of the evidence showing a direct and significant link between “producers” receiving upland cotton contract payments and “producers” planting upland cotton. Brazil produced extensive evidence showing the link between these contract payments and the maintenance of upland cotton production.^⁷⁰¹ Consider the following key uncontested facts:

96 per cent of MY 2002 upland cotton acreage was planted on farms that hold upland cotton base.^⁷⁰² This demonstrates that the overwhelming majority of current US upland cotton production is planted on upland cotton base and shows that, in fact, direct and counter-cyclical payments are directly linked to current production.

US upland cotton producers would have lost $332.79 per acre between MY 1997-2002 if they had not received upland cotton contract payments.^⁷⁰³ This demonstrates the critical role contract payments play in sustaining production of upland cotton during MY 1999-2002.

Without direct and counter-cyclical payments in MY 2002, the average US cotton farmer would have lost 14.36 cents per pound. With these two payments, they earned a “profit” of 4.2 cents per pound with the cotton DP and CCP payments.^⁷⁰⁴

Producers growing crops on upland cotton acreage receive much higher per acre payments than all other “covered commodities”, except rice. The higher per acre payments are directly related to the higher costs to produce cotton compared to other crops.^⁷⁰⁵ This fact highlights the expectation that former producers would continue to be present producers.^⁷⁰⁶ This is an expectation that is a reality, since 96 per cent of upland cotton farmers do plant upland cotton on high per-acre payment upland cotton base acreage.

Upland cotton producers in MY 2002 received $446.8 million in upland cotton direct payments, representing a subsidization rate of 13.1 per cent.^⁷⁰⁷

Upland cotton producers in MY 2002 received $986.4 million in upland cotton counter-cyclical payments, representing a subsidization rate of 28.9 per cent.^⁷⁰⁸

The amount of US planted cotton acreage has shown only relatively small shifts over the past ten years regardless of market price movements, confirming the influence of the contract payments in maintaining large volumes of production.^⁷⁰⁹ This evidence is consistent with NCC testimony and USDA data showing that most upland cotton farmers do not shift out of specializing in upland cotton production towards the production of other crops to any great extent.^⁷¹⁰

NCC officials repeatedly stated that their cotton farmer members cannot produce upland cotton without contract payments, and they have always treated contract payments as an integral part of an overall subsidy package of support for upland cotton production.^⁷¹¹

25. In addition to the above, the provisions of the 2002 FSRI Act are evidence that upland cotton contract payments were intended to support the production of upland cotton. First, Section 1104(c)(1)(F) of the 2002 FSRI Act sets a “target price” for upland cotton of 72.4 cents per pound, which guarantees high revenues in much the same way that deficiency payments worked before MY 1996. This upland cotton-specific “target price” was requested by the NCC in 2001 and exists to support upland cotton – not the production of other crops. The cotton target price results in much higher per acre counter-cyclical payments for upland cotton than other crops (except rice). Second, Sections 1103(a) and 1104(a) require payments to current producers growing on covered crop base acreage. In other words, Congress intended that only farmers actually planting crops (or sharing the risk of planting a crop if one would have been produced) would directly receive the payments. Third, Section 1103(b) of the 2002 FSRI Act establishes very high direct payment rates for upland cotton base relative to other “covered commodities”^⁷¹²

26. The facts set out above are crucial for understanding why the US “Annex IV” methodology rests on a completely false assumption. That assumption is that US producers of upland cotton do not need or rely on the full amount of upland cotton payments to cover their long-term losses from the production of upland cotton. The United States implements this assumption by proposing that the only methodology that can be used is one that would spread the entire amount of the contract payments across the total value of an upland cotton farmer’s production. But the record shows conclusively that most upland cotton farmers simply could not produce upland cotton profitably in MY 1999-2002 without using all contract payments they demanded and received for their upland cotton production.
27. The US 11 February 2004 Comments argue that Brazil’s methodology for counting support to upland cotton makes “no economic sense”.^⁷¹³ But it is the US Annex IV methodology, as applied to contract payments to US upland cotton producers, that makes no economic sense. For example, if upland cotton farmers were, in fact, using these payments to support unprofitable dairy, livestock, or fish farming operations, then they would have lost money on their upland cotton production. The fact that US producers were able to grow any upland cotton at all in MY 2002 after four straight years of huge “losses” (totalling $872 per acre by MY 2002,^⁷¹⁴ comparing production costs and market revenue) demonstrates conclusively the production-sustaining effects of these subsidies.^⁷¹⁵ Indeed, the continued high levels of plantings in MY 2002 despite these losses are strong evidence that upland cotton producers did in fact (a) receive, and (b) use upland cotton contract payments to sustain their upland cotton production during MY 1999-2002. If not, US upland production would have been far lower, as farmers simply could not have survived economically. Thus, the US assumption in its “Annex IV” methodology that producers did not need or use upland cotton payments to sustain high-cost upland cotton production is simply wrong.
28. By contrast, Brazil’s methodology properly reflects the economic reality of the key role these payments played in sustaining US upland cotton production in MY 1999-2002. Brazil, like the NCC, believes that the contract payments were necessary for the maintenance and the survival of US upland cotton production during MY 1999-2002.^⁷¹⁶ In keeping with the key role that upland cotton contract payments played in sustaining upland cotton production, the principal element of Brazil’s methodology focuses only on upland cotton contract payments made to producers of upland cotton. Such “cotton to cotton” payments represent the vast bulk of contract payments received by upland cotton producers. For example, under Brazil’s methodology, 99.1 per cent of the MY 2002 direct payments received by upland cotton producers were upland cotton payments.^⁷¹⁷ Similarly, under Brazil’s methodology, 99.8 per cent of the MY 2002 counter-cyclical payments received by upland cotton producers were upland cotton payments.^⁷¹⁸ Treating all of these “cotton to cotton” payments as support to upland cotton is fully supported by the essential role these cotton payments play in sustaining US upland cotton production.
29. The second (and relatively minor) part of Brazil’s methodology is to account for the non-upland cotton contract payments received by current upland cotton producers. These non-upland cotton base payments represented a tiny 0.9 per cent in MY 2002 of the total direct payments allocated to upland cotton under Brazil’s methodology, and 0.2 per cent in MY 2002 of the counter-cyclical payments allocated to upland cotton under Brazil’s methodology. This small part of Brazil’s methodology first pools any contract payments received for base acres not planted to their respective base crop and then distributes them as support to these contract payment crops according to their share of total “overplanted” base acreage on the farm.
30. The facts show that it is appropriate for Brazil to allocate these payments over the plantings of the other “covered commodities” produced by an upland cotton producer. Brazil demonstrated that, for each of the marketing years from 2000-2002, an upland cotton producer growing upland cotton on non-contract acreage would have suffered considerable losses.^⁷¹⁹ Even growing on non-upland cotton (except rice) base acreage would have resulted in losses during most of the period of investigation.^⁷²⁰ Therefore, the relatively few upland cotton producers planting on some other type of base acreage needed and relied on the non-upland cotton payments to come close to making a profit. Without such payments, the average producer would have not been able to sustain upland cotton production.
31. In addition, the allocation across all contract crops (as opposed to all farm products produced) is justified by the evidence of the “specific” nature of the “covered commodity” payments. The United States never contested Brazil’s evidence or argument that the contract payments are “specific” subsidies within the meaning of the SCM Agreement. For example, the United States never rebutted evidence that the 2002 FSRI Act “covered commodities” represented only 24 per cent of the value of US farm receipts (and 30 per cent of US farm acreage) in MY 2002, and that the 1996 FAIR Act “programme crops” represented less than 14 per cent of the value of US crops (and 22 per cent of the acreage) during MY 1999-2001.^⁷²¹ Nor did the United States ever rebut any of the numerous statements of the users and recipients of the contract payments – the NCC – that they needed and received contract payments to survive.^⁷²²
32. In sum, the proper allocation methodology under Article 13(b)(ii) of the Agreement on Agriculture must be consistent with the extent to which the domestic support payments directly maintain the production of a specific commodity. Brazil’s methodology reflects the crucial role that each of the four contract payments plays in maintaining the production of US upland cotton. By contrast, the US “Annex IV” methodology assumes incorrectly that these payments do not support upland cotton any more than they support catfish farming or other production activities on an upland cotton farm. For the above reasons, Brazil requests that the Panel reject the US arguments, and adopt Brazil’s methodology for allocating the contract payments.

Directory: english -> tratop e -> dispu e
dispu e -> Annex g list of exhibits submitted by the parties
dispu e -> World Trade Organization
dispu e -> World Trade Organization

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