WORLD TRADE ORGANIZATION

Transcription

1 WORLD TRADE ORGANIZATION WT/DS267/RW 18 December 2007 ( ) Original: English UNITED STATES SUBSIDIES ON UPLAND COTTON Recourse to Article 21.5 of the DSU by Brazil Report of the Panel

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3 Page i TABLE OF CONTENTS Page I. INTRODUCTION...1 II. BACKGROUND...2 III. FACTUAL ASPECTS...4 A. PRODUCTS AT ISSUE...4 B. DEVELOPMENTS CONCERNING THE MEASURES FOUND TO BE WTO-INCONSISTENT BY THE ORIGINAL PANEL User marketing (Step 2) payments, marketing loan payments, market loss assistance payments and counter-cyclical payments...5 (a) (b) User marketing (Step 2) payments...5 Marketing loan payments...5 (c) Market loss assistance payments...7 (d) Counter-cyclical payments Export credit guarantees...8 IV. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS...10 V. ARGUMENTS OF THE PARTIES...12 VI. ARGUMENTS OF THE THIRD PARTIES...12 VII. INTERIM REVIEW...12 A. CHANGES REQUESTED BY THE PARTIES REGARDING THE "FACTUAL ASPECTS" SECTION OF THE INTERIM REPORT...12 B. CHANGES REQUESTED BY THE PARTIES WITH RESPECT TO THE PANEL'S DESCRIPTION OF ARGUMENTS OF THE PARTIES...12 C. REQUESTS FOR CHANGES WITH RESPECT TO THE PANEL'S FACTUAL AND LEGAL ANALYSIS...13 D. EDITORIAL CORRECTIONS...25 VIII. PROCEDURAL MATTERS...25 A. REQUEST OF BRAZIL THAT THE PANEL EXERCISE ITS DISCRETION TO SEEK CERTAIN INFORMATION FROM THE UNITED STATES UNDER ARTICLE 13 OF THE DSU...25 B. REQUEST OF THE UNITED STATES FOR OPEN HEARING...28 C. SERVICING OF SUBMISSIONS...29 D. REQUEST OF THE EUROPEAN COMMUNITIES FOR A FINDING OR RULING ON THE PANEL'S COMPOSITION...31 E. LEAST DEVELOPED COUNTRY MEMBERS...31 IX. GENERAL CONSIDERATIONS AND ISSUES RELATING TO THE SCOPE OF THIS PROCEEDING...31 A. STANDARD OF REVIEW, BURDEN OF PROOF AND RULES OF TREATY INTERPRETATION Standard of review...31

4 Page ii 2. Burden of proof Rules of treaty interpretation...34 B. SCOPE OF THIS PROCEEDING UNDER ARTICLE 21.5 OF THE DSU Introduction Whether Brazil's claims relating to export credit guarantees for pig meat and poultry meat are outside the scope of this proceeding...34 (a) (b) Main arguments of the parties...34 Main arguments of third parties...36 (c) Evaluation by the Panel Whether Brazil's claims with respect to the marketing loan and counter-cyclical payment programmes are outside the scope of this proceeding...39 (a) Whether Brazil's claims with respect to the marketing loan payment and countercyclical programmes are outside the scope of this proceeding because these programmes were not subject to recommendations and rulings of the DSB in the original proceeding...39 (i) Main arguments of the parties...39 (ii) Main arguments of third parties...42 (iii) Evaluation by the Panel...44 (b) Whether Brazil's claims with respect to the marketing loan and counter-cyclical payment programmes are outside the scope of this proceeding because these programmes have not been changed in response to DSB recommendations and rulings or otherwise and therefore are not "measures taken to comply" within the meaning of Article 21.5 of the DSU Whether Brazil's claim regarding the failure of the United States to take measures between 22 September 2005 and 31 July 2006 is outside the scope of this proceeding...48 (a) (b) Main arguments of the parties...48 Main arguments of third parties...49 (c) Evaluation by the Panel Whether "payments" made after 21 September 2005 pursuant to the marketing loan and counter-cyclical payment programmes are within the scope of this proceeding...52 (a) Main arguments of the parties...52 (b) Evaluation by the Panel...53 X. FINDINGS ON BRAZIL'S CLAIMS OF "PRESENT" SERIOUS PREJUDICE UNDER ARTICLES 5(C) AND 6.3 OF THE SCM AGREEMENT...55 A. INTRODUCTION...55 B. BRAZIL'S CLAIM OF "PRESENT" SERIOUS PREJUDICE WITHIN THE MEANING OF ARTICLES 5(C) AND 6.3 (C) OF THE SCM AGREEMENT Introduction overview of the main arguments of the parties Arguments of third parties...58

5 Page iii 3. Preliminary considerations relating to the Panel's evaluation of Brazil's claim under Articles 5(c) and 6.3(c) of the SCM Agreement...59 (a) Text of legal provisions...59 (b) Period to be considered by the Panel...60 (i) Main arguments of the parties...60 (ii) Main arguments of third parties...60 (iii) Evaluation by the Panel...60 (c) Whether marketing loan and counter-cyclical payments are specific subsidies...61 (d) Magnitude of the marketing loan and counter-cyclical payments...62 (i) (ii) (e) (f) Marketing loan payments...62 Counter-cyclical payments...63 Product at issue, like product, relevant "market" and "price"...68 Significant price suppression as the effect of the subsidy The alleged "substantial proportionate influence" of US upland cotton production and exports...72 (a) Main arguments of the parties...72 (b) Evaluation by the Panel "Structure, design and operation" of the marketing loan and counter-cyclical payments...75 (a) Main arguments of the parties...75 (b) Evaluation by the Panel Alleged "large magnitude" of the marketing loan payments and counter-cyclical payments...89 (a) Main arguments of the parties...89 (b) Evaluation by the Panel Alleged "link between high levels of US subsidies and high levels of US planted acreage, production and exports"...92 (a) Main arguments of the parties...92 (b) Evaluation by the Panel Alleged "discernible temporal coincidence" of suppressed world market prices and large marketing loans and counter-cyclical payments...97 (a) Main arguments of the parties...97 (b) Evaluation by the Panel Alleged gap between long-term costs of production and market revenues of US upland cotton producers (a) Main arguments of the parties (b) Evaluation by the Panel (i) Description of the data on commodity cost and returns...108

6 Page iv (ii) Whether certain items (land, unpaid labour and capital recovery costs) should be included as variable costs (iii) Cash or opportunity costs (iv) Total or variable costs of production (v) The role of off-farm income (vi) US upland cotton producers' long-term costs of production and market revenues (vii) Other arguments The economic simulation model submitted by Brazil in this proceeding (a) (b) (i) Introduction Main arguments of the parties Structure of the model (ii) Parameters of the model (c) Evaluation by the Panel Impact of the elimination of Step 2 payments (a) (b) Introduction Main arguments of the parties (c) Evaluation by the Panel (i) Assessing the effects on US cotton exports (ii) Indirect effect on marketing loan and counter-cyclical payments Other factors impacting the world market price for upland cotton (a) Main arguments of the parties (b) Evaluation by the Panel Summary and conclusion of the Panel's analysis of Brazil's claim of serious prejudice within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement C. CLAIM OF BRAZIL OF "PRESENT" SERIOUS PREJUDICE WITHIN THE MEANING OF ARTICLES 5(C) AND 6.3(D) OF THE SCM AGREEMENT Main arguments of the parties Evaluation by the Panel XI. XII. XIII. BRAZIL'S CLAIM OF THREAT OF SERIOUS PREJUDICE UNDER ARTICLES 5(C) AND 6.3 OF THE SCM AGREEMENT BRAZIL'S CLAIM OF "PRESENT" SERIOUS PREJUDICE UNDER ARTICLES 5(C), 6.3(C) AND 6.3(D) OF THE SCM AGREEMENT AS A RESULT OF THE FAILURE OF THE UNITED STATES TO TAKE ANY ACTION BETWEEN 22 SEPTEMBER 2005 AND 31 JULY ATTACHMENT 1: OVERVIEW OF NEW ECONOMIC LITERATURE ON COUNTER-CYCLICAL PAYMENTS A. IMPACT OF COUNTER-CYCLICAL PAYMENTS Studies cited by the United States...138

7 Page v 2. Studies cited by Brazil B. ARE COUNTER-CYCLICAL PAYMENTS CAPITALIZED INTO HIGHER LAND VALUES? Studies cited by the United States XIV. FINDINGS ON BRAZIL'S CLAIMS UNDER ARTICLES 10.1 AND 8 OF THE AGREEMENT ON AGRICULTURE AND ARTICLES 3.1(A), 3.2 AND 4.7 OF THE SCM AGREEMENT WITH RESPECT TO EXPORT CREDIT GUARANTEES A. INTRODUCTION Description of the export credit guarantees at issue in this dispute Summary of the original panel and Appellate Body's findings concerning export credit guarantees B. BRAZIL'S CLAIMS WITH RESPECT TO EXPORT CREDIT GUARANTEES OUTSTANDING ON 1 JULY Introduction Main arguments of the parties Main arguments of third parties Evaluation by the Panel (a) Introduction (b) Panel and Appellate Body reports in Brazil Aircraft (Article 21.5 Canada) (c) Whether the obligation to "withdraw the subsidy" includes an obligation to abstain from performing on outstanding financial commitments (d) Meaning of the term "withdraw" C. BRAZIL'S CLAIMS CONCERNING GSM 102 EXPORT CREDIT GUARANTEES ISSUED AFTER 1 JULY Introduction Brazil's claims under Articles 8 and 10.1 of the Agreement on Agriculture Are GSM 102 export credit guarantees "export subsidies" legal bases for Brazil's arguments Brazil's arguments under item (j) of the Illustrative List of Export Subsidies (a) Original panel's analysis under item (j) of the Illustrative List of Export Subsidies (i) Past performance of the programmes (ii) Structure, design and operation of the programme (iii) (iv) (b) Overall conclusion by the original panel Appellate Body "Quantitative" analysis under item (j) (i) Main arguments of the parties (ii) Evaluation by the Panel (c) Comparison with MPRs under the OECD Arrangement...167

8 Page vi (i) Main arguments of the parties (ii) Main arguments of third parties (iii) Evaluation by the Panel (d) Structure, design and operation of the GSM 102 programme (i) Main arguments of the parties (ii) Evaluation by the Panel (e) Overall conclusion of the Panel's analysis under item (j) of the Illustrative List Whether the United States has applied GSM 102 guarantees in a manner that results in circumvention of its export subsidy commitments under the Agreement on Agriculture (a) (b) Introduction Unscheduled products (c) Scheduled products Claims that GSM 102 export credit guarantees are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement D. CLAIMS WITH RESPECT TO LYSINE, LYOCELL AND WOOD PRODUCTS XV. CONCLUSIONS AND RECOMMENDATION...188

9 Page vii LIST OF ANNEXES ANNEX A FIRST WRITTEN SUBMISSIONS OF PARTIES AND THIRD PARTIES Contents Page Annex A-1 Executive Summary of the First Written Submission of Brazil A-2 Annex A-2 Executive Summary of the First Written Submission of the A-9 United States (Including Request for Preliminary Rulings) Annex A-3 Third Party Submission of Argentina A-18 Annex A-4 Third Party Submission of Australia A-22 Annex A-5 Third Party Submission of Canada A-31 Annex A-6 Third Party Submission of Chad A-38 Annex A-7 Third Party Submission of the People's Republic of China A-52 Annex A-8 Third Party Submission of the European Communities A-57 Annex A-9 Third Party Submission of Japan A-72 Annex A-10 Third Party Submission of New Zealand A-79 ANNEX B REBUTTAL SUBMISSIONS OF PARTIES Contents Page Annex B-1 Executive Summary of the Rebuttal Submission of Brazil B-2 Annex B-2 Executive Summary of the Rebuttal Submission of the B-8 United States Annex B-3 Executive Summary of Brazil's Submission Regarding US Requests for Preliminary Ruling B-16 ANNEX C ORAL STATEMENTS OF PARTIES AND THIRD PARTIES AT THE MEETING WITH THE PANEL Contents Page Annex C-1 Opening Statement of Brazil (Executive Summary) C-2 Annex C-2 Closing Statement of Brazil C-10 Annex C-3 Opening Statement of the United States (Executive Summary) C-18 Annex C-4 Closing Statement of the United States C-26 Annex C-5 Third Party Oral Statement of Argentina C-29 Annex C-6 Third Party Oral Statement of Australia C-34 Annex C-7 Third Party Oral Statement of Canada C-37 Annex C-8 Third Party Oral Statement of Chad C-40 Annex C-9 Third Party Oral Statement of the People's Republic of China C-45 Annex C-10 Third Party Oral Statement of the European Communities C-47 Annex C-11 Third Party Oral Statement of India C-56 Annex C-12 Third Party Oral Statement of Japan C-58 Annex C-13 Third Party Oral Statement of New Zealand C-61 Annex C-14 Third Party Oral Statement of Thailand C-64

10 Page viii ANNEX D RESPONSES OF PARTIES TO THE PANEL'S QUESTIONS AND OTHER COMMENTS AND DOCUMENTS RECEIVED FROM PARTIES Contents Page Annex D-1 Brazil's Request for the Panel to Seek Production of Documents and D-2 Information Pursuant to Article 13 of the DSU Annex D-2 Responses of Brazil to the Panel's Questions on the DSU Article 13 D-18 Issue Annex D-3 Responses of the United States to the Panel's Questions on the DSU D-21 Article 13 Issue Annex D-4 Comments of Brazil on the Oral Statements of the United States at D-24 the Meeting with the Panel Annex D-5 Comments of the United States on the Oral Statements of Brazil at D-46 the Meeting with the Panel Annex D-6 Responses of Brazil to the Panel's First Set of Questions (Sections D-78 A-C) Annex D-7 Responses of Brazil to the Panel's First Set of Questions (Sections D-114 D&E) Annex D-8 Responses of the United States to the Panel's First Set of Questions D-134 (Sections A-C) Annex D-9 Responses of the United States to the Panel's First Set of Questions D-152 (Sections D&E) Annex D-10 Brazil's Comments on the Responses of the United States to the D-177 Panel's First Set of Questions Annex D-11 United States' Comments on the Responses of Brazil to the Panel's D-220 First Set of Questions Annex D-12 Responses of Brazil to the Panel's Second Set of Questions D-269 Annex D-13 Responses of the United States to the Panel's Second Set of D-355 Questions Annex D-14 Brazil's Comments on the Responses of the United States to the D-443 Panel's Second Set of Questions Annex D-15 United States' Comments on the Responses of Brazil to the Panel's Second Set of Questions D-518 ANNEX E COMMUNICATIONS FROM PARTIES Contents Page Annex E-1 Letter of the United States dated 7 November 2006 E-2 Annex E-2 Letter of the United States dated 20 November 2006 E-5 Annex E-3 Letter of the United States dated 21 November 2006 E-8 Annex E-4 Letter of Brazil dated 22 November 2006 E-10 Annex E-5 Letter of Brazil dated 24 November 2006 E-13 Annex E-6 Letter of Brazil dated 18 December 2006 E-15 Annex E-7 Letter of the United States dated 19 December 2006 E-16 Annex E-8 Letter of Brazil dated 22 January 2007 E-19

11 Page ix Contents Page Annex E-9 Letter of Brazil dated 7 February 2007 E-21 Annex E-10 Letter of the United States dated 12 February 2007 E-22 ANNEX F COMMUNICATIONS FROM THE PANEL TO PARTIES Contents Page Annex F-1 Communication of 8 November 2006 F-2 Annex F-2 Communication of 27 November 2006 F-3 Annex F-3 Communication of 28 November 2006 F-4 Annex F-4 Communication of 20 December F-5 Annex F-5 Communication of 17 January 2007 F-6 Annex F-6 Communication of 22 January 2007 F-7 Annex F-7 Communication of 16 February 2007 F-8 Annex F-8 Communication of 21 March 2007 F-9 ANNEX G WORKING PROCEDURES AND TIMETABLE OF THE PANEL Contents Page Annex G-1 Working Procedures G-2 Annex G-2 Timetable (Final) G-5 ANNEX H REQUEST FOR THE ESTABLISHMENT OF A PANEL Contents Page Annex H-1 Request for the Establishment of a Panel by Brazil H-2 1 This communication was sent to the Parties as well as to the Third Parties.

12 Page x TABLE OF CASES CITED IN THIS REPORT Short Title Australia Salmon (Article 21.5 Canada) Brazil Aircraft (Article 21.5 Canada) Brazil Aircraft (Article 21.5 Canada) Canada Aircraft (Article 21.5 Brazil) Canada Aircraft (Article 21.5 Brazil) Canada Dairy Canada Dairy (Article 21.5 New Zealand and US) Canada Dairy (Article 21.5 New Zealand and US II) Chile Price Band System (Article 21.5 Argentina) EC Bed Linen (Article 21.5 India) EC Bed Linen (Article 21.5 India) EC Export Subsidies on Sugar Indonesia Autos Korea Commercial Vessels Full Case Title and Citation Panel Report, Australia Measures Affecting Importation of Salmon Recourse to Article 21.5 of the DSU by Canada, WT/DS18/RW, adopted 20 March 2000, DSR 2000:IV, 2031 Appellate Body Report, Brazil Export Financing Programme for Aircraft Recourse by Canada to Article 21.5 of the DSU, WT/DS46/AB/RW, adopted 4 August 2000, DSR 2000:VIII, 4067 Panel Report, Brazil Export Financing Programme for Aircraft Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW, adopted 4 August 2000, as modified by Appellate Body Report, WT/DS46/AB/RW, DSR 2000:IX, 4093 Appellate Body Report, Canada Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 21.5 of the DSU, WT/DS70/AB/RW, adopted 4 August 2000, DSR 2000:IX, 4299 Panel Report, Canada Measures Affecting the Export of Civilian Aircraft Recourse by Brazil to Article 21.5 of the DSU, WT/DS70/RW, adopted 4 August 2000, as modified by Appellate Body Report, WT/DS70/AB/RW, DSR 2000:IX, 4315 Panel Report, Canada Measures Affecting the Importation of Milk and the Exportation of Dairy Products, WT/DS103/R, WT/DS113/R, adopted 27 October 1999, as modified by Appellate Body Report, WT/DS103/AB/R, WT/DS113/AB/R, DSR 1999:VI, 2097 Panel Report, Canada Measures Affecting the Importation of Milk and the Exportation of Dairy Products Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/RW, WT/DS113/RW, adopted 18 December 2001, as reversed by Appellate Body Report, WT/DS103/AB/RW, WT/DS113/AB/RW, DSR 2001:XIII, 6865 Appellate Body Report, Canada Measures Affecting the Importation of Milk and the Exportation of Dairy Products Second Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/AB/RW2, WT/DS113/AB/RW2, adopted 17 January 2003, DSR 2003:I, 213 Appellate Body Report, Chile Price Band System and Safeguard Measures Relating to Certain Agricultural Products Recourse to Article 21.5 of the DSU by Argentina, WT/DS207/AB/RW, adopted 22 May 2007 Appellate Body Report, European Communities Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India Recourse to Article 21.5 of the DSU by India, WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965 Panel Report, European Communities Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India Recourse to Article 21.5 of the DSU by India, WT/DS141/RW, adopted 24 April 2003, as modified by Appellate Body Report, WT/DS141/AB/RW, DSR 2003:IV, 1269 Appellate Body Report, European Communities Export Subsidies on Sugar, WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, adopted 19 May 2005 Panel Report, Indonesia Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3 and 4, adopted 23 July 1998, DSR 1998:VI, 2201 Panel Report, Korea Measures Affecting Trade in Commercial Vessels, WT/DS273/R, adopted 11 April 2005

13 Page xi Short Title Mexico Corn Syrup (Article 21.5 US) US Countervailing Measures on Certain EC Products (Article 21.5 EC) US FSC US FSC US FSC (Article 21.5 EC) US FSC (Article 21.5 EC) US FSC (Article 21.5 EC II) US FSC (Article 21.5 EC II) US Oil Country Tubular Goods Sunset Reviews US Oil Country Tubular Goods Sunset Reviews (Article 21.5 Argentina) US Shrimp (Article 21.5 Malaysia) US Softwood Lumber IV (Article 21.5 Canada) US Softwood Lumber VI (Article 21.5 Canada) US Upland Cotton US Upland Cotton Full Case Title and Citation Appellate Body Report, Mexico Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States Recourse to Article 21.5 of the DSU by the United States, WT/DS132/AB/RW, adopted 21 November 2001, DSR 2001:XIII, 6675 Panel Report, United States Countervailing Measures Concerning Certain Products from the European Communities Recourse to Article 21.5 of the DSU by the European Communities, WT/DS212/RW, adopted 27 September 2005 Appellate Body Report, United States Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619 Panel Report, United States Tax Treatment for "Foreign Sales Corporations", WT/DS108/R, adopted 20 March 2000, as modified by Appellate Body Report, WT/DS108/AB/R, DSR 2000:IV, 1675 Appellate Body Report, United States Tax Treatment for "Foreign Sales Corporations" Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55 Panel Report, United States Tax Treatment for "Foreign Sales Corporations" Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW, adopted 29 January 2002, as modified by Appellate Body Report, WT/DS108/AB/RW, DSR 2002:I, 119 Appellate Body Report, United States Tax Treatment for "Foreign Sales Corporations" Second Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW2, adopted 14 March 2006 Panel Report, United States Tax Treatment for "Foreign Sales Corporations" Second Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW2, adopted 14 March 2006, upheld by Appellate Body Report, WT/DS108/AB/RW2 Appellate Body Report, United States Sunset Reviews of Anti-Dumping Measures on Oil Country Tubular Goods from Argentina, WT/DS268/AB/R, adopted 17 December 2004, DSR 2004:VII, 3257 Appellate Body Report, United States Sunset Reviews of Anti-Dumping Measures on Oil Country Tubular Goods from Argentina Recourse to Article 21.5 of the DSU by Argentina, WT/DS268/AB/RW, adopted 11 May 2007 Panel Report, United States Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 of the DSU by Malaysia, WT/DS58/RW, adopted 21 November 2001, upheld by Appellate Body Report, WT/DS58/AB/RW, DSR 2001:XIII, 6529 Appellate Body Report, United States Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada Recourse by Canada to Article 21.5 of the DSU, WT/DS257/AB/RW, adopted 20 December 2005 Appellate Body Report, United States Investigation of the International Trade Commission in Softwood Lumber from Canada Recourse to Article 21.5 of the DSU by Canada, WT/DS277/AB/RW, adopted 9 May 2006 Appellate Body Report, United States Subsidies on Upland Cotton, WT/DS267/AB/R, adopted 21 March 2005 Panel Report, United States Subsidies on Upland Cotton, WT/DS267/R, and Corr.1, adopted 21 March 2005, as modified by Appellate Body Report, WT/DS267/AB/R

14 Page xii Short Title US Wool Shirts and Blouses Full Case Title and Citation Appellate Body Report, United States Measure Affecting Imports of Woven Wool Shirts and Blouses from India, WT/DS33/AB/R and Corr.1, adopted 23 May 1997, DSR 1997:I, 323

15 Page 1 I. INTRODUCTION 1.1 On 18 August 2006, Brazil requested the establishment of a panel pursuant to Article 21.5 of the Dispute Settlement Understanding ("DSU") concerning the alleged failure of the United States to implement the recommendations and rulings of the Dispute Settlement Body ("DSB") in US Upland Cotton At its meeting of 28 September 2006 the DSB decided, in accordance with Article 21.5 of the DSU, to refer this matter, if possible, to the original panel. 1.3 The terms of reference of the Panel are the following: "To examine, in the light of the relevant provisions of the covered agreements cited by Brazil in document WT/DS267/30, the matter referred to the DSB by Brazil in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements." 1.4 On 18 and 20 October 2006, Brazil and the United States respectively requested the Director- General to determine the composition of the Panel in accordance with Article 8.7 of the DSU. Article 8.7 of the DSU provides: "If there is no agreement on the panelists within 20 days after the date of the establishment of a panel, at the request of either party, the Director-General, in consultation with the Chairman of the DSB and the Chairman of the relevant Council or Committee, shall determine the composition of the panel by appointing the panelists whom the Director-General considers most appropriate in accordance with any relevant special or additional rules or procedures of the covered agreement or covered agreements which are at issue in the dispute after consulting with the parties to the dispute. The Chairman of the DSB shall inform the Members of the composition of the panel thus formed no later than 10 days after the date the Chairman receives such a request." 1.5 On 25 October 2006, the Director-General determined the composition of the Panel as follows: Chairman: Members: Mr. Eduardo Pérez Motta Mr. Mario Matus Mr. Ho-Young Ahn Argentina, Australia, Canada, Chad, China, the European Communities, India, Japan, New Zealand, and Thailand reserved their rights to participate in the Panel proceedings as third parties. 1.7 The Panel met with the parties to the dispute on February The Panel met with the third parties on 28 February The Panel submitted its interim report to the parties on 27 July 2007 and submitted its final report to the parties on 15 October WT/DS267/30. 2 WT/DS267/31.

16 Page 2 II. BACKGROUND 2.1 This dispute concerns the disagreement between Brazil and the United States, within the meaning of Article 21.5 of the DSU, as to "the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings" of the DSB in US Upland Cotton The report of the original panel in US Upland Cotton was circulated to Members on 8 September The original panel found that certain measures of the United States were inconsistent with the Agreement on Agriculture and/or the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). 2.4 First, the original panel found that export credit guarantees under the GSM 102, GSM 103 and SCGP export credit guarantee programmes 4 were inconsistent with Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement in respect of exports of upland cotton and other unscheduled agricultural products supported under these programmes and in respect of one scheduled product (rice). 5 The original panel also found that in respect of exports of unscheduled agricultural products not supported under the programmes and other scheduled agricultural products, export credit guarantees under the GSM 102, GSM 103 and SCGP export credit guarantee programmes were not inconsistent with Articles 10.1 and 8 of the Agreement on Agriculture Second, the original panel found that section 1207(a) of the Farm Security and Rural Investment Act of 2002 ("FSRI Act of 2002") providing for user marketing (Step 2) payments to exporters of upland cotton was inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement 7 and that section 1207 (a) of the FSRI Act of 2002 providing for user marketing (Step 2) payments to domestic users of upland cotton was inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement Third, the original panel found that the effect of certain mandatory, price-contingent subsidy measures of the United States 9 was significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement in the same world market constituting serious prejudice to the interests of Brazil within the meaning of Article 5(c) of the SCM Agreement As discussed below, the United States considers that certain claims of Brazil are not properly within the scope of this proceeding because they do not pertain to a disagreement regarding "the existence or consistency with a covered agreement of measures taken to comply with the recommendations and rulings". Infra, Section IX.B. 4 See infra, paras Panel Report, US Upland Cotton, paras , and 8.1(d)(i). 6 Panel Report, US Upland Cotton, paras and. 8.1(d)(ii). Thus the Panel concluded that these export credit guarantees were exempt from actions based on Article XVI of the GATT 1994 and Article 3 of the SCM Agreement. 7 Panel Report, US Upland Cotton, paras , and 8.1(e). 8 Panel Report, US Upland Cotton, paras and 8.1(f). 9 Marketing loan programme payments, user marketing (Step 2) payments, market loss assistance payments and counter-cyclical payments. See infra, paras Panel Report, US Upland Cotton, paras and 8.1(g)(i).

17 Page In respect of the measures found to be inconsistent with the Agreement on Agriculture, the original panel recommended pursuant to Article 19.1 of the DSU that the United States bring its measures into conformity with the Agreement on Agriculture In respect of the measures found to be subsidies prohibited under Articles 3.1(a) and 3.2 and 3.1(b) and 3.2 of the SCM Agreement, the original panel recommended pursuant to Article 4.7 of the SCM Agreement that the United States withdraw the prohibited subsidy without delay, i.e. at the latest within six months of the date of adoption of the panel report by the DSB or 1 July 2005, whichever was earlier In respect of the measures subject to the finding of significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement constituting serious prejudice to the interests of Brazil within the meaning of Article 5(c) of the SCM Agreement, the original panel stated the following: "[W]e recall that, in respect of the subsidies subject to our conclusion in paragraph 8.1(g)(i) above, pursuant to Article 7.8 of the SCM Agreement: '7.8 Where a panel report or an Appellate Body report is adopted in which it is determined that any subsidy has resulted in adverse effects to the interests of another Member within the meaning of Article 5, the Member granting or maintaining such subsidy shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.' Accordingly, upon adoption of this report, the United States is under an obligation to 'take appropriate steps to remove the adverse effects or... withdraw the subsidy'." The Appellate Body report in the original proceeding in this dispute was circulated to Members on 3 March The Appellate Body upheld the finding in paragraph of the original panel report that the export credit guarantee programmes at issue constituted a per se export subsidy within the meaning of item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement and the finding in paragraphs and of the original panel report that these export credit guarantee programmes were inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement. 14 The Appellate Body reversed the finding in paragraph of the original panel report that Brazil had not established that the application of export credit guarantees had resulted in actual circumvention of export subsidy commitments for pig meat and poultry meat. The Appellate Body considered that there were insufficient facts in the record to enable it to complete the legal analysis to determine whether the export credit guarantees had been applied in a manner that resulted in actual circumvention of the export subsidy commitments of the United States The Appellate Body upheld the findings in paragraphs , and 8.1(f) of the original panel report that Step 2 payments to domestic users of upland cotton under section 1207(a) of the FSRI Act of 2002 were inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement and the findings in paragraphs , and 8.1(e) of the original panel 11 Panel Report, US Upland Cotton, para. 8.3(a). 12 Panel Report, US Upland Cotton, paras. 8.3(b) and (c). 13 Panel Report, US Upland Cotton, para. 8.3(d). 14 Appellate Body Report, US Upland Cotton, paras. 674 and 763(e)(iv). 15 Appellate Body Report, US Upland Cotton, paras and 763(f)(i).

18 Page 4 report that Step 2 payments to exporters of US upland cotton under section 1207(a) of the FSRI Act of 2002 were inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement The Appellate Body upheld the finding in paragraphs and 8.1(g)(i) of the original panel report that the effect of certain price contingent subsidies was significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement On 21 March 2005, the DSB adopted the report of the Appellate Body in US Upland Cotton and the report of the original panel, as modified by the Appellate Body report. III. FACTUAL ASPECTS A. PRODUCTS AT ISSUE 3.1 The original panel described the products at issue as follows: "This dispute principally concerns alleged United States subsidies in respect of 'upland cotton' (Gossypium hirsutum). This is defined in relevant United States legislation as: 'Planted and stub cotton that is produced from other than pure strain varieties of the Barbadense species, any hybrid thereof, or any other variety of cotton in which one or more of these varieties predominate.' In relation to Brazil's claims that United States export credit guarantee measures constitute export subsidies under the Agreement on Agriculture and the SCM Agreement, the dispute concerns upland cotton and other eligible agricultural products as well." 18 (footnotes omitted) 3.2 In this compliance dispute, there is no disagreement between the parties on the description of upland cotton, and thus, the Panel considers that the above description of upland cotton remains accurate. 3.3 The original panel explained that "[u]pland cotton harvested from a field has cotton lint and cottonseed", that "[g]inning involves separating cotton lint from cottonseed", and that "[u]nless otherwise indicated, references in this report to upland cotton ordinarily refer to upland cotton lint." 19 In this proceeding, there is no disagreement between the parties that the term "upland cotton" refers to upland cotton lint. 3.4 While the product at issue in Brazil's claims of serious prejudice is upland cotton, with respect to Brazil's claims under the Agreement on Agriculture and the SCM Agreement relating to export credit guarantees, this compliance dispute concerns upland cotton and the following products: (i) three agricultural products for which the United States has entered export subsidy reduction 16 Appellate Body Report, US Upland Cotton, paras. 552, and 763(d). 17 Appellate Body Report, US Upland Cotton, paras. 496 and 763(c). 18 Panel Report, US Upland Cotton, paras Panel Report, US Upland Cotton, footnote 258.

19 Page 5 commitments ("scheduled products") rice, poultry meat and pig meat 20 and (ii) "unscheduled products" for which export credit guarantees were provided after 1 July The products described in (i) and (ii) in the preceding paragraph as well as upland cotton, all fall within the product coverage of the Agreement on Agriculture In addition, three other products (lysine, lyocell and wood products) are the subject of claims by Brazil that the United States provided export subsidies in the form of export credit guarantees, inconsistently with its obligations under the SCM Agreement. 23 B. DEVELOPMENTS CONCERNING THE MEASURES FOUND TO BE WTO-INCONSISTENT BY THE ORIGINAL PANEL User marketing (Step 2) payments, marketing loan payments, market loss assistance payments and counter-cyclical payments (a) User marketing (Step 2) payments 3.7 The term "user marketing (Step 2) payments" as used in the original panel report refers to payments made under the upland cotton user marketing certificate or "Step 2" programme, a special marketing loan provision for upland cotton in section 1207(a) of the FSRI Act of This programme provided for marketing certificates or cash payments to eligible domestic users and exporters of eligible upland cotton when certain market conditions existed such that US cotton pricing benchmarks were exceeded. 25 On 1 February 2006, the Congress of the United States adopted legislation repealing the Step 2 subsidy programme for upland cotton effective as of 1 August (b) Marketing loan payments 3.8 Marketing loan payments are provided for in sections of the FSRI Act of The original panel described these measures as follows: "Marketing loan programme payments for upland cotton began in 1986 and have continued under successive legislation, including the Federal Agriculture 20 The United States requests that the Panel rule that Brazil's claims concerning poultry meat and pig meat are outside the scope of this proceeding. US First Written Submission, paras The Panel addresses this request of the United States below in Section IX.B Brazil has identified the following products as having benefited from GSM 102 export credit guarantees since 1 July 2005: cotton, oilseeds (including soybeans and soybean meal), protein meals, fresh vegetables, hides/skins, tallow, corn products. Brazil's First Written Submission, para. 450 and note Article 2 and Annex 1 of the Agreement on Agriculture. In particular, the Panel notes that the Agreement covers products under Harmonized System Headings to (raw cotton, waste and cotton carded and combed). 23 Brazil included these products in the list of unscheduled products that benefited from GSM 102 export credit guarantees. Following an argument by the United States that these products fall outside the product coverage of the Agreement on Agriculture, Brazil indicated that, with respect to these three products, it makes no claims under the Agreement on Agriculture but maintains its claims under the SCM Agreement. See US Rebuttal Submission, para. 83, Brazil's Response to Panel Question 50 and US Comments thereon. See infra, Section XIV.D for the Panel's determination that Brazil's claims concerning these products are outside the scope of these proceedings. 24 The inclusion of a measure in this section and the terms used to describe the measure are without prejudice to the Panel's position on the preliminary objections raised by the United States with respect to whether certain measures are properly within the scope of this proceeding under Article 21.5 of the DSU. 25 Panel Report, US Upland Cotton, para Section 1103 of the Deficit Reduction Act of 2005, reproduced in Exhibit Bra-435.

20 Page 6 Improvement and Reform Act of 1996 ('FAIR Act of 1996') and the FSRI Act of The marketing loan programme is intended to minimize potential loan forfeitures by providing interim financing to eligible producers on their eligible production and facilitate the orderly distribution of eligible commodities throughout the year. Accordingly, rather than selling the crop at harvest when prices tend to be at their lowest, the proceeds of the interim loan enable producers to pay off their expenses when they become due, while storing their pledged harvested crop as collateral and repaying the loan when market conditions are potentially more favourable. Under the FAIR Act of 1996, marketing assistance loans for upland cotton were provided to producers for upland cotton harvested on a farm containing eligible cropland covered by a production flexibility contract [...]. The loans for upland cotton were made on conditions prescribed by the Secretary for a term of ten months. The legislation provided that the loan rate for upland cotton was determined by the Secretary for each year's crop at a rate that was no less than the smaller of 85 per cent of the five year Olympic average of county spot market prices, or 90 per cent of the Northern Europe-based average price but which should be not less than 50 cents per pound and not more than cents per pound. The loan rates for the 1999, 2000, 2001 and 2002 crops of upland cotton were each determined at cents per pound. The loans were non-recourse, so a producer had the option to deliver to the CCC [Commodity Credit Corporation] the quantity of a commodity pledged as collateral for the loan as payment in full when the loan was due to be repaid. Under the FSRI Act of 2002, marketing assistance loans continue to be provided, but certain features of the programme have been changed. In particular, loans are provided to producers for any upland cotton produced on a farm, the term of a marketing assistance loan for upland cotton is now nine months and the loan rate for upland cotton is fixed by the Act itself at 52 cents per pound for the 2002 through 2007 crop years. The repayment rate for marketing loans is the lower of the adjusted world market price and the loan rate plus interest. When the adjusted world market price is lower than the loan rate, the producer repays at less than the loan rate and the difference is referred to as a 'marketing loan gain'. Alternatively, a producer may forego a marketing loan and receive a 'loan deficiency payment' in the amount of the difference between the lower adjusted world market price and the loan rate. Additionally, in October 1999, the FAIR Act of 1996 was amended to include provisions for the issuance of 'commodity certificates', available to producers, including upland cotton producers, to use in acquiring 1998 through 2002 crop collateral pledged to CCC for a commodity loan. Marketing loan gains, loan deficiency payments and commodity certificate exchange gains are collectively referred to below as 'marketing loan programme payments'. When loans are repaid, the CCC charges interest at a rate 1 per cent higher than the rate it pays the Treasury. The CCC forgives interest and pays storage charges for the loan period when upland cotton under loan is forfeited, and also on redemption of upland cotton under loan where the repayment amount is too low to satisfy the loan amount and those charges." 27 (footnotes omitted) 27 Panel Report, US Upland Cotton, paras

21 Page It is not in dispute that the United States continues to provide marketing loan payments to US producers of upland cotton and that the legislative and regulatory provisions governing these marketing loan payments have not been changed. (c) Market loss assistance payments 3.10 Market loss assistance payments were provided for in four separate pieces of legislation. 28 The original panel described these measures as follows: "Market loss assistance ('MLA') payments were made under four separate pieces of legislation, one each for the years 1998 through They were ad hoc emergency and supplementary assistance provided to producers in order to make up for losses sustained as a result of recent low commodity prices. The 1998 MLA payments were intended essentially as a 50 per cent additional [production flexibility contract] payment. The 1998, 1999 and 2001 Acts each appropriated a dollar amount to assistance which was divided among PFC payment recipients proportionately to their respective previous PFC payment. The 2000 Act provided for payments at the same contract payment rates as the 1999 Act. MLA payments were only made to recipients enrolled in the PFC programmes." 29 (footnotes omitted) (d) Counter-cyclical payments 3.11 Counter-cyclical payments are provided for in sections of the FSRI Act of The original panel described these measures as follows: "The counter-cyclical payments ('CCP') programme was also established by the FSRI Act of It provides support to producers (as defined) based on historical acreage and yields for the same commodities as [direct payments], including upland cotton. An eligible producer must enter into an annual agreement in order to receive payments for a crop year. The eligibility requirements and planting flexibility requirements are the same as for the DP programme. CCP payments, like DP payments, are made to producers on farms for which payment yields and base acres are established for each of the 2002 through 2007 crop years of each covered commodity. CCP payments depend on the current prices of commodities. They are provided to producers with base acres and yields for a covered commodity for each of the 2002 through 2007 crop years whenever the effective price falls below the target price, which is fixed by the Act at 72.4 cents per pound for upland cotton. The effective price for a commodity is the sum of the DP payment rate [...], plus the higher of the national average farm price for the marketing year or the loan rate [...]. The difference between the effective price and the target price is the CCP payment rate. Consequently, the CCP payment rate, DP payment rate and, where applicable, the 28 Market loss assistance payments were provided pursuant to the following Acts: the Agriculture, Rural Development, Food and Drug Administration and Related Agencies Appropriation Act of 1999 for the 1998 crop; the Agriculture, Rural Development, Food and Drug Administration and Related Agencies Appropriation Act of 2000 for the 1999 crop; the Agriculture Risk Protection Act of 2000 for the 2000 crop; and the Crop Year 2001 Agriculture Economic Assistance Act for the 2001 crop. 29 Panel Report, US Upland Cotton, paras

22 Page 8 loan rate, are equal to the difference between the market price and 72.4 cents per pound. CCP payments are made on 85 per cent of the base acreage for each commodity multiplied by the corresponding payment rate multiplied by the applicable payment yield. An owner who elected to have his or her base acreage calculated on the basis of the four-year average of planted acreage during the 1998 through 2001 crops, had a one-time opportunity partially to 'update' CCP payment yields for CCP payments for all covered commodities, using one of two methods which both included the farm's average yields for the 1998 through 2001 crop years." 30 (emphasis original, footnotes omitted) 3.12 It is not in dispute that the United States continues to provide counter-cyclical payments to US producers of upland cotton and that the legislative and regulatory provisions governing these counter-cyclical payments have not been changed. 2. Export credit guarantees 3.13 The original panel examined three export credit guarantee programmes administered by the United States Department of Agriculture (USDA) through the Commodity Credit Corporation (CCC): 31 the General Sales Manager 102 ("GSM 102") programme, the General Sales Manager 103 ("GSM 103") programme and the Supplier Credit Guarantee Programme ("SCGP"). Brazil challenged the programmes "as such" and "as applied" 32 to exports of upland cotton and other eligible agricultural commodities. 33 All three programmes were used to guarantee the repayment of credit made available to finance commercial export sales of US agricultural commodities The original panel described the three programmes as follows: "General Sales Manager 102 ('GSM 102') Under the GSM 102 export credit guarantee programme, the CCC is authorized to guarantee the repayment of credit made available to finance commercial export sales of agricultural commodities from privately owned stocks on credit terms between 90 days and three years. The CCC generally covers 98 per cent of the principal and a portion of the interest. The CCC selects agricultural commodities and products according to market potential. The CCC does not provide financing, but rather guarantees payments due from foreign banks. To secure such a payment guarantee, once a firm export sale exists, the United States exporter must apply prior to the date of exportation. The exporter pays a fee calculated on the dollar amount guaranteed, based on a schedule of rates applicable to different credit periods. There is a statutory cap on the fee charged of 1 per cent of the guaranteed dollar value of the transaction. In terms of financing, the CCC-approved foreign bank issues an irrevocable letter of credit in favour of the United States exporter, ordinarily advised or confirmed by the financial institution in the United States which agrees to extend credit to the foreign 30 Panel Report, US Upland Cotton, paras The CCC is a wholly-owned government corporation within the USDA; it has no employees and carries out the majority of its programmes through the personnel and facilities of the Farm Service Agency. See Panel Report, US Upland Cotton, footnote Because the original panel adopted a "programme-wide" analytical approach under item (j) of the Illustrative List of Export Subsidies in Annex I to the SCM Agreement, it did not view the distinction between Brazil's "as such" and "as applied" claims as a determinative one. Panel Report, US Upland Cotton, para Panel Report, US Upland Cotton, para

23 Page 9 bank. If the foreign bank fails to make any payment as agreed, the exporter is required to submit a notice of default to the CCC. The CCC pays a valid claim for loss. General Sales Manager 103 ('GSM 103') The GSM 103 programme operates in a similar fashion to GSM 102. The main differences between the two programmes include: export credit guarantees under GSM 103 are "intermediate term credit guarantees" issued for terms from three to 10 years; there are additional statutory required determinations to be made when the CCC issues guarantees; and there is no statutory cap on the origination fees that may be charged by the CCC in connection with an export credit guarantee transaction. Supplier Credit Guarantee Programme ('SCGP') Under the SCGP, the CCC is authorized to issue guarantees for the repayment of credit made available for a period not exceeding 180 days by a United States exporter to a purchaser of United States agricultural commodities in a foreign country. These direct credits must be secured by promissory notes signed by the importers. The CCC does not provide financing, but rather guarantees payment due from the importer. Typically, the CCC guarantees a portion (65 per cent) of the value of the exports (principal only; the guarantee does not cover interest). The exporter negotiates terms of export credit sales with the importer. Once a firm export sale exists, the United States exporter must apply for a payment guarantee prior to the date of exportation. The exporter pays a fee for the guarantee calculated on the guaranteed portion of the value of the export sales. There is a statutory cap on the fee charged of 1 per cent of the guaranteed dollar value of the transaction. The importer must issue a dollardenominated promissory note in favour of the United States exporter in the form specified in the applicable country or regional programme announcement. The United States exporter may negotiate an arrangement to be paid, in full or in part, by assigning the right to proceeds that may become payable under the CCC's guarantee to a United States financial institution. If the foreign bank fails to make any payment, the exporter or assignee is required to submit a notice of default to the CCC. The CCC pays a valid claim for loss." 34 (footnotes omitted) 3.15 Under the GSM 102 and GSM 103 export credit guarantee programmes, the fees charged by the CCC varied with the guaranteed dollar value of the transaction, the repayment period, and the principal repayment interval (annual or semi-annual). 35 Under the SCGP, fees varied with the repayment period (up to 90 days or 90 to 180 days) Following the adoption of the original panel and Appellate Body reports, the USDA announced, on 30 June 2005, that as of 1 July 2005, the CCC would no longer accept applications for payment guarantees under the GSM 103 programme. 37 It also announced that the CCC would henceforth use a new fee structure for the GSM 102 and SCGP programmes. Under the new schedule, fees were increased and fees now vary with country risk, repayment term (tenor) and repayment frequency (annual or semi-annual). 38 Countries are classified in eight risk categories (0-7); 34 Panel Report, US Upland Cotton, paras Panel Report, US Upland Cotton, para Panel Report, US Upland Cotton, para and footnote Exhibits Bra-502 and Bra "Fee rates will be based on the country risk that CCC is undertaking, as well as the repayment term (tenor) and repayment frequency (annual or semi-annual) under the guarantee. For the GSM-102 programme,