United States – Subsidies on Upland Cotton

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United States Subsidies on Upland Cotton (WT/DS267) Comments of the United States of America on the March 10, 2004, Comments of Brazil on the U.S. Data Submitted on March 3, 2004 March 15, 2004 1 Brazils Comments on U.S. 3 M arch 2004 D ata (March 10, 20 04) (Brazils March 10 Co mments). 2 Comments of the United States of America on the Comments of Brazil to U.S. Data Submitted on Decemb er 18 and 19 , 2003 (February 11, 20 04) (U.S. February 11 Co mments). 3 Comments of the United States of America on the February 18, 2004, Comments of Brazil (March 3, 2004) (U .S. March 3 Co mments). 4 Agre eme nt on A griculture, Article 13 (Agreement on Agriculture). 5 Brazils March 10 Comments, paras. 2-3. 6 Brazils Answer to Question 41 from the Panel, para. 58 (footnote omitted; italics added). Introduction 1. The United States thanks the Panel for this opportunity to respond to the March 10 comments filed by Brazil 1 relating to the data submitted by the United States on March 3, 2004, in response to the Panels supplemental request for information. Brazils March 10 comments
consist primarily of a series of calculations using the U.S. March 3 data in each of the
methodologies previously explained by Brazil in its February 18 comments. The United States
has previously explained, in filings on February 11 2 and March 3, 3 that none of these methodologies is pertinent for purposes of the Peace Clause. 4 Therefore, we will not repeat much of that analysis in these comments but rather will refer the Panel, as appropriate, to those
previous comments by the United States. 2. Brazil states that, because the U.S. March 3 data is the best information available before the Panel, Brazil no longer considers that relying on its 14/16th methodology would be
appropriate. 5 This means that, by Brazils own statement, the only methodology that Brazil had brought forward from August 2003 until January 2004 to allegedly demonstrate a breach of the
Peace Clause is irrelevant to this dispute. Moreover, it is difficult to reconcile Brazils
concession with its view that the Panel need only apply a reasonable methodology to calculate
the support to upland cotton since Brazil alleges that the 14/16th methodology produces results
that are similar to those under its other (flawed) methodologies. 3. Brazils disavowal of its 14/16th methodology, however, does highlight the shifting nature of Brazils Peace Clause arguments on decoupled payments. It may be of use to set out
just how and how many times Brazils theories have changed in this dispute. 4. First, Brazil argued that all payments for upland cotton base acres were support to upland cotton. For example, in response to Question 41 from the Panel following the first
session of the first substantive meeting, Brazil wrote: The only U.S. domestic support measures that Brazil is aware of that would meet the
test of being support to upland cotton are those that it listed for purposes of calculating
the level of support in its First Written Submission. In the view of Brazil, these non-
green box domestic support measures are the measures that constitute support to
upland cotton for the purpose of Article 13(b). 6 The decoupled measures listed in Brazils first written submission (paragraphs 144, 148, and
149) were all production flexibility contract payments, market loss assistance payments, direct United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 2 7 See U.S. Comm ent on Brazils Answer to Question 204 from the Pane l, paras. 36-39 (providing additional citations) (January 28, 2004 ). 8 Brazils Answer to Question 67 from the Panel, para. 130 (table fn. 2-5) (August 11, 2003). 9 See, e.g., Brazils Rebuttal Submission, para. 32, 38 (August 22, 2003). 10 Bra zils Furthe r Sub mission , para . 335 ; see also id., para. 331. 11 See Brazils Answer to Question 125(7), para. 38 (October 27, 2003) (Testimony from NCC representatives indicated that a number of producers in the south-eastern part of the United States grew upland cotton
on corn base acreage during M Y19 99-2001 .) (footnote omitted). payments, and counter-cyclical payments for upland cotton base acres only. Thus, in the view
of Brazil as of the first session of the first substantive meeting, only these payments were within
the Panels terms of reference. 7 5. Second, in response to U.S. criticisms, Brazil realized that, on its own terms, the theory that all payments for upland cotton base acres were support to upland cotton was not tenable.
Brazils theory ignored the fact that there were fewer acres planted to upland cotton than there
were upland cotton base acres, suggesting that payment recipients utilized planting flexibility to
plant other crops or nothing at all. Thus, following the first session of the first panel meeting, Brazil introduced the so-
called 14/16th methodology, which adjusted total expenditures for upland cotton base
acres by the ratio of upland cotton base acres actually planted. In Brazils words, only
the portion of upland cotton [base] payments that actually benefits acres planted to upland
cotton can be considered support to upland cotton. 8 That is, Brazil amended its theory, arguing that all upland cotton was planted on upland cotton
base acres. 6. Third, under Brazils fallacious argument that receipt of decoupled payments was necessary for upland cotton producers to cover their costs, Brazil acknowledged that it was not
necessary that upland cotton be planted on upland cotton base acres that is, rice and peanuts
base acreage also received payments that would allow these alleged costs to be covered.
However, Brazil argued that the facts did not support the notion that upland cotton was planted
on rice or peanuts base acreage. 9 Rather, through the second session of the Panels first substantive meeting (that is, after the Peace Clause phase of the dispute had concluded), Brazil
continued to insist that at a minimum a significant majority of upland cotton farmers in MY
2002 were farming on upland cotton base acres. 10 7. Fourth, however, even Brazils own evidence indicated that not all upland cotton was planted on upland cotton base acres. For example, as a result of pest eradication and adoption
of biotechnology, significant acres in the U.S. Southeast previously planted to peanuts, corn, and
other crops were newly being planted to upland cotton. 11 Thus, Brazil altered its theory again and argued that Brazils methodology assumes that U.S. producers of upland cotton grew United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 3 12 Brazils Answer to Question 125(8), para. 40 (October 27, 200 3). 13 Brazils Further Rebuttal Submission, para. 50. 14 Brazils Further Rebuttal Submission, para. 48 (italics added). 15 Panel Comm unication of January 12, 2004 (Question 258). 16 The United S tates has elsewh ere ex plaine d that B razil has not b roug ht forwa rd ev idenc e and argum ents to allow the An nex IV metho dolo gy to be app lied for purp oses o f its subsidie s claims. See, e.g., U.S. March 3
Comments, paras. 29-35, 45-56. upland cotton on upland cotton base acreage, which is a reasonable proxy, because there will
be some upland cotton that is grown on rice (and peanut) base receiving higher payments, and
some upland cotton that is grown on, e.g., corn base receiving somewhat lower payments. On
average, Brazils approach would roughly cancel out the over-counting of rice and peanut
payments and the under-counting of corn and any other lower-paying program crop payments. 12 8. Fifth, Brazil suggested in its further rebuttal submission of November 18, 2003, that the United States has refused to generate information regarding how much and which of the contract
payment base acreage was planted to upland cotton. 13 However, Brazil nowhere explained how such an analysis of how much and which of the contract payment base acreage was planted to
upland cotton could be done. In fact, Brazil suggested that the Panel should request the United
States to produce information and that Brazil would be pleased to provide the Panel with a
precise list of parameters and questions that should be answered in any such analysis. 14 9. Brazil, however, did not provide any such precise list of parameters and questions until the second panel meeting in December 2003. While Brazil requested certain information through
its request in Exhibit BRA-369, Brazil did not explain to the Panel or the United States how it
proposed to determine the amount of upland cotton acreage planted on base acreage for any
particular commodity. Indeed, the Panel was compelled on January 12, 2004, to ask Brazil to
submit a detailed explanation of the method by which one could calculate total expenditures to
producers of upland cotton under the four relevant programmes on the basis of the data which it
seeks. 15 10. Sixth, Brazil put forward on January 20, 2004, for the first time its allocation methodology that is, after further rebuttal submissions had been filed and as the serious
prejudice phase (and indeed the dispute settlement proceeding) was concluding. Here, Brazil
set out its notion of under- and over-planting of program crop base acreage, which the United
States has criticized and rebutted in a series of filings over the last month. 11. Seventh, however, Brazil did not stop there. On January 28, 2004, in its comments on the U.S. December 18 and 19, 2003, data (the comments that were to have been filed on January 20),
Brazil set forth yet another in-the-alternative methodology, a purported application of that
December data to the Subsidies Agreement Annex IV methodology. 16 United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 4 17 Brazils February 18 Comments, para. 46 (Brazil first presents the results of using a slight variation of Brazils methodology.). 18 Brazils February 18 Comments, para. 50 (Brazil also applied the revised U.S. summary data to a modified Annex IV methodology allocating total contract payments to farms producing upland cotton over the
value o f contract payment crops produced on these farms.). 19 Brazils February 18 Comments, para. 84. 12. Eighth, Brazil put forward on February 18, 2004 that is, in its last substantive filing in this dispute two more in-the-alternative methodologies to calculate the alleged support to
upland cotton from decoupled payments. First, it explained a cotton-to-cotton methodology 17 under which only decoupled payments for upland cotton base acres would be deemed support to
upland cotton. Second, it introduced a modified (program crop only) annex IV methodology 18 under which decoupled payments would be allocated only to program crops in the proportions to
which they contributed to the value of program crop production on a farm. 13. Given this never-ending stream of theories of how and to what extent decoupled income support payments could be support to upland cotton, it would appear that Brazil has made any
argument that suited its immediate needs to maximize the purported support to upland cotton.
There can be no question that Brazils incessant in-the-alternative argumentation has prejudiced
the United States by significantly increasing the burden in evaluating and responding to Brazils
theories. 14. Brazil has argued that [w]ithout farm-specific data, there [was] no basis to develop, let alone apply, Brazils methodology. Brazil could only develop a methodology to apply to actual
data when it received the EWG data in mid-November, and when it then sought farm-specific
data from the United States. 19 In this statement, however, Brazil concedes that it had not developed because, allegedly, there [was] no basis to develop its methodology until, at the
earliest, mid-November 2003. It is simply incredible to read that a complaining party should have chosen to challenge
payments which, on their face, are not product-specific support to upland cotton, yet not
have developed a methodology to determine the amount of the payments it would
consider support to [that] specific commodity until at least 6 months into the dispute. That is, it is rather startling that Brazil, as the complaining party, began this dispute
without the evidence, or even the legal theory, necessary to sustain its assertions. Further, we note that, even if Brazil had developed its methodology in mid-November, it did not
choose to put this methodology forward until January 20, 2004 (eight months into this dispute),
in response to the Panels Question 258. 15. It is precisely this long delay in developing its Peace Clause arguments that led Brazil first to focus solely on payments for upland cotton base acres, and then only six months or more United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 5 20 U.S. February 11 Comments, paras. 47-50. 21 See U.S. Comments on Brazils Answer to Question 204 from the Panel, paras. 34-42 (January 28, 2004). 22 See, e.g., U.S. March 3 Comments, paras. 3-16. 23 Brazils March 10 Co mments, paras. 3-4 (italics added). 24 Brazils March 10 Comments, para. 10 fn. 14. 25 Brazil February 13, 2004, Letter to the Panel, at 5. into the dispute to seek to bring in payments for non-upland cotton base acres. As the United
States has argued, Brazil did not identify these payments that are not within the Panels terms of
reference 20 and which, if included in this dispute, would prejudice U.S. rights of defense. 21 Furthermore, that Brazil had not crafted its methodology for Peace Clause purposes until six or
eight months into this dispute undermines Brazils Peace Clause interpretation: that is, Brazil has
cast and recast its Peace Clause theories in order to find a theory that would result in U.S. support
exceeding the 1992 level. As the United States has demonstrated, however, non-product-specific
support (whether green box or not) cannot be allocated as support to a specific commodity
within the ordinary meaning of that phrase and as defined in Article 1(a) of the Agreement on
Agriculture. 22 Thus, there is no basis to allocated decoupled income support payments to upland cotton for purposes of Peace Clause. Brazil various theories also rely on a budgetary outlays
approach, which, for all the reasons the United States has explained previously, is not found in
the Peace Clause text and is the wrong approach for Peace Clause purposes. Brazils Attempt to Resurrect a Basis for the Use of Adverse Inferences Is Unsustainable 16. After stating that the U.S. March 3 data is the best information available before the Panel and that the United States appears to have provided complete summary base and
complete summary planted data covering all crops for which data was requested by the Panel
and all farms covered by the Panels request, 23 Brazil nonetheless faults the United States for certain problems with the data and argues, in the alternative, that the alleged U.S. refusal to
provide certain data would permit the Panel to draw the adverse inferences that this data if
produced would have shown even higher payments being allocated to upland cotton. 24 Brazils effort to resuscitate its request for adverse inferences to be drawn is misguided. First,
in its February 13 letter, Brazil stated that by producing the complete aggregated information,
there would no longer be a need to draw adverse inferences. 25 As noted, Brazil has in its March 10 comments stated that the United States has produced complete summary base and complete
summary planted data covering all crops for which data was requested by the Panel and all farms
covered by the Panels request. Therefore, Brazil has implicitly conceded that there is no basis
to draw adverse inferences, and its suggestion otherwise is yet another in-the-alternative
argument that only serves to add needlessly to the complexity of this dispute. 17. This conclusion is confirmed by examining the data that the United States allegedly refused to provide. First, Brazil faults the United States for providing data with respect to United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 6 26 Given Brazils repeated complaints in this dispute, it is ironic that Brazil now, in effect, complains that the United States has provided too much information. 27 Panels Supplementary Request for Information, item (b) (February 3, 2004). 28 Brazils March 10 Comments, para. 6 & fn. 5. 29 Brazils March 10 Comments, para. 7. 30 Brazils comment that the United States should have provided information on payment units in good faith as it did in its data submissions of December 18 and 19, 2004, and January 28, 2004, fails to mention that
Brazils request for data specifically asked for contract yields to be provided. Exhibit BR A-369 (second p aragraph,
fourth bullet: requesting payment yield for each program crop) (3 December 2003). The United States has
responded to all requests for data in this dispute in good faith by providing all the data (within the limits of U.S.
law) requested. 31 See, e.g., Response of the United States of America to the Panels February 3, 2004, Data Request, As Clarified on February 16, 2004, paras. 10-13. 32 Brazils March 10 Comments, para. 8. 33 See Panels Supplementary Request for Information, item (b) (first solid bullet: How many farms had fewer upland cotton planted acres than upland cotton base acres, or equal numbers of each? We refer to these as
Category A farms.; second solid bullet: How many farms had more upland cotton planted acres than upland
cotton base acres? We refer to these as Category B farms.; third solid bullet: How many farms had upland cotton farms that had upland cotton base acres but planted no upland cotton within Category A. 26 We note that the Panels supplementary request for information asked for information on farms with
fewer upland cotton planted acres than upland cotton base acres, or equal numbers of each, 27 which does not exclude farms with no planted acres from its ambit. Indeed, as Brazil points out,
on January 28, 2004, and on December 19, 2003, the United States had provided planted and
base acreage information relating to (1) farms that both planted upland cotton and had upland
cotton base acres and (2) farms that did not plant upland cotton and had upland cotton base
acres. 28 It is not apparent from the text of item (b) of the Panels supplementary request for information that the Panel was seeking the same information that had previously been provided.
Because the United States provided the information requested under item (b) with respect to
Category A farms, there is no basis for any adverse inference to be drawn. 18. Second, Brazil argues that the U.S. March 3 data does not provide contract payment yield or payment[] units. However, Brazil itself immediately concedes that the Panels
3 February 2004 Request does not ask for this information. 29 Thus, as the payment yield information was not requested by the Panel, the United States could not have refused to provide
it, and there is no basis for any adverse inference to be drawn. 30 19. Third, Brazil states that the United States did not produce any information that would allow the calculation of producer-based soybean market loss assistance [that is, oilseed
payments for soybean producers 31 ] and peanut direct and counter-cyclical payments received by producers operating upland cotton farms. 32 However, Brazil does not contest that these payments were made to producers and that there were no base acres for these payments on any
farms for the relevant years (soybeans in 1999 and 2000, peanuts in 2002). The United States
recalls that the Panels supplementary request for information related to farms with upland
cotton base acres and/or upland cotton planted acres. 33 Thus, the Panels request did not ask for United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 7 planted acres but no upland cotton base acres? We refer to these as Category C farms.) (February 3, 2004). 34 See U.S. March 3 Comments, paras. 3-16; U.S. February 11 Comments, paras. 7-14. 35 Agreement on Subsidies and Countervailing Measures, Annex IV, paras. 2-3 (Subsidies Agreement). 36 See, e.g., U.S. March 3 Comments, paras. 29-35; U.S. February 11 Comments, paras. 18-21. 37 See, e.g., U.S. March 3 Comments, paras. 36-56; U.S. February 11 Comments, paras. 35-60. payments received by producers operating upland cotton farms, and there is no basis to draw
an adverse inference from an alleged failure to provide information not requested. 20. In sum, Brazils in-the-alternative renewed request concerning adverse inferences has no basis in fact; either the Panels supplementary request for information did not request the
information or the United States properly responded to the request as drafted. Furthermore, to
the extent that Brazil argues that the contract payment yield data or soybeans or peanuts
payments received by producers operating upland cotton farms were necessary for its Peace
Clause analysis, this would demonstrate not that any adverse inference should be drawn but
rather that Brazil, as the complaining party bearing the burden of proof, has failed to bring forth
evidence to make a prima facie case. Brazils Allocation Methodologies Are Irrelevant for Peace Clause Purposes and, in any
event, Continue to Suffer from Conceptual and Methodological Flaws 21. The United States has set forth in other comments the reasons that no allocation methodology may be employed for purposes of a Peace Clause analysis since the only relevant
support is support to a specific commodity that is, assistance or backing specially
pertaining to a particular agricultural crop (in the ordinary meaning of the terms) or support
. . . provided for a basic agricultural product in favour of the producers of the basic agricultural
product (read in the context of the definition of product-specific support in Article 1(a) of the
Agreement on Agriculture). 34 22. Further, we have explained that for purposes of Brazils serious prejudice claims, the Annex IV methodology 35 would be necessary to identify the subsidy benefit and subsidized product for each of the challenged decoupled income support measures and Brazil has not
brought forward evidence and arguments to allow the Annex IV methodology to be used. 36 23. Finally, we have previously presented comments on each of Brazils allocation methodologies. 37 As the calculations in Brazils March 10 Comments are substantially similar to those it set out earlier, our comments on Brazils new calculations are limited but also
substantially similar to those we have previously provided. In particular, we note that Brazil has
simply ignored the U.S. criticisms of its pseudo-Annex IV methodology and excluded any
sales from fruits and vegetables production, non-crop on-farm activities, and all other off-farm
economic activity. Cotton-to-Cotton Methodology United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 8 38 See, e.g., U.S. March 3 Comments, paras. 37-38. 39 Com pare Brazils March 10 Comments, para. 15 with Brazils February 18 Comments, para. 47. 40 For e xam ple, in E xhibit B RA -433 , Bra zil presents ca lculation s for allo cating p ayme nts und er its methodology for the different categories of farms set out in the Panels supplementary request for information. For
mark eting yea r 2002, C atego ry B2 farms p lanted 2,70 3,66 3 acr es of co tton and had 2,03 5,33 5 ba se acres of co tton.
Thu s, Brazil calculates that there were 668 ,329 o verplanted cotton acres e ligible for allocated pa yments. Base
acreage fo r other pro gram cro ps for Categ ory B2 farms exceed ed planted acreage for tho se crops b y 1,197 ,785 a cres, 24. The United States has previously set out its criticism of this methodology, under which decoupled payments for upland cotton base acres on a farm that are equal to or less than the
number of upland cotton planted acres are deemed to be support to upland cotton. Indeed, Brazil
has never responded to the U.S. explanation that there are no physical base acres on a farm.
Crop base acres are an accounting fiction that do not represent any particular acres on a farm. 38 Thus, the very notion that base acres are planted to any particular crop (or, conversely, that a
crop is planted on any particular base acre) is illusory. 25. We do note that the application of this erroneous methodology to the March 3 data does result in significant downwards revisions in the calculations Brazil previously presented, ranging
from $58 million (MY2001 PFC) to $122 million (MY2002 CCP). 39 Brazils Methodology 26. Again, the United States has previously set out at length its criticisms of Brazils methodology. The inconsistencies and logical flaws in this methodology are striking and
demonstrate the post hoc nature of Brazils attempt to force an allocation methodology onto
decoupled payments. For example: There is no physical or economic basis to consider that decoupled payments for base
acres of a crop are support to current production of that crop or to other (underplanted)
program crops. Base acres are not physical acres and are not planted to anything. A
decoupled income support recipient may produce no, one, or multiple products; since
money is fungible, those payments in economic terms (but not for purposes of Peace
Clause) may be attributed to all (if any) of the recipients sales. Brazil has never examined whether decoupled payments for non-upland cotton base
acres support or maintain the production of those non-upland cotton program crops
and thus has demonstrated no basis (on its own theory) for allocating such payments to
those crops first. Brazil argues that base acres are planted to a particular commodity, one-for-one, but
has no explanation for how an upland cotton planted acre can also be deemed to be
planted on multiple base acres at once, as occurs when underplanted base acres are
totaled and allocated proportionally to all excess planted acres (including cotton). 40 United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 9 and no other program crop was planted in excess of its base acreage. Thus, Brazil allocated the total payments free
to be allocated ($21,290,090) from the non-upland cotton base acreage entirely to upland cotton. This means that
the 668,329 overplanted cotton acres were planted on 1,197,785 excess base acres for other program crops, or
each exce ss acre of co tton was planted o n 1.79 non-upland cotton ba se acres. 41 Brazils February 18 Comments, para. 3. 42 See U.S . M arch 3 Comments, pa ras. 37 -44; U .S. Feb ruary 1 1 Comm ents, pa ras. 35 -43; U .S. Co mments to Brazils Answer to Question 258 from the Pane l, paras. 207-29 (January 28, 2004). 43 Brazils February 18 Comments, para. 60. 44 Brazils March 10 Comments, para. 20. Brazil has never provided any logical explanation for why decoupled income support
payments would be attributed to program crops but not to other crops or other on-farm or
off-farm economic activities (as economics and the Annex IV methodology would
suggest is necessary). Neither has Brazil attempted to apply its own rationale that decoupled payments are
support to a specific commodity when such payments cover (or contribute to) the costs
of production of that commodity 41 to any other product produced by payment recipients, thus invalidating its own methodology, under which payments for base acreage is first
support to the crop to which the acreage corresponds and then to other program crops.
Using Brazils own cost of production principle, there is no basis to assert that order of
analysis since Brazil has presented no evidence that such payments cover (or contribute
to) the costs of production of those commodities but not others. The United States has explored at some length these and other logical inconsistencies in Brazils
purported methodology for allocating decoupled payments to particular commodities. Although
there is no basis in the Peace Clause to allocate non-product-specific support as support to a
specific commodity, we nonetheless invite the Panel to consider these reasons why Brazils
methodology cannot serve as a neutral means to allocate decoupled payments. 42 27. We also pause to recall that one of Brazils primary responses to the U.S. criticism that its methodology would result in different subsidization rates for upland cotton on a single farm and
would result in the allocation of multiple non-upland cotton base acres per cotton planted acre
was that both of these alleged problems . . . do not exist from MY 2002. This is because
Brazils methodology allocates for each planted acre[] of upland cotton only one upland cotton
base acre. Brazil then went on to suggest that because in MY 2002 greater than 99 percent of
direct and counter-cyclical payments received by upland cotton producers were for upland cotton
base acres and because upland cotton base exceeded upland cotton planted acreage, the two
main U.S. criticisms affect . . . at most, 0.9 percent of the payments at issue for MY 2002. 43 28. However, Brazils March 10 comments tell quite a different story. There, Brazil calculates the amount of upland cotton planted acres for which there exists a corresponding
upland cotton base acre [by] farm category. 44 The percentage of upland cotton planted acreage for which an upland cotton base acre exists is 72.87 percent in marketing year 1999, United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 10 45 Brazils February 18 Comments, para. 67. 46 Com pare Brazils March 10 Comments, para. 19 with Brazils February 18 Comments, para. 49. 47 W e note that the rice price s used by B razil in its calc ulations in Exh ibit BRA -434 are incorrect. Bra zil has mistakenly divided the average rice farm price, reported in dollars per hundredweight (i.e., 100 pounds), by
220.46 instead of by 100 to obtain a price expressed in dollars per pound. Brazil 1/ WASD E 2/ MY 1999 $0.027 $0.0593 MY 2000 $0.025 $0.0561 MY 2001 $0.019 $0.0425 MY 2002 $0.019 $0.0449 1/ Exhibit BRA-434
2/ World Agricultural Supply and Demand E stimates, availab le at: http://www.usda.gov/agency/oce/waob/wasde/wasde.htm . 48 Brazils March 10 Comments, para. 24. 70.03 percent in marketing year 2000, 68.06 percent in marketing year 2001, and 84.33 percent
in marketing year 2002. That is, in any given year, approximately 15 to 22 percent of upland cotton planted
acres between 2.1 million and 4.9 million acres were allocated payments for non-
upland cotton base acres and would be subject to the U.S. criticisms dismissed by Brazil
as de minimis. Brazil simply ignores this issue in its March 10 comments. Furthermore, we recall that Brazil stated that [a]s for some of the U.S. criticisms that might
affect the results (except for MY2002), Brazil will control for these effects once the United
States provides aggregate data in the manner requested by the Panel. 45 The United States is not aware of any explicit recognition by Brazil of U.S. criticisms that might affect the results nor
any effort by Brazil in its March 10 comments to control for these effects. 29. Finally, we note that the application of Brazils erroneous methodology to the March 3 data again results in significant downwards revisions in the calculations Brazil previously
presented, ranging from approximately $43 million (MY2001 PFC) to $120 million (MY2002
CCP). 46 Modified U.S. Annex IV methodology 30. Brazil presents largely unchanged modified Annex IV calculations, for example, excluding both soybeans (marketing years 1999 and 2000) and peanuts (marketing year 2002) as
a program crop. 47 Under this modified Annex IV methodology, Brazil allocated total contract payments to upland cotton according to the share of upland cotton crop value of the total value
of contract payment crop production. 48 Thus, the U.S. view of this modified methodology United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 11 49 Subsidies Agreement, Annex IV, paras. 2-3. 50 See file DCP 02-2W .xls (Grand T otal (Farms A - C) row). 51 See U.S. February 11 Comments, para. 54. 52 See Exhibit US-154. 53 Brazils February 18 Comments, Annex A, Table 4.5. 54 Category C farms had no upland cotton base acres and thus received no decoupled payments within the scope of this dispute. To the extent Brazil disagrees, however, the same criticism of Brazils failure to use the actual
planted ac reage da ta applies. remains unchanged: Brazils approach is fundamentally inconsistent with Annex IV, paragraph 2,
under which the subsidy is allocated over the total value of the recipient firms sales.
Furthermore, there is no plausible basis to maintain that decoupled income support payments are
support only to contract payment crops. Brazil also improperly includes the total value of
contract payments in its calculation when only payments for upland cotton base acres are within
the scope of this dispute.
U.S. Annex IV Methodology 31. Brazil offers no new analysis in its March 10 comments but just repeats the calculations presented in its February 18 filing. Thus, Brazils US Annex IV methodology does not reflect
the U.S. interpretation of Annex IV, which is based on the text of Annex IV. That text
establishes that, if a payment is not tied to the production or sale of a given product, the
subsidized product is all of the recipient firms sales, and the subsidy for any one product is that
products share of the total value of the recipient firms sales. 49 Brazil does not use the total value of the recipient firms sales in its U.S. Annex IV calculation and does not even attempt
to calculate total sales of upland cotton producers. 32. Because Brazil reiterates its February 18 calculations, Brazils March 10 calculations are similarly flawed. First, Brazil errs by omitting the value of fruits and vegetables in calculating
the total value of non-program crop production. As the U.S. March 3 data shows, in marketing
year 2002 alone, 1.2 million acres were planted to fruits and vegetables on farms that reported
cotton base acreage. 50 As pointed out in the U.S. comments of February 11, 51 excluding fruits and vegetables biases significantly downward the value of non-program crop acreage. For
example, the United States estimated the per-acre value of non-program crops including fruits
and vegetables was estimated at $281 52 for 2002 that is, 138 percent higher than the $118 per acre Brazil calculated when fruits and vegetables are excluded. 53 33. Brazil suggests that it was not able to make any adjustment to its calculations because of its inability to separate those farms with no planted acres of cotton from Category A. However,
Brazil does not explain why it was unable to use the actual planted acreage data, including that
for fruits and vegetables, for Category B farms. 54 Nor does Brazil explain why it was unable to use the state-by-state information on plantings to make any adjustment to its use of the average United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 12 55 Brazils January 28 Da ta Comments, para. 90 (italics added). 56 U.S. March 3 Comments, para. 50; U.S. February 11 Comments, para. 55. 57 See U.S. March 3 Comments, para. 51. 58 Brazils Answer to Question 179 from the Panel, para. 165 (October 27, 200 3); Brazils Opening Statement at the Second Panel Meeting, para. 57. 59 U.S. March 3 Comments, paras. 52-54; Exhibit US-155, at 106. per-acre value of production of non-program crops in that marketing year in the entire United
States. 55 34. Further, Brazil has not taken any account of the value of on-farm production other than crops, and has presented no data that would allow that calculation to be made. Again, the 1997
ARMS cotton costs of production survey suggested that, had Brazil taken into account the value
of non-crop on-farm production, the share of cotton as a percent of total farm sales would be
lower still. For 1997, when the value of cotton was high, the 1997 ARMS cotton costs of
production survey reported that cotton accounted for only 44.5 percent of the total value of
agricultural production on cotton farms. 56 35. Brazil also fails to include off-farm economic activity, which can be substantial, in its calculation. Annex IV, paragraph 2, establishes that the non-tied subsidy is allocated over the
total value of the recipient firms sales, not merely its farm sales. As we have previously noted,
cotton operations earn almost 30 percent of income from off-farm sources. 57 36. Finally, Brazil continues not to make any adjustment for the fact that landowners capture the subsidy benefit of payments on rented acres. As the United States has noted, Brazil has
previously conceded that, as of marketing year 1997, 34 to 41 cents per dollar of production
flexibility contract payments were capitalized into land rent. 58 Furthermore, certain missing pages from Exhibit BRA-276 report that, during 1998-2000, the capture by landowners through
increased rent of production flexibility contract payments increased to an estimated average of 81
to 83 percent. 59 Thus, Brazils own evidence does not support its decision not to adjust the subsidy benefit to upland cotton producers downwards to reflect the two-thirds of cotton acres
that are rented by producers, not owned. Conclusion: Brazil Can Only Prevail on the Peace Clause Under an Incorrect
Interpretation of the Peace Clause 37. The United States has demonstrated that Brazils reading of the Peace Clause is not tenable; instead, Brazil invents the concept that non-product-specific support must be allocated to
specific commodities. This concept runs directly contrary to the ordinary meaning of the Peace
Clause text and directly contrary to its context, including the fundamental separation of product-
specific and non-product-specific support in the Agreement on Agriculture. United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 13 60 U.S. March 3 Comments, para. 30 fn. 59. 61 See Subsidies Agreement, Article 7.2 (request for consultations under Article 7.1 shall include a statement of available evidence with regard to (a) the existence and nature of the subsidy in question) (italics
added). 62 Only direct and counter-cyclical payments were measures in existence at the time the Panel was established during marketing year 2002. Both production flexibility contract payments and market loss assistance
payments were recurring subsidies paid with respect to past production that had terminated by the time of the panel
requ est and pane l establish men t. 63 See, e.g., U.S . Com men ts on B razils Comm ents on U.S . Com men ts Concern ing B razils E conome tric Mo del, paras. 4-9 (January 28, 2004). 64 See, e.g., U.S. February 11 Comments, paras. 15-17. 65 See Brazils Further Submission, para. 432 (The existence of the 72.4 cents per pound support price under the 2002 FSRI Act alone causes production-enhancing and price-suppressing effects. The single fact that
these programs exist ensures a guaranteed revenue amount from the production of upland cotton. This revenue floor
is a guaranteed entitlement. That guaranteed revenue floor has the effect of removing any uncertainty and risk about
the revenue farmers will receive for the crop. It means that regardless of the actual price development during the
marketing year, a farmer knows that he or she will receive at the very least the loan rate for their product, plus
price-triggered revenue support granted by the CCP pro gram.). 38. The United States has also demonstrated that Brazils approach to its serious prejudice claims is misguided. As mentioned previously, Brazils notion that the effect of the subsidy
may be analyzed without knowing the amount of the challenged subsidy is akin to saying that
the effect of eating may be determined without knowing how much is being eaten. 60 Of course, to determine the effect of eating one must also determine what is being eaten (in addition to
how much); similarly, the effect of the subsidy will depend on the nature of the challenged
subsidy. 61 Thus, the United States believes that Brazil has failed to make a prima facie case with respect to decoupled income support payments (direct and counter-cyclical payments) 62 under its serious prejudice claims because it has not identified either the subsidy benefit or the subsidized
product(s) using the Annex IV methodology. In addition, Brazil has failed to establish that the
effect of these challenged payments is serious prejudice; to the contrary, the United States has
demonstrated that the effect of these decoupled measures is no more than minimal. 63 39. Finally, the United States has demonstrated that using any measurement that reflects the support decided by the United States rather than factors (such as market prices) beyond the
United States control U.S. support to upland cotton in marketing years 1999-2002 has not
exceeded the 1992 marketing year level. 64 Brazils proposed approach suffers from the key flaws (among others) that it relies on the argument that: (1) budgetary outlays must be used, despite the fact that the United States never decided
an expenditure level (a point confirmed by Brazils own reliance on the marketing loan
rate and counter-cyclical target price for purposes of its per se and threat of serious
prejudice claims 65 ); and United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 14 66 W ere the Pan el to examine the term inated paym ents pr ior to the 200 2 Fa rm A ct, pro duction flexib ility contract payments would be green box, and the market loss assistance payments would be non-product-specific, as
notified to the WTO. 67 Brazils March 10 Comments, paras. 35-38. 68 See Brazils March 10 Comments, paras. 35, 37. This calculation ignores the inappropriate inclusion of crop insurance payments (non-product-specific), cottonseed payments (not in existence at time of panel
establishment), and other payments (not identified in Panel request). We also note that the marketing year 1999
budgetary outlay level would be $2,431.6 million if decoupled support is excluded. Brazil has alleged that some
portion of Step 2 payments are prohibited export subsidies, rather than domestic support, and the United States has
argue d that o ther pa ymen ts are n ot within the Pan els terms of refere nce. T he P anels vie w of these issues c ould
result in the 199 9 bu dgetary outla y level too being belo w the 1 992 level. 69 See U.S. Rebuttal Submission, paras. 114-17. By holding the external reference price fixed, support measured using a price-gap calculation shows the effect of changes in the level of support (the applied administered
price ) dec ided by the U nited S tates, rathe r than ch ange s in outlays that ma y result from forces beyo nd o ur co ntrol,
such as mark et prices. 70 For marketing year 2001, support measured using a price-gap calculation for price-based measures and budgetary expenditures for other payments results in $1,251 million. For methodologies (1) (cotton-to-cotton) and
(4) (U.S. Annex IV methodo logy), support was $1,240.9 million and $1,18 3.8 million. Again, these calculations
do not remove crop insurance payments (non-product-specific), any portion of Step 2" payments, or other
payments (not within the scope of the dispute). (2) decoupled income support measures the green box direct payments and the non-
product-specific counter-cyclical payments 66 can and must be allocated as support to a specific commodity, despite the ordinary meaning of those terms in their context in the
Agreement on Agriculture. 40. That both of these conditions must be met is evident if one examines the four tables setting out Brazils Peace Clause comparisons. 67 For example, even using budgetary outlays, if decoupled income support payments are
removed from Brazils Peace Clause comparisons, U.S. measures did not breach the
Peace Clause in marketing years 2002 and 2000. The 1992 support would be $2,117.0
million, and the 2002 and 2000 levels would be $1,557.1 million and $1,218.7 million,
respectively. 68 On the other hand, even if decoupled income support measures were allocated
according to any of Brazils four erroneous methodologies, U.S. measures did not breach
the Peace Clause in marketing year 2001 if a price-gap calculation is used in place of
outlays for marketing loan payments. A price-gap calculation eliminates the effect of
market prices on the support provided. 69 U.S. measures conform to the Peace Clause in marketing year 2001 under two different Brazilian allocation methodologies if a price-gap
calculation is used. 70 United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 15 71 Bra zils M arch 1 0 Comm ents, pa ra. 37 (1992 b udge tary outla ys were $2,1 17.0 million; 2 000 outlays under the cotton-to-cotton methodology were $2,068.8 m illion; 2000 outlays under the U.S. Annex IV
Method ology were $2,112.6 million). 72 The measures (subsidies) p rovid ed with respe ct to ma rketing ye ars 19 99-2 001 were n o lon ger in existence at the time of Brazils panel request and panel establishment. To the extent the Panel were to examine
these m easures, how ever, the same analysis would app ly. 73 This figure use s the sam e $1 ,017 .4 exp enditure am ount tha t Bra zil used for de ficiency p ayme nts. Th is figure is no t markedly d ifferent from the $1 ,009 price -gap figu re calc ulated by the U nited S tates using eligible
acreage, but even if actual payment acreage were used, the price-gap payment total would be $867 million. U.S.
Comm ents on New M aterial in Brazils Rebuttal Filings, para. 8 (August 27, 2003). Thus, the 1992 level of support
would still be higher than in marketing years 1999-2002. 74 These revised figures exclude decoupled payments and use the price-gap calculation for marketing loan paym ents, whic h results in a zero level of supp ort since the ma rketing lo an rate was b elow the fixed referen ce pr ice.
See U.S. Rebuttal Submission, para. 117 & fn. 148 (August 22, 2003). However, these revised figures do not even
remove crop insurance payments (non-product-specific), any portion of Step 2" payments (which Brazil alleges are,
in part, prohibited export subsidies), or other payments (not within the scope of the dispute). Indeed, even without making any changes to Brazils data, under two of its current
reasonable methodologies, U.S. measures did not breach the Peace Clause in 2000, the
year with the highest market prices and therefore the lowest marketing loan payments. 71 41. The United States believes that a proper interpretation and application of the Peace Clause must reflect the way in which the United States decided support in marketing years
1992 and 2002 72 and, in the case of U.S. measures, the support to upland cotton as decided was a rate of support. However, the United States has demonstrated that even an AMS
calculation that reflects the support decided by the United States rather than market prices
beyond our control would also demonstrate that U.S. measures conform to the Peace Clause.
Brazils revised budgetary outlay calculations also support this view. If neither condition set out above is met that is, decoupled income support measures
are properly excluded from the Peace Clause analysis and price-based marketing loan
payments are calculated using a price-gap methodology U.S. measures did not breach
the Peace Clause in any marketing year between 1999 and 2002. Support in marketing year 1992 would be $1,384 million, 73 well above the revised support levels are $659.1 million for marketing year 2002, $458.9 million for marketing
year 2001, $582.7 million for marketing year 2000, and $670.6 million for marketing year
1999. 74 Again, these lower levels of support decided in recent years reflects the United
States decision after the Uruguay Round to move away from the product-specific
deficiency payments with high target prices and instead to supplement producer income
with a mix of decoupled income supports that are green box (direct payments) or non-
product-specific (counter-cyclical payments). United States Subsidies on Upland Cotton U.S . Com men ts on B razils M arch 1 0, 20 04, C omm ents (WT/DS267) March 15, 2004 Page 16 42. Were the Panel to reach the question of serious prejudice or threat thereof, the United States has demonstrated that Brazil has not made a prima facie case that the challenged U.S.
measures have had that effect. However, the Panel should not even reach that question as the
facts demonstrate that the United States has disciplined itself to grant support not in excess of
that decided during the 1992 marketing year. Brazil must argue that non-product-specific
support can be allocated as support to a specific commodity and must argue that support
decided means budgetary outlays because without those conditions, it cannot demonstrate a
Peace Clause breach. The United States has demonstrated, however, that Brazils approach is
legally unsound and internally inconsistent. It would, moreover, provide no certainty for
Members who seek to conform to their WTO obligations. Brazils constantly shifting
methodologies reflect its desire to find an approach to maximize the dollars it could argue are
support to upland cotton but do not reflect the legal texts, structure, and concepts found in the
Agreement on Agriculture and the Subsidies Agreement.

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