Info Service on WTO and Trade Issues (June08/18)
28 June 2008
DSB adopts rulings in US-Brazil cotton dispute
SUNS #6501 Monday 23 June 2008
20 Jun (Kanaga Raja) -- The WTO Dispute Settlement Body on Friday adopted
the report of the Appellate Body and the report of the compliance panel
in relation to a dispute brought by Brazil against the United States
on its subsidies on upland cotton.
2 June, the Appellate Body upheld an earlier compliance panel ruling
that found subsidies provided by the US to its cotton
farmers to be illegal, with respect to its obligations under the Agreement
on Agriculture and Subsidies and Countervailing Measures (SCM).
Appellate Body recommended that the Dispute Settlement Body request
the US to bring its measures - found to
be inconsistent with the Agreement on Agriculture and the SCM Agreement
- into conformity with its obligations under those Agreements. (See
SUNS #6487 dated 3 June 2008).
from statements at the DSB relating to the adoption of the Panel and
Appellate Body reports, Brazil, Australia and Canada also voiced their
concerns over the US 2008 Farm Bill re-enacted by Congress Wednesday,
with continuation of the illegal cotton subsidy programs, and more generally,
continuing US trade-distorting agricultural subsidy and support policies.
the adoption of the reports, Brazil
said at the DSB that some of the conclusions of the Appellate Body are
very important in that they clarify the nature of the implementation
obligations of Members with respect to subsidies that are found to cause
said Brazil, according to the Appellate Body, the terms of Article 7.8
of the SCM Agreement involve "affirmative action" that is
directed at effecting the withdrawal of the subsidy or removal of its
the obligation in Article 7.8 is not limited to subsidies granted in
the past. In the words of the Appellate Body, this means that "in
the case of recurring annual payments, the obligation in Article 7.8
would extend to payments 'maintained' by the respondent Member beyond
the period examined by the panel".
said Brazil, according
to the Appellate Body, the option in Article 7.8 of removing the adverse
effects instead of withdrawing the subsidy "cannot be read as allowing
a Member to continue to cause adverse effects by maintaining the subsidies
that were found to have resulted in adverse effects."
the Appellate Body recognized that the distinction between "as
such" and "as applied" claims may not lend itself to
a proper analysis of adverse effects cases. Brazil said that this was in the context
of an artificial distinction between "payments" and "programs"
that was at the core of the dispute in these compliance proceedings.
Appellate Body correctly noted that it was difficult to divorce payments
from programs, and that "it would be difficult to conceive how
an analysis of whether a programme 'as such' resulted in adverse effects
would differ from an analysis of whether payments under a programme
have resulted in such effects."
Brazil said that all these findings
go in the direction of safeguarding the effectiveness of the rules agreed
by Members to discipline the use of subsidies. Brazil said that it agrees with the
Appellate Body that a different conclusion would have "serious
implications for a complaining Member's ability to obtain relief against
adverse effects of actionable subsidies."
Brazil recalled that at the DSB meeting
where the reports of the Appellate Body and the original panel were
adopted in 2005, it had stated that "this protracted and sometimes
painful process has finally come to an end."
of course, expected that the United
States would comply with the clear
and unmistakable rulings that were then made by the DSB. Now, 3 years
after that meeting and after another period of prolonged litigation,
we can at least say that this was the last stage where Brazil's arguments could be examined on their merits,"
light of the findings of continued inconsistency of the US
measures with the multilateral rules, Brazil
said that it once again expresses hope and expectation that the United States
will fully and immediately comply with the rulings and recommendations
of the DSB in this matter.
signals being received by Brazil, however,
are not encouraging, it said. The compliance panel proceedings were
about measures that were enacted as part of the 2002 farm bill, pursuant
to which $8.8 billion were paid to cotton producers from marketing years
2002 to 2005 alone under the three programs that were found to cause
adverse effects - an average of $2.2 billion per year. The original
panel proceedings, started in 2003, referred to $12.9 billion in subsidies
paid in years 1999-2002, corresponding, on average, to a subsidization
rate of 89.5%.
Brazil noted that a new Farm Bill
was recently approved by the US Congress. According to a report by the
International Cotton Advisory Committee (ICAC), "the 2008 farm
bill introduces few modifications to the US cotton program. The structure of
subsidies (...) will remain the same. (...) [L]oan rates will be unchanged
(...) and the upland target price, currently 72.40 cents per pound,
will be reduced to 71.25 cents per pound. (...) In conclusion, the cotton
program introduced in the 2008 farm bill is little different from the
cotton program established by the 2002 farm bill. US farmers will face
a similar set of policies between 2008/9 and 2012/13 as they faced between
2002/3 and 2007/8."
Thursday, the US Congress (both Senate and House) overrode for the second
time a Presidential veto, and re-approved a $290 billion Farm Bill that
becomes law. The votes to override, in both Houses of Congress were
overwhelming: the Senate by 80 to 14, and the House by 317 to 109.]
said that this is a cause of great concern, not only for Brazilian cotton
growers, but certainly also for other producers around the world, who
may have to continue to suffer the adverse effects of subsidized US
cotton production while US producers, as recognized by the Appellate
Body, are kept isolated from market signals.
actions raise questions about the willingness of the United
States to comply with its obligations in the present
case, said Brazil, expressing hope that the adoption of the
compliance panel and Appellate Body reports provides sufficient incentive
for the United States
to amend its legislation and ensure compliance with the rulings of the
full compliance with these rulings, Brazil
will pursue the established procedures in order to obtain from the DSB
authorization to take counter-measures vis-a-vis the United States."
US expressed disappointment with the
compliance panel and Appellate Body reports. It believed that it had
brought the challenged payments and export credit guarantees into full
compliance with the DSB's recommendations and rulings.
find otherwise, the compliance panel and Appellate Body had to make
findings on jurisdiction that re-cast or ignored those recommendations
and rulings and other findings that assume conclusions and fail to demand
of the complaining party that it fully prove its case, said the US.
a detailed statement, the US highlighted
three aspects of the compliance panel and Appellate Body reports; First,
the findings on jurisdiction under Article 21.5 of the DSU; second,
the findings on export credit programs; and third, the findings on serious
the issue of findings on jurisdiction under Article 21.5 of the DSU,
the US maintained that the Appellate Body
upheld the compliance panel's two preliminary rulings on scope of compliance
proceedings by misapplying Article 21.5 and neglecting the fundamental
role of the DSB's recommendations and rulings. The US pointed to
the preliminary rulings in relation to US export credit guarantees,
and certain payments commencing in September 2005.
respect to the substantive findings of the dispute, the US
expressed disappointment that the Appellate Body relied on what amounted
to little more than speculation concerning the design of the GSM 102
program to uphold the compliance panel's ultimate finding on export
US budget re-estimates data showed that the US export credit
guarantee programs were projected to be strongly profitable, even before
the measures taken to comply were adapted. And, in fact, for the years
in which the books had closed (Fiscal Year 1994 and 1995), the data
showed an actual profit.
findings on serious prejudice, the US
was also disappointed that the Appellate Body upheld the compliance
panel's findings that the US marketing loan and counter-cyclical payments
continued to cause significant price suppression, thereby constituting
present serious prejudice to Brazil's
interests, even though the Appellate Body at times recognized serious
weaknesses in the compliance panel's analysis.
US also said that it was compelled
to note that the findings on serious prejudice being considered today
are outdated. The compliance panel and Appellate Body reports deal with
market conditions from two to three years ago. Since then, US cotton acreage has fallen precipitously,
and continues to decline. US cotton planted acreage fell by 29.5% in
2007 from the year before and fell a further 12.8% in 2008. That is,
said the US, despite
the allegedly market-insulating effects of US payments, US cotton acreage has declined by
more than 38.5% in the last two years.
despite the alleged price-suppressing effects of US payments, cotton
prices have risen sharply, and futures prices indicate the market expects
prices to remain high for the foreseeable future, said the US,
adding that as a result, it has not made any marketing loan payments
since September 2007, before circulation of the compliance panel report.
Further, the US
is making only minimal counter-cyclical payments.
an intervention, Canada welcomed the panel and Appellate Body findings
that the US
continues to violate the SCM Agreement through its marketing loan and
counter-cyclical payments and its GSM 102 export credit guarantee program.
respect to the marketing loan and counter-cyclical payments in particular,
said Canada, the reports confirm that the US has failed
to implement the rulings and recommendations of the DSB by failing to
"take appropriate steps to remove adverse effects or withdraw the
US had argued that its obligation under Article 7.8 of the SCM Agreement
was limited to removing adverse effects caused by subsidies granted
in a particular period of time and did not cover either future payments
under the same programs, or the subsidy programs themselves.
said that as a third party in the proceedings, it had argued before
the Appellate Body that the loophole that the US sought to establish was a direct
challenge to the effectiveness of compliance proceedings in serious
rejecting the US position, the Appellate Body's report provides helpful
clarification on the obligation in Article 7.8 of the SCM Agreement
to "take appropriate steps to remove the adverse effects"
and the relationship between Article 7.8 and Article 21.5 of the DSU.
welcomed the Appellate Body findings as an important contribution to
the prompt and effective settlement of disputes.
Canada was also pleased with the Appellate
Body findings on the scope of a "measure taken to comply"
for purposes of an Article 21.5 proceeding. The Appellate Body's findings
that a panel must consider a measure in its totality in a 21.5 proceeding,
while confirming that the scope of claims that may be raised in an Article
21.5 proceeding is not unbounded, are consistent with previous Appellate
also welcomed the Appellate Body's findings on the allegations of the
US in respect
of Article 11 of the DSU. Canada
said that it is pleased that the Appellate Body has maintained its consistent
position that while a panel must carefully consider and analyze competing
evidence submitted by parties, it will not interfere lightly with a
panel's exercise of its authority as the trier of fact.
Canada expressed concern that the
Farm Bill recently passed by the US Congress fails to reform major US
programs including programs at issue in the case, such as the direct
payments and the counter-cyclical payments programs. Not only does the
new Farm Bill lack meaningful reforms, it also raises the possibility
of increased subsidies.
a result, the US has missed an opportunity to make its farm programs
more market-oriented and to decrease the vulnerability of US farm programs to future challenges," said
its intervention, Australia also
welcomed the report of the Appellate Body, saying that the Appellate
Body has clarified the scope of proceedings under Article 21.5 of the
DSU, where these proceedings concern recommendations and rulings on
that the findings and conclusions of the Appellate Body give real effect
to the meaning of Article 7.8 of the SCM Agreement, Australia said that
the Appellate Body has ensured that a Member whose interests have been
adversely affected by another Member's subsidy is not left without a
remedy, should the subsidizing Member fail to take action envisaged
by Article 7.8.
Appellate Body has recognized that compliance with Article 7.8 will
usually involve an affirmative action to withdraw the subsidy or remove
its adverse effects, said Australia, adding that it expects the US to
take such positive action without delay, in fulfillment of the DSB's
recommendations and rulings in this dispute.
Australia also expressed concern that
the Farm Bill recently passed by the US Congress continues the cotton
support programs at issue in the dispute and reinstates certain elements
of support programs benefiting cotton production previously found to
generally, said Australia, the
2008 Farm Bill institutionalizes trade-distorting support programs with
the potential to provide even greater subsidies to major crops. The
continuance of these same support programs with more generous terms
could severely test the ability of the US
to comply with its WTO domestic support commitments in future years,
particularly should prices for key commodities return to historic levels.
EC said that the reports clarify WTO rules on export financing, actionable
subsidies and the scope of compliance procedures. For example, they
confirmed that if payments under a subsidies program has been found
to be inconsistent with the SCM Agreement and if the defending Member
continues to make payments under such program under the same conditions,
those further payments clearly fall within the jurisdiction of a compliance
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