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DISPUTE SETTLEMENT: DISPUTE DS267

United States — Subsidies on Upland Cotton

This summary has been prepared by the Secretariat under its own responsibility. The summary is for general information only and is not intended to affect the rights and obligations of Members.

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Summary of the dispute to date  back to top

The summary below was up-to-date at
See also: One-page summary of key findings of this dispute

Compliance Panel Reports (Article 21.5) currently under appeal

Complaint by Brazil.

On 18 August 2006, Brazil requested the establishment of an Article 21.5 panel. At its meeting on 1 September 2006, the DSB deferred the establishment of an Article 21.5 panel. Further to a second request, at its meeting on 28 September 2006, the DSB agreed, if possible, to refer the matter raised by Brazil to the original panel. Argentina, Australia, Canada, China, the European Communities, India, Japan and New Zealand reserved their third party rights. Subsequently, Chad and Thailand reserved their third party rights. On 18 and 20 October 2006, Brazil and the United States respectively requested the Director-General to compose the Article 21.5 panel. On 25 October 2006, the Director-General composed the panel.

On 9 January 2007, the Chairman of the Panel informed the DSB that given the particular circumstances of this case and the schedule adopted after consultations with parties to this dispute, it has not been possible for the Panel to complete its work within the 90-day period as foreseen in Article 21.5. The Panel expects to complete its work in July 2007. On 18 December 2007, the compliance panel report was circulated to Members. The Panel found that with respect to the measure taken by the United States to comply with the DSB recommendations and rulings relating to the original panel's finding of inconsistency with Articles 5 and 6 of the SCM Agreement:

• The United States acts inconsistently with its obligations under Articles 5(c) and 6.3(c) of the SCM Agreement in that the effect of marketing loan and counter-cyclical payments provided to US upland cotton producers pursuant to the FSRI Act of 2002 is significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement in the world market for upland cotton constituting “present” serious prejudice to the interests of Brazil within the meaning of Article 5(c) of the SCM Agreement.  By acting inconsistently with Articles 5(c) and 6.3(c) of the SCM Agreement the United States has failed to comply with the DSB recommendations and rulings.  Specifically, the United States has failed to comply with its obligation under Article 7.8 of the SCM Agreement “to take appropriate steps to remove the adverse effects or ... withdraw the subsidy”.
    
• Brazil has not made a prima facie case that the effect of marketing loan and counter-cyclical payments provided to US upland cotton producers pursuant to the FSRI Act of 2002 is an increase in the US world market share in upland cotton as compared to the average US world market share during the previous period of three years and that this increase follows a consistent trend over a period when subsidies have been granted.  Therefore, it has not been established that the United States acts inconsistently with Articles 5(c) and 6.3(d) of the SCM Agreement.

With respect to the measure taken by the United States to comply with the DSB recommendations and rulings relating to the original panel's findings of inconsistency with Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement, the Panel found:

• Regarding GSM 102 export credit guarantees issued after 1 July 2005 the United States acts inconsistently with Article 10.1 of the Agreement on Agriculture by applying export subsidies in a manner which results in the circumvention of US export subsidy commitments with respect to certain unscheduled products and certain scheduled products, and as a result acts inconsistently with Article 8 of the Agreement on Agriculture. Regarding GSM 102 export credit guarantees issued after 1 July 2005 also acts inconsistently with Articles 3.1(a) and 3.2 of the SCM Agreement by providing export subsidies to unscheduled products and by providing export subsidies to scheduled products in excess of the commitments of the United States under the Agreement on Agriculture. By acting inconsistently with Articles 10.1 and 8 of the Agreement on Agriculture and Articles 3.1(a) and 3.2 of the SCM Agreement the United States has failed to comply with the DSB recommendations and rulings. Specifically, the United States has failed to bring its measures into conformity with the Agreement on Agriculture and has failed “to withdraw the subsidy without delay”.
    
• With respect to certain export credits guarantees issued prior to 1 July 2005, Brazil has not established that the United States has failed to “withdraw the subsidy without delay”.

The Panel also considered that to the extent that the measures taken by the United States to comply with the recommendations and rulings adopted by the DSB in the original proceeding are inconsistent with the objections of the United States under the covered agreements, these recommendations and rulings remain operative.

On 12 February 2008, the United States notified its decision to appeal to the Appellate Body certain issues of law covered in the panel report and certain legal interpretations developed by the panel in this dispute. On 25 February 2008, Brazil notified its decision to appeal to the Appellate Body certain issues of law and legal interpretations in the panel report. On 11 April 2008, the Chairman of the Appellate Body informed the DSB that it would not be possible to circulate its report within 60 days in light of the numerous and complex issues raised in this appeal, and the increased burden on translation services. It is estimated that the Appellate Body report will be issued no later than 2 June 2008.

Appellate Body and Panel Reports Adopted

On 27 September 2002 Brazil requested consultations with the US regarding prohibited and actionable subsidies provided to US producers, users and/or exporters of upland cotton, as well as legislation, regulations, statutory instruments and amendments thereto providing such subsidies (including export credits), grants, and any other assistance to the US producers, users and exporters of upland cotton (“US upland cotton industry”).

Brazil contended that these measures were inconsistent with the obligations of the US under the following provisions: Articles 5(c), 6.3(b), (c) and (d), 3.1(a) (including item (j) of the Illustrative List of Export Subsidies in Annex I), 3.1(b), and 3.2 of the SCM Agreement; Articles 3.3, 7.1, 8, 9.1 and 10.1 of the Agreement on Agriculture; and Article III:4 of GATT 1994. Brazil was of the view that the US statutes, regulations, and administrative procedures listed above were inconsistent with these provisions as such and as applied.

On 9 October and 11 October 2002, Zimbabwe and India, respectively, requested to join the consultations. On 14 October 2002, Argentina and Canada requested to join the consultations. The United States informed the DSB that it had accepted the requests of Argentina and India to join the consultations.

On 6 February 2003, Brazil requested the establishment of a panel. At its meeting on 19 February 2003, the DSB deferred the establishment of a panel. Further to a second request by Brazil, the DSB established a Panel at its meeting on 18 March 2003. Argentina, Canada, China, Chinese Taipei, the EC, India, Pakistan and Venezuela reserved their third-party rights to participate in the Panel’s proceedings. At that meeting, the Chairman of the DSB announced that he continued to consult with Brazil and the US on the issue of appointing a DSB representative to facilitate the information-gathering process, pursuant to the Annex V procedures under the SCM Agreement, which had been invoked by Brazil in its panel request. On 24 March 2003, Benin reserved its third-party rights. On 25 March 2003, Australia reserved its third-party rights. On 26 March 2003, Paraguay reserved its third-party rights. On 28 March 2003, New Zealand reserved its third-party rights. On 4 April 2003, Chad reserved its third-party rights. On 9 May 2003, Brazil requested the Director-General to compose the panel. On 19 May 2003, the Director-General composed the panel.

On 17 November 2003, the Chairman of the Panel informed the DSB that it would not be able to complete its work in six months due to the complexity of the matter and that the Panel expected to issue its final report to the parties in May 2004.

On 8 September 2004, the report of the Panel was circulated to Members. The Panel found that:

• agricultural export credit guarantees are subject to WTO export subsidy disciplines and three United States export credit guarantee programmes are prohibited export subsidies which have no Peace Clause protection and are in violation of those disciplines;
   
• the United States also grants several other prohibited subsidies in respect of cotton;
   
• United States’ domestic support programmes in respect of cotton are not protected by the Peace Clause, and certain of these programmes result in serious prejudice to Brazil’s interests in the form of price suppression in the world market.

On 18 October 2004, United States notified its intention to appeal certain issues of law and legal interpretations developed by the Panel. On 16 December 2004, the Chairman of the Appellate Body informed the DSB that due to the numerous and complex issues arising in this dispute, the Appellate Body would not be able to circulate its Report by Friday, 17 December 2004. The Chairman then stated in the letter that in the light of the numerous and complex issues raised, the increased burden on the Appellate Body as well as the translation services, the intervening holiday period, and the fact that the Appellate Body expected to be considering two or three other appeals in the coming weeks, the Appellate Body estimateed that the Appellate Body Report in this appeal would be circulated to WTO Members no later than Thursday, 3 March 2005.

On 3 March 2005, the Appellate Body Report was circulated to Members. The Appellate Body found inter alia as follows:

1. As regards the applicability of the Peace Clause to this dispute, the Appellate Body:

• upholds the Panel’s finding that two challenged measures (production flexibility contract and direct payments) are related to the type of production undertaken after the base period and thus are not green box measures conforming fully to paragraph 6(b) of Annex 2 to the Agreement on Agriculture; and, therefore, are not exempt, by virtue of Article 13(a)(ii), from actions under Article XVI of GATT 1994 and Part III of the SCM Agreement;
   
• modifies the Panel’s interpretation of the phrase “support to a specific commodity” in Article 13(b)(ii), but upholds the Panel’s conclusion that the challenged domestic support measures granted support to upland cotton; and
   
• upholds the Panel’s finding that the challenged domestic support measures granted, between 1999 and 2002, support to upland cotton in excess of that decided during the 1992 benchmark period and, therefore, that these measures are not exempt, by virtue of Article 13(b)(ii), from actions under Article XVI:1 of the GATT 1994 and Part III of the SCM Agreement;

2. As regards serious prejudice, the Appellate Body:

• upholds the Panel’s finding that the effect of the challenged price-contingent subsidies (marketing loan program payments, user marketing (Step 2) payments, market loss assistance payments, and counter-cyclical payments) are significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement, by in turn upholding the Panel’s findings that: (i) the “same market” in Article 6.3(c) may be a “world market”, a “world market” for upland cotton exists, and “the A-Index can be taken to reflect a world price in the world market for upland cotton”; (ii) “a causal link exists” between the price-contingent subsidies and significant price suppression, and that this link is not attenuated by other factors raised by the United States; (iii) it was not required to quantify precisely the benefit conferred on upland cotton by the price-contingent subsidies; and (iv) the effect of the price-contingent subsidies for marketing years 1999 to 2002 is significant price suppression in the same period;
   
• finds that the Panel set out the findings of fact, the applicability of relevant provisions, and the basic rationale behind this finding, as required by Article 12.7 of the DSU; and
   
• finds it unnecessary to rule on the interpretation of the term “world market share” in Article 6.3(d) of the SCM Agreement and neither upholds nor reverses the Panel’s finding that this term means world supply share;^

3. As regards user marketing (Step 2) payments, the Appellate Body:

• upholds the Panel’s findings that Step 2 payments to domestic users of United States upland cotton, under Section 1207(a) of the FSRI Act of 2002, are subsidies contingent on the use of domestic over imported goods that are inconsistent with Articles 3.1(b) and 3.2 of the SCM Agreement; and
   
• upholds the Panel’s findings that Step 2 payments to exporters of United States upland cotton, pursuant to Section 1207(a) of the FSRI Act of 2002, are subsidies contingent upon export performance within the meaning of Article 9.1(a) of the Agreement on Agriculture that are inconsistent with Articles 3.3 and 8 of that Agreement and Articles 3.1(a) and 3.2 of the SCM Agreement;

4. As regards export credit guarantee programs, the Appellate Body:

• in a majority opinion, upholds the Panel’s finding that Article 10.2 of the Agreement on Agriculture does not exempt export credit guarantees from the export subsidy disciplines in Article 10.1 of that Agreement;
   
• one Member of the Division, in a separate opinion, expresses the contrary view that Article 10.2 of the Agreement on Agriculture exempts export credit guarantees from the disciplines of Article 10.1 of that Agreement until international disciplines are agreed upon;
   
• finds that the Panel did not improperly apply the burden of proof in finding that the United States’ export credit guarantee programs are prohibited export subsidies under Article 3.1(a) of the SCM Agreement and are consequently inconsistent with Article 3.2 of that Agreement;
   
• upholds the Panel’s finding that “the United States export credit guarantee programmes at issue-GSM 102, GSM 103 and SCGP-constitute 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 upholds the Panel’s findings that these export credit guarantee programs are export subsidies for purposes of Article 3.1(a) of the SCM Agreement and are inconsistent with Articles 3.1(a) and 3.2 of that Agreement; and
   
• finds that the Panel did not err in exercising judicial economy in respect of Brazil’s allegation that the United States’ export credit guarantee programs are prohibited export subsidies, under Article 3.1(a) of the SCM Agreement, because they confer a “benefit” within the meaning of Article 1.1 of that Agreement;

At its meeting on 21 March 2005, the DSB adopted the Appellate Body report and the Panel report, as modified by the Appellate Body report.

Implementation Status of Adopted Reports

At the DSB meeting of 20 April 2005, the United States stated its intention to comply with the recommendations and rulings of the DSB in a manner that respected its WTO obligations and had already begun evaluating options for doing so, and stated that it would require a reasonable period of time to implement the recommendation and ruling of the DSB.

In respect of the prohibited subsidies, with regard to which the reasonable period of time expired on 1 July 2005, on 4 July 2005 Brazil requested the DSB for authorization to suspend concessions or other obligations under Article 4.10 of the SCM Agreement and Article 22.2 of the DSU.  With regard to the prohibited subsidies, on 5 July 2005 the parties to the dispute jointly notified the DSB that they had agreed on the “Agreed Procedures under Articles 21 and 22 of the Dispute Settlement Understanding and Article 4 of the SCM Agreement”.  On 14 July 2005, the United States submitted its objections to the request for authorization by Brazil pursuant to Article 22.6 of the DSU and Article 4.11 of the SCM Agreement.  At its meeting on 15 July 2005, the DSB referred the matter raised by the United States to arbitration.  On 17 August 2005, the parties to the dispute jointly requested the Chairman of the Arbitrator to suspend the Article 22.6 arbitration proceedings in accordance with the Agreed Procedures, and the Arbitrator suspended the proceedings accordingly.     

In respect of the actionable subsidies, with regard to which the reasonable period of time expired on 21 September 2005, on 6 October 2005 Brazil requested the DSB for authorization to suspend concessions or other obligations under Article 7.9 of the SCM Agreement and Article 22.2 of the DSU.  On 17 October 2005, the United States submitted its objections to the request for authorization by Brazil pursuant to Article 22.6 of the DSU and Article 7.10 of the SCM Agreement.  At its meeting on 18 October 2005, the DSB referred the matter raised by the United States to arbitration.  On 21 November 2005, the parties to the dispute jointly requested the Chairman of the Arbitrator to suspend the Article 22.6 arbitration proceedings in accordance with the Agreed Procedures, and the Arbitrator suspended the proceedings accordingly. 

On 18 August 2006, Brazil requested the establishment of an Article 21.5 panel. At its meeting on 1 September 2006, the DSB deferred the establishment of an Article 21.5 panel. Further to a second request, at its meeting on 28 September 2006, the DSB agreed, if possible, to refer the matter raised by Brazil to the original panel.

For details of the Article 21.5 panel proceedings, see above.

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