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Issues covered by the WTO’s committees and agreements

REPERTORY OF APPELLATE BODY REPORTS

Agreement on Agriculture


ON THIS PAGE:

Article 1(a) and Annex 3 — “Aggregate Measurement of Support”
Article 1(a)(ii) and Annex 3 — “AMS commitments”
Article 1(e) — “subsidy”
Article 1(e) — “contingent upon export performance”
Article 3.1 — “export subsidy commitments”
Article 3.1 — “commitments limiting subsidization”
Article 3.3 — “export subsidies”
Article 3.3 — “budgetary outlay and quantity commitment levels”
Articles 3.3 and 10.1 — “export subsidy commitments”
Article 4 — “market access”
Article 4.1 — Market access commitments contained in Schedules. See also Tariff Quotas — Non-Discriminatory Administration (T.2)
Article 4.2 and footnote 1 — Conversion of certain border measures into ordinary customs duties
Article 4.2 and footnote 1 — Measures of the kind
Article 4.2 and footnote 1 — Minimum import price
Article 4.2 and footnote 1 — Similar border measures other than ordinary customs duties
Article 4.2 and footnote 1 — Variable import levies
Article 5 — Special safeguard
Article 6.3 — Domestic support commitments
Article 8 — “export competition commitments”
Article 9.1 — “export subsidies”
Article 9.1 — “subject to reduction commitments”
Article 9.1(a) — “direct subsidies, including payments-in-kind”
Article 9.1(a) — “governments or their agencies”
Article 9.1(a) — “contingent on export performance”
Article 9.1(c) — “payments”
Article 9.1(c) — Benchmark for payments-in-kind
Article 9.1(c) — Benchmark — World market prices vs. Domestic prices
Article 9.1(c) — Benchmark — Cost of production
Article 9.1(c) — Industry-wide vs. Individual standard
Article 9.1(c) — “imputed” costs
Article 9.1(c) — Selling and quota costs
Article 9.1(c) — “governmental action”
Article 9.1(c) — Governmental action vs. Private action
Article 9.1(c) — “by virtue of”
Article 9.1(c) — “financed”
Article 9.1(c) — Cross-subsidization
Article 9.1(d) — “costs of marketing”
Article 9.2 — Budgetary outlay and quantity commitment levels
Article 10 — General
Article 10.1 — “export subsidy commitments”
Article 10.1 — “export subsidies” not listed in Article 9.1
Article 10.1 — Actual circumvention
Article 10.1 — Threat of circumvention
Article 10.1 — “non-commercial transactions”
Article 10.1 — Relationship with Article 9.1
Article 10.2 — Export credit guarantees
Article 10.3 — Reversal of burden of proof. See also Burden of Proof, Reversal (B.3.4)
Article 10.3 — Relationship with Article 6.2 of the DSU
Article 10.4 — “food aid”
Article 13 — “due restraint” (peace clause). See also Agreement on Agriculture, Relationship between the Agreement on Agriculture and the GATT 1994 (A.1.37)
Annex 2 — “green box”
Annex 3, paragraph 7 — Measures directed at processors benefiting producers
Annex 3, paragraph 8 — “market price support”
Relationship between domestic support and export subsidies disciplines
Relationship between the Agreement on Agriculture and the GATT 1994. See also Tariff Concessions, Relationship between Member’s Schedules and the Agreement on Agriculture (T.1.4)
Relationship between the Agreement on Agriculture and the Modalities Paper
Relationship between the Agreement on Agriculture and the SCM Agreement. See also Agreement on Agriculture, Article 1(e) — “subsidy” (A.1.3); SCM Agreement, Article 3.1 — “except as provided in the Agreement on Agriculture” (S.2.11)


A.1.1 Article 1(a) and Annex 3 — “Aggregate Measurement of Support”     back to top

A.1.1.1 Korea — Various Measures on Beef, para. 115
(WT/DS161/AB/R, WT/DS169/AB/R)

 

…for purposes of determining whether a Member has exceeded its commitment levels, Base Total AMS, and the commitment levels resulting or derived therefrom, are not themselves formulae to be worked out, but simply absolute figures set out in the Schedule of the Member concerned. As a result, Current Total AMS which is calculated according to Annex 3, is compared to the commitment level for a given year that is already specified as a given, absolute, figure in the Member’s Schedule.

 
A.1.2 Article 1(a)(ii) and Annex 3 — “AMS commitments”     back to top

A.1.2.1 Korea — Various Measures on Beef, para. 112
(WT/DS161/AB/R, WT/DS169/AB/R)

 

Looking at the wording of Article 1(a)(ii) itself, it seems to us that this provision attributes higher priority to “the provisions of Annex 3” than to the “constituent data and methodology”. From the viewpoint of ordinary meaning, the term “in accordance with” reflects a more rigorous standard than the term “taking into account”.

 

A.1.2.2 Korea — Various Measures on Beef, para. 114
(WT/DS161/AB/R, WT/DS169/AB/R)

 

In the circumstances of the present case, it is not necessary to decide how a conflict between “the provisions of Annex 3” and the “constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule” would have to be resolved in principle. As the Panel has found, in this case, there simply are no constituent data and methodology for beef. Assuming arguendo that one would be justified — in spite of the wording of Article 1(a)(ii) — to give priority to constituent data and methodology used in the tables of supporting material over the guidance of Annex 3, for products entering into the calculation of the Base Total AMS, such a step would seem to us to be unwarranted in calculating Current AMS for a product which did not enter into the Base Total AMS calculation. …

 
A.1.3 Article 1(e) — “subsidy”     back to top

A.1.3.1 Canada — Dairy, para. 87
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

…Correspondingly, a “subsidy” involves a transfer of economic resources from the grantor to the recipient for less than full consideration. As we said in our Report in Canada — Aircraft, a “subsidy”, within the meaning of Article 1.1 of the SCM Agreement, arises where the grantor makes a “financial contribution” which confers a “benefit” on the recipient, as compared with what would have been otherwise available to the recipient in the marketplace. …

 

A.1.3.2 US — FSC, para. 137
(WT/DS108/AB/R)

 

Therefore, in this case, we will consider, first, whether the FSC measure involves a transfer of economic resources by the grantor, which in this dispute is the government of the United States, and, second, whether any transfer of economic resources involves a benefit to the recipient.

 

A.1.3.3 US — FSC (Article 21.5 — EC), para. 194
(WT/DS108/AB/RW)

 

… We have rejected the United States’ appeal regarding the proper characterization of the measure under Article 3.1(a) of the SCM Agreement. The Panel held, and we have upheld, that the measure involves the forgoing of revenues that are otherwise due under Article 1.1(a)(ii) of the SCM Agreement. As we indicated in US FSC, where a government forgoes revenues that are otherwise due in relation to agricultural products, a subsidy may arise under the Agreement on Agriculture.

 

The fiscal treatment of agricultural products, under the measure, is not materially different from the fiscal treatment of products falling within the scope of the SCM Agreement. Accordingly, we see no reason to reach any conclusion under the Agreement on Agriculture that differs from our conclusion under the SCM Agreement.

 

A.1.3.4 EC — Export Subsidies on Sugar, para. 269
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

The chapeau of Article 9.1 provides: “The following export subsidies are subject to reduction commitments”. Hence, Article 9.1 sets forth a list of practices that, by definition, involve export subsidies. In other words, a measure falling within Article 9.1 is deemed to be an export subsidy within the meaning of Article 1(e) of the Agreement on Agriculture. We observe that Article 9.1(c) requires no independent enquiry into the existence of a “benefit”.

 
A.1.4 Article 1(e) — “contingent upon export performance”     back to top

A.1.4.1 US — FSC, para. 141
(WT/DS108/AB/R)

 

… We see no reason, and none has been pointed out to us, to read the requirement of “contingent upon export performance” in the Agreement on Agriculture differently from the same requirement imposed by the SCM Agreement. The two Agreements use precisely the same words to define “export subsidies”. Although there are differences between the export subsidy disciplines established under the two Agreements, those differences do not, in our view, affect the common substantive requirement relating to export contingency. Therefore, we think it appropriate to apply the interpretation of export contingency that we have adopted under the SCM Agreement to the interpretation of export contingency under the Agreement on Agriculture.

 

A.1.4.2 US — Upland Cotton, para. 571
(WT/DS267/AB/R)

 

Although an export subsidy granted to agricultural products must be examined, in the first place, under the Agreement on Agriculture, we find it appropriate, as has the Appellate Body in previous disputes, to rely on the SCM Agreement for guidance in interpreting provisions of the Agreement on Agriculture. Thus, we consider the export-contingency requirement in Article 1(e) of the Agreement on Agriculture having regard to that same requirement contained in Article 3.1(a) of the SCM Agreement.

 

A.1.4.3 US — Upland Cotton, para. 582
(WT/DS267/AB/R)

 

In sum, we agree with the Panel’s view that Step 2 payments are export-contingent and, therefore, an export subsidy for purposes of Article 9 of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement. The statute and regulations pursuant to which Step 2 payments are granted, on their face, condition payments to exporters on exportation. In order to claim payment, an exporter must show proof of exportation. If an exporter does not provide proof of exportation, the exporter will not receive a payment. This is sufficient to establish that Step 2 payments to exporters of United States upland cotton are “conditional upon export performance” or “dependent for their existence on export performance”. That domestic users may also be eligible to receive payments under different conditions does not eliminate the fact that an exporter will receive payment only upon proof of exportation.

 

A.1.4.4 US — Upland Cotton, para. 615
(WT/DS267/AB/R)

 

… Article 1(e) of the Agreement on Agriculture defines “export subsidies” as “subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement” (emphasis added). The use of the word “including” suggests that the term “export subsidies” should be interpreted broadly and that the list of export subsidies in Article 9 is not exhaustive. Even though an export credit guarantee may not necessarily include a subsidy component, there is nothing inherent about export credit guarantees that precludes such measures from falling within the definition of a subsidy. An export credit guarantee that meets the definition of an export subsidy would be covered by Article 10.1 of the Agreement on Agriculture because it is not an export subsidy listed in Article 9.1 of that Agreement.

  
A.1.4A Article 3.1 — “export subsidy commitments”     back to top

A.1.4A.1 EC — Export Subsidies on Sugar, paras. 166-167
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

A preliminary question for our consideration is what rules apply in interpreting export subsidy commitments specified in a Member’s Schedule under the Agreement on Agriculture. We observe that Article II:7 of the General Agreement on Tariffs and Trade 1994 (the “GATT 1994”) provides that the “Schedules annexed to this Agreement are hereby made an integral part of Part I of this Agreement.” Furthermore, Article 3.1 of the Agreement on Agriculture provides that “export subsidy commitments in Part IV of each Member’s Schedule are hereby made an integral part of [the] GATT 1994”.

 

The applicable rules for interpreting the provisions of the GATT 1994 are the “customary rules of interpretation of public international law”. The Appellate Body has held that these rules are codified in the Vienna Convention on the Law of Treaties (the “Vienna Convention”). As provisions of a Member’s Schedule are “part of the terms of the treaty”, they are subject to these same rules of treaty interpretation. …

 
A.1.4B Article 3.1 — “commitments limiting subsidization”     back to top

A.1.4B.1 EC — Export Subsidies on Sugar, para. 209
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… We do not see Article 3.1 as permitting a Member to limit subsidization to whatever commitment it chooses to specify in its Schedule without regard to Members’ obligations under the Agreement on Agriculture. Rather, with respect to export subsidy commitments, we see Article 3.1 as requiring a Member to limit its subsidization to the budgetary outlay and quantity reduction commitments specified in its Schedule in accordance with the provisions of the Agreement on Agriculture. …

 
A.1.5 Article 3.3 — “export subsidies”     back to top

A.1.5.1 US — FSC, para. 132
(WT/DS108/AB/R)

 

… A finding of inconsistency with Article 3.3 of the Agreement on Agriculture is dependent on the Member having provided export subsidies listed in Article 9.1.

 

A.1.5.2 US — FSC, para. 152
(WT/DS108/AB/R)

 

As regards scheduled products, when the specific reduction commitment levels have been reached, the limited authorization to provide export subsidies as listed in Article 9.1 is transformed, effectively, into a prohibition against the provision of those subsidies. …

 
A.1.5A Article 3.3 — “budgetary outlay and quantity commitment levels”     back to top

A.1.5A.1 EC — Export Subsidies on Sugar, paras. 193-194
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

By its terms, Article 3.3 of the Agreement on Agriculture prohibits the granting of export subsidies (listed in Article 9.1) in excess of the budgetary outlay and quantity commitment levels specified in a Member’s Schedule. Article 3.3 does not, however, explicitly state that export subsidy commitments must be specified in a Member’s Schedule in terms of both budgetary outlay and quantity commitment levels. At the same time, Article 3.3 does not explicitly state that a Member may specify its commitment level in terms of either of the two forms of commitments. In our view, the use of the conjunctive “and”, and the corresponding use of the word “levels” in the plural, suggest that the drafters of the Agreement intended that both types of commitments must be specified in a Member’s Schedule in respect of any export subsidy listed in Article 9.1. Had the drafters intended that a Member could specify one or the other of the two forms of commitments, they would have chosen the disjunctive “or” and correspondingly used the word “level” in the singular. Given the choice, Members would choose only one or the other type of commitment, but not both, so as to minimize their obligations. Therefore, it appears to us that the drafters intended to ensure that export subsidy commitments are specified in Members’ Schedules in terms of both budgetary outlay and quantity commitments, by using the word “and” as well as the word “levels” in the text of Article 3.3.

 

We find contextual support for the above interpretation in Article 9.2(b)(iv) of the Agreement on Agriculture, which provides:

 

(iv) the Member’s budgetary outlays for export subsidies and the quantities benefiting from such subsidies, at the conclusion of the implementation period, are no greater than 64 per cent and 79 per cent of the 1986-1990 base period levels, respectively. For developing country Members these percentages shall be 76 and 86 per cent, respectively.

 

This provision prescribes the export subsidy commitment levels to be reached at the conclusion of the implementation period (and to be maintained thereafter), and those commitment levels are expressed in terms of both budgetary outlays and quantities. We do not see how a Member could comply with Article 9.2(b)(iv), or for that matter Article 9.2(a), without having specified its export subsidy commitments in terms of both budgetary outlays and quantities. We also consider it significant that both Article 9.2(b)(iii) and Article 9.2(b)(iv) use the expression “budgetary outlays for export subsidies and the quantities benefiting from such subsidies” (emphasis added). This shows the drafters’ recognition of the need to address the budgetary outlays and quantities together.

 

A.1.5A.2 EC — Export Subsidies on Sugar, para. 196
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Our interpretation that Article 3.3 (as well as Article 9.2) requires that export subsidy commitments in a Member’s Schedule must be expressed in terms of both budgetary outlay and quantity commitment levels is also in consonance with the object and purpose of the Agreement on Agriculture. We note, as did the Panel, that the third paragraph of the Preamble to the Agreement recognizes that the “long-term objective” of WTO Members, in initiating a reform process to deal with the distortions in the world agricultural markets, is “to provide for substantial progressive reductions in agricultural support and protection”. Pursuant to this objective, the fourth paragraph of the Preamble expresses the commitment of the WTO Members “to achieving binding commitments” in the three specified areas, including “export competition”. An interpretation that export subsidy commitments must be expressed in a Member’s Schedule in terms of both budgetary outlay and quantity commitment levels is more in harmony with the objectives stated in the Preamble to the Agreement than an interpretation that a Member is only obliged to fulfil “whatever commitments” it chooses to specify in its Schedule.

 

A.1.5A.3 EC — Export Subsidies on Sugar, para. 197
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

We are also of the view that if an export subsidy commitment were allowed to be specified in only one form, budgetary outlay or quantity, as a Member may choose, and its conformity were measured on the basis of that one commitment alone, it would undermine the export subsidy disciplines of the Agreement on Agriculture. As we noted above, the drafters recognized the need to deal with budgetary outlays and quantities together in order to restrain subsidized exports. A commitment on budgetary outlay alone provides little predictability on export quantities, while a commitment on quantity alone could lead to subsidized exports taking place that would otherwise have not taken place but for the budgetary support. This is especially so given that the Agreement on Agriculture has initiated a reform process in an environment of high levels of export subsidies taking the form of budgetary outlays and quantities. …

 

A.1.5A.4 EC — Export Subsidies on Sugar, para. 200
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

…we agree with the Panel that Article 3.3 requires a Member to schedule both budgetary outlay and quantity commitment levels in respect of export subsidies listed in Article 9.1 of the Agreement on Agriculture.

 
A.1.6 Articles 3.3 and 10.1 — “export subsidy commitments”     back to top

A.1.6.1 US — FSC, para. 145
(WT/DS108/AB/R)

 

Under Article 3, Members have undertaken two different types of “export subsidy commitments”. Under the first clause of Article 3.3, Members have made a commitment that they will not “provide export subsidies listed in paragraph 1 of Article 9 in respect of the agricultural products or groups of products specified in Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity commitments levels specified therein”. …

 

A.1.6.2 US — FSC, paras. 146-147
(WT/DS108/AB/R)

 

Under the second clause of Article 3.3, Members have committed not to provide any export subsidies, listed in Article 9.1, with respect to unscheduled agricultural products. This clause clearly also involves “export subsidy commitments” within the meaning of Article 10.1. …

 

… The term “export subsidy commitments” has a wider reach that covers commitments and obligations relating to both scheduled and unscheduled agricultural products.

 

A.1.6.3 EC — Export Subsidies on Sugar, para. 211
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… we examine whether the claimed commitment in Footnote 1 “limiting” subsidization of exports of sugar can prevail over the provisions of the Agreement on Agriculture, despite such a commitment being inconsistent with Articles 3.3 and 9.1 of the Agreement on Agriculture.

 

A.1.6.4 EC — Export Subsidies on Sugar, para. 222
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… Footnote 1, being part of the European Communities’ Schedule, is an integral part of the GATT 1994 by virtue of Article 3.1 of the Agreement on Agriculture. Therefore, pursuant to Article 21 of the Agreement on Agriculture, the provisions of the Agreement on Agriculture prevail over Footnote 1. …

 
A.1.7 Article 4 — “market access”     back to top

A.1.7.1 Chile — Price Band System, para. 200
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

… we turn now to Article 4, which is the main provision of Part III of the Agreement on Agriculture. As its title indicates, Article 4 deals with “Market Access”. During the course of the Uruguay Round, negotiators identified certain border measures which have in common that they restrict the volume or distort the price of imports of agricultural products. The negotiators decided that these border measures should be converted into ordinary customs duties, with a view to ensuring enhanced market access for such imports. Thus, they envisioned that ordinary customs duties would, in principle, become the only form of border protection. As ordinary customs duties are more transparent and more easily quantifiable than non-tariff barriers, they are also more easily compared between trading partners, and thus the maximum amount of such duties can be more easily reduced in future multilateral trade negotiations. The Uruguay Round negotiators agreed that market access would be improved — both in the short term and in the long term — through bindings and reductions of tariffs and minimum access requirements, which were to be recorded in Members’ Schedules.

 
A.1.8 Article 4.1 — Market access commitments contained in Schedules.
See also Tariff Quotas — Non-Discriminatory Administration (T.2)     back to top

A.1.8.1 EC — Bananas III, para. 156
(WT/DS27/AB/R)

 

Article 4.1 of the Agreement on Agriculture provides as follows:

 

Market access concessions contained in Schedules relate to bindings and reductions of tariffs, and to other market access commitments as specified therein.

 

In our view, Article 4.1 does more than merely indicate where market access concessions and commitments for agricultural products are to be found. Article 4.1 acknowledges that significant, new market access concessions, in the form of new bindings and reductions of tariffs as well as other market access commitments (i.e. those made as a result of the tariffication process), were made as a result of the Uruguay Round negotiations on agriculture and included in Members’ GATT 1994 Schedules. These concessions are fundamental to the agricultural reform process that is a fundamental objective of the Agreement on Agriculture.

 

A.1.8.2 EC — Bananas III, para. 157
(WT/DS27/AB/R)

 

… we do not see anything in Article 4.1 to suggest that market access concessions and commitments made as a result of the Uruguay Round negotiations on agriculture can be inconsistent with the provisions of Article XIII of the GATT 1994. There is nothing in Articles 4.1 or 4.2, or in any other article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products. …

 

A.1.8.3 US — Upland Cotton, para. 548
(WT/DS267/AB/R)

 

Our approach in this case is consistent with the Appellate Body’s approach in EC — Bananas III. In that case, the European Communities relied on Article 4.1 of the Agreement on Agriculture in arguing that the market access concessions it made for agricultural products pursuant to the Agreement on Agriculture prevailed over Article XIII of the GATT 1994. The Appellate Body, however, found that “[t]here is nothing in Articles 4.1 or 4.2, or in any other article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products”. It further explained that “[i]f the negotiators had intended to permit Members to act inconsistently with Article XIII of the GATT 1994, they would have said so explicitly”. The situation before us is similar. We have found nothing in Article 6.3, paragraph 7 of Annex 3 or anywhere else in the Agreement on Agriculture that “deals specifically” with subsidies that are contingent on the use of domestic over imported agricultural products.

 
A.1.9 Article 4.2 and footnote 1 — Conversion of certain border measures into ordinary customs duties     back to top

A.1.9.1 Chile — Price Band System, paras. 206-207
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

… Article 4.2 of the Agreement on Agriculture should be interpreted in a way that gives meaning to the use of the present perfect tense in that provision — particularly in the light of the fact that most of the other obligations in the Agreement on Agriculture and in the other covered agreements are expressed in the present, and not in the present perfect, tense. In general, requirements expressed in the present perfect tense impose obligations that came into being in the past, but may continue to apply at present. As used in Article 4.2, this temporal connotation relates to the date by which Members had to convert measures covered by Article 4.2 into ordinary customs duties, as well as to the date from which Members had to refrain from maintaining, reverting to, or resorting to, measures prohibited by Article 4.2. The conversion into ordinary customs duties of measures within the meaning of Article 4.2 began during the Uruguay Round multilateral trade negotiations, because ordinary customs duties that were to “compensate” for and replace converted border measures were to be recorded in Members’ draft WTO Schedules the conclusion of those negotiations. These draft Schedules, in turn, had to be verified before the signing of the WTO Agreement on 15 April 1994. Thereafter, there was no longer an option to replace measures covered by Article 4.2 with ordinary customs duties in excess of the levels of previously bound tariff rates. Moreover, as of the date of entry into force of the WTO Agreement on 1 January 1995, Members are required not to “maintain, revert to, or resort to” measures covered by Article 4.2 of the Agreement on Agriculture.

 

If Article 4.2 were to read “any measures of the kind which are required to be converted”, this would imply that if a Member — for whatever reason — had failed, by the end of the Uruguay Round negotiations, to convert a measure within the meaning of Article 4.2, it could, even today, replace that measure with ordinary customs duties in excess of bound tariff rates. But, as Chile and Argentina have agreed, this is clearly not so. It seems to us that Article 4.2 was drafted in the present perfect tense to ensure that measures that were required to be converted as a result of the Uruguay Round — but were not converted — could not be maintained, by virtue of that Article, from the date of the entry into force of the WTO Agreement on 1 January 1995.

 
A.1.10 Article 4.2 and footnote 1 — Measures of the kind     back to top

A.1.10.1 Chile — Price Band System, para. 208
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

Thus, contrary to what Chile argues, giving meaning and effect to the use of the present perfect tense in the phrase “have been required” does not suggest that the scope of the phrase “any measures of the kind which have been required to be converted into ordinary customs duties” must be limited only to those measures which were actually converted, or were requested to be converted, into ordinary customs duties by the end of the Uruguay Round. Indeed, in our view, such an interpretation would fail to give meaning and effect to the word “any” and the phrase “of the kind”, which are descriptive of the word “measures” in that provision. A plain reading of these words suggests that the drafters intended to cover a broad category of measures. We do not see how proper meaning and effect could be accorded to the word “any” and the phrase “of the kind” in Article 4.2 if that provision were read to include only those specific measures that were singled out to be converted into ordinary customs duties by negotiating partners in the course of the Uruguay Round.

 

A.1.10.2 Chile — Price Band System, para. 209
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

The wording of footnote 1 to the Agreement on Agriculture confirms our interpretation. … the use of the word “include” in the footnote indicates that the list of measures is illustrative, not exhaustive. And, clearly, the existence of footnote 1 suggests that there will be “measures of the kind which have been required to be converted” that were not specifically identified during the Uruguay Round negotiations. …

 

A.1.10.3 Chile — Price Band System, para. 216
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

Article 4.2 speaks of “measures of the kind which have been required to be converted into ordinary customs duties”. The word “convert” means “undergo transformation”. The word “converted” connotes “changed in their nature”, “turned into something different”. Thus, “measures which have been required to be converted into ordinary customs duties” had to be transformed into something they were not — namely, ordinary customs duties. The following example illustrates this point. The application of a “variable import levy”, or a “minimum import price”, as the terms are used in footnote 1, can result in the levying of a specific duty equal to the difference between a reference price and a target price, or minimum price. These resulting levies or specific duties take the same form as ordinary customs duties. However, the mere fact that a duty imposed on an import at the border is in the same form as an ordinary customs duty, does not mean that it is not a “variable import levy” or a “minimum import price”. Clearly, as measures listed in footnote 1, “variable import levies” and “minimum import prices” had to be converted into ordinary customs duties by the end of the Uruguay Round. The mere fact that such measures result in the payment of duties does not exonerate a Member from the requirement not to maintain, resort to, or revert to those measures.

 

A.1.10.4 Chile — Price Band System, para. 278
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

… we disagree with the Panel’s definition of “ordinary customs duties” and, therefore, we reverse the Panel’s finding, in paragraph 7.52 of the Panel Report, that the term “ordinary customs duty”, as used in Article 4.2 of the Agreement on Agriculture, is to be understood as “referring to a customs duty which is not applied to factors of an exogenous nature”.

 

A.1.10.5 Chile — Price Band System (Article 21.5 — Argentina), para. 149
(WT/DS207/AB/RW)

 

Footnote 1 provides a non-exhaustive list of the measures that are covered by the obligation under Article 4.2. The various border measures identified in footnote 1 have different forms and structures and apply to imports in different ways. Yet, these measures “have in common that they restrict the volume or distort the price of imports of agricultural products” and, therefore, frustrate a key objective of the Agreement on Agriculture — to achieve improved market access conditions for imports of agricultural products by permitting only the application of ordinary customs duties. Some of the measures specifically identified in footnote 1 entail the payment of duties at the border, while others do not. The mere fact that a measure results in the payment of duties that take the same form as ordinary customs duties does not, alone, mean that the measure falls outside the scope of footnote 1. Thus, in order to ascertain whether a measure is among the “measures of the kind which have been required to be converted into ordinary customs duties”, it is necessary to conduct an in-depth examination of the measure itself. Such an examination must take due account of the scope and meaning of the relevant language in footnote 1.

 
A.1.11 Article 4.2 and footnote 1 — Minimum import price     back to top

A.1.11.1 Chile — Price Band System, paras. 236-237
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

The term “minimum import price” refers generally to the lowest price at which imports of a certain product may enter a Member’s domestic market. Here, too, no definition has been provided by the drafters of the Agreement on Agriculture. However, the Panel described “minimum import prices” as follows:

 

[these] schemes generally operate in relation to the actual transaction value of the imports. If the price of an individual consignment is below a specified minimum import price, an additional charge is imposed corresponding to the difference.

 

The Panel also said that minimum import prices “are generally not dissimilar from variable import levies in many respects, including in terms of their protective and stabilization effects, but that their mode of operation is generally less complicated.” The main difference between minimum import prices and variable import levies is, according to the Panel, that “variable import levies are generally based on the difference between the governmentally determined threshold and the lowest world market offer price for the product concerned, while minimum import price schemes generally operate in relation to the actual transaction value of the imports” (emphasis added).

 

A.1.11.2 Chile — Price Band System (Article 21.5 — Argentina), para. 198
(WT/DS207/AB/RW)

 

… The entry price of any given shipment depends not only on the specific duty applied, if any, but also on the c.i.f. transaction value and the ad valorem tariff applied to that c.i.f. value. This does not mean, as Chile’s arguments imply, that the lower band threshold has nothing to do with the resulting level of entry prices. Because any specific duty is applied on the basis of the difference between the lower band threshold and the reference price, the lower threshold is an indispensable factor in determining the magnitude of the specific duty.… Even if the lower threshold of the measure at issue does not serve as a target domestic price per se, it does serve the function of ensuring that, the more the reference prices fall below that lower threshold, the higher the specific duties imposed will be. This is accompanied by a high likelihood that the corresponding entry price in the Chilean market will be higher than that threshold. Thus, the fact that the lower band threshold was expressed on an f.o.b. basis indicates that the measure at issue is not “identical” to a minimum import price but does not, in and of itself, preclude a finding that the measure at issue is “similar” to a minimum import price.

 

A.1.11.3 Chile — Price Band System (Article 21.5 — Argentina), para. 201
(WT/DS207/AB/RW)

 

… In our view, it is primarily the periods in which the reference price is below the lower band threshold that will be the most relevant to the assessment of whether the effects of the measure at issue are similar to the effects of a minimum import price. …

 

A.1.11.4 Chile — Price Band System (Article 21.5 — Argentina), para. 202 and footnote 280
(WT/DS207/AB/RW)

 

In sum, the measure at issue shares the following characteristics with a minimum import price scheme, all of which were also characteristics exhibited by the original price band system: (i) when a reference price applicable to a shipment falls below a specified level (the lower band threshold), an additional specific duty is imposed on the basis of the difference between those two parameters; (ii) due to the operation of the measure, it is highly improbable that the entry prices of wheat and wheat flour in the Chilean market will fall below the lower band threshold; (iii) the lower band threshold operates, at least to a degree, as a proxy or substitute for domestic target prices; (iv) the lower the reference price relative to the lower band threshold, the higher the specific duty and the greater its protective effects; and (v) the measure distorts the transmission of declines in world prices to the domestic market. Notwithstanding certain dissimilarities between the measure at issue and a minimum import price scheme,280 which were also present in the original price band system, the overall nature of the measure at issue, including its design and structure, and the way it operates, are sufficiently “similar” to a minimum import price to make it, as the Panel found, a prohibited border measure within the meaning of footnote 1 to Article 4.2.

  
A.1.12 Article 4.2 and footnote 1 — Similar border measures other than ordinary customs duties     back to top

A.1.12.1 Chile — Price Band System, para. 226
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

We agree with the first part of the Panel’s definition of the term “similar” as “having a resemblance or likeness”, “of the same nature or kind”, and “having characteristics in common”. … The better and appropriate approach is to determine similarity by asking the question whether two or more things have likeness or resemblance sufficient to be similar to each other. In our view, the task of determining whether something is similar to something else must be approached on an empirical basis.

 

A.1.12.2 Chile — Price Band System (Article 21.5 — Argentina), para. 163
(WT/DS207/AB/RW)

 

A third category of measures defined in footnote 1 as subject to the obligation in Article 4.2 of the Agreement on Agriculture is that of “similar border measures other than ordinary customs duties”. In the original proceedings, the Appellate Body endorsed the original panel’s definition of the term “similar” as “having a resemblance or likeness”, “of the same nature or kind”, and “having characteristics in common”. Similarity must be determined by undertaking a comparative analysis between an actual measure and one or more of the measures explicitly listed in footnote 1, and such a task “must be approached on an empirical basis”. The Appellate Body observed that all of the border measures expressly mentioned in footnote 1 “have in common the object and effect of restricting the volumes, and distorting the prices, of imports of agricultural products in ways different from the ways that ordinary customs duties do”. A measure need not be identical to one of the prohibited categories of measures listed in footnote 1 to fall nevertheless within the scope of that provision. Rather, as the Appellate Body explained, in order to be a “similar border measure” within the meaning of footnote 1, a measure must, “in its specific factual configuration”, have “sufficient ‘resemblance or likeness to’, or be ‘of the same nature or kind’ as, at least one of the specific categories of measures listed in footnote 1”.

 

A.1.12.3 Chile — Price Band System (Article 21.5 — Argentina), para. 164
(WT/DS207/AB/RW)

 

As regards the words “ordinary customs duties” in footnote 1, … the mere fact that the duties resulting from the application of a measure take the form of ad valorem or specific rates, or are calculated on the basis of the value and/or volume of imports, does not, alone, imply that the underlying measure or scheme constitutes ordinary customs duties and cannot be similar to one of the categories of measures explicitly identified in footnote 1.

 

A.1.12.4 Chile — Price Band System (Article 21.5 — Argentina), para. 167
(WT/DS207/AB/RW)

 

… an examination of “similarity” cannot be made in the abstract: it necessarily involves a comparative analysis. That analysis can be undertaken by comparing the measure at issue with at least one of the listed measures which, by definition, have characteristics different from the characteristics of an ordinary customs duty. The term “ordinary customs duties” in footnote 1 forms part of the phrase “similar border measures other than ordinary customs duties”. This phrase contains no punctuation, which suggests that the phrase as a whole defines a relevant concept for purposes of footnote 1. As we see it, “other than ordinary customs duties” is an adjectival phrase that qualifies the term “similar border measures”. This language will, therefore, inform a panel’s analysis of whether a measure is “similar” to one of the categories of measures listed in footnote 1. We observe, as well, that the structure and logic of footnote 1 make clear that variable import levies and minimum import prices cannot be ordinary customs duties. The same is true for border measures similar to variable import levies and to minimum import prices.

 

A.1.12.5 Chile — Price Band System (Article 21.5 — Argentina), paras. 168-169, 171
(WT/DS207/AB/RW)

 

… the Panel undertook no separate inquiry into whether the measure at issue was “other than ordinary customs duties”. Instead, after finding that the measure at issue was similar to a variable import levy and to a minimum import price, the Panel simply added that, “[a]s such, it is not an ordinary customs duty.” The Panel’s approach differs in this regard from that of the original panel, which did conduct a separate analysis of the phrase “other than ordinary customs duties” and, on the basis of that analysis, found that the characteristics of the original price band system differed from the characteristics of “ordinary customs duties”.

 

The Panel’s approach is, however, consistent with the approach taken by the Appellate Body in the original proceedings. Having reversed the original panel’s definition of “ordinary customs duties”, the Appellate Body made no separate finding as to whether the original measure was “other than ordinary customs duties”.

 

… Thus, the original measure was characterized as a “similar border measure other than ordinary customs duties”, even in the absence of a separate finding that it was “other than ordinary customs duties”.

 

… we are of the view that inconsistency with Article 4.2 can be established when it is shown that a measure is a border measure similar to one of the measures explicitly identified in footnote 1. A separate analysis of whether, or an additional demonstration that, the measure is “other than ordinary customs duties” may also be undertaken to confirm such a finding. However, these are not indispensable for reaching a conclusion on the categories listed in footnote 1.

 

A.1.12.6 Chile — Price Band System (Article 21.5 — Argentina), paras. 188-189
(WT/DS207/AB/RW)

 

… [In the original proceedings] the Appellate Body agreed with the original panel that an examination of similarity involved a comparison of two things and an assessment of the characteristics that they share. The Appellate Body disagreed, however, with the original panel’s additional observation that, in order for two things to be similar, they must share some but not all “fundamental characteristics”, and that a “border measure should therefore have some fundamental characteristics in common with one or more of the measures explicitly listed in footnote 1”. …

 

… in advocating that the issue of similarity be approached “on an empirical basis”, the Appellate Body was contrasting this to, and counselling against, an approach that focused on the fundamental nature of the shared characteristics. The proper approach should, instead, entail both an analysis of the extent of such shared characteristics and a determination of whether these are sufficient to render the two things similar. Such characteristics can be identified from an analysis of both the structure and design of a measure as well as the effects of that measure. Thus, we do not consider that the Panel would have needed, as Chile’s argument seems to imply, to focus its examination primarily on numerical or statistical data regarding the effects of that measure in practice. Where it exists, evidence on the observable effects of the measure should, obviously, be taken into consideration, along with information on the structure and design of the measure. The weight and significance to be accorded to such evidence will, as is the case with any evidence, depend on the circumstances of the case.

 
A.1.13 Article 4.2 and footnote 1 — Variable import levies     back to top

A.1.13.1 Chile — Price Band System, para. 233
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

To determine what kind of variability makes an import levy a “variable import levy”, we turn to the immediate context of the other words in footnote 1. The term “variable import levies” appears after the introductory phrase “[t]hese measures include”. Article 4.2 — to which the footnote is attached — also speaks of “measures”. This suggests that at least one feature of “variable import levies” is the fact that the measure itself — as a mechanism — must impose the variability of the duties. Variability is inherent in a measure if the measure incorporates a scheme or formula that causes and ensures that levies change automatically and continuously. Ordinary customs duties, by contrast, are subject to discrete changes in applied tariff rates that occur independently, and unrelated to such an underlying scheme or formula. The level at which ordinary customs duties are applied can be varied by a legislature, but such duties will not be automatically and continuously variable. To vary the applied rate of duty in the case of ordinary customs duties will always require separate legislative or administrative action, whereas the ordinary meaning of the term “variable” implies that no such action is required.

 

A.1.13.2 Chile — Price Band System, para. 234
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

However, in our view, the presence of a formula causing automatic and continuous variability of duties is a necessary, but by no means a sufficient, condition for a particular measure to be a “variable import levy” within the meaning of footnote 1. “Variable import levies” have additional features that undermine the object and purpose of Article 4, which is to achieve improved market access conditions for imports of agricultural products by permitting only the application of ordinary customs duties. These additional features include a lack of transparency and a lack of predictability in the level of duties that will result from such measures. This lack of transparency and this lack of predictability are liable to restrict the volume of imports. As Argentina points out, an exporter is less likely to ship to a market if that exporter does not know and cannot reasonably predict what the amount of duties will be. …

 

A.1.13.3 Chile — Price Band System, para. 254
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

… we find nothing in Article 4.2 to suggest that a measure prohibited by that provision would be rendered consistent with it if applied with a cap. Before the conclusion of the Uruguay Round, a measure could be recognized as a “variable import levy” even if the products to which the measure applied were subject to tariff bindings. And, there is nothing in the text of Article 4.2 to indicate that a measure, which was recognized as a “variable import levy” before the Uruguay Round, is exempt from the requirements of Article 4.2 simply because tariffs on some, or all, of the products to which that measure now applies were bound as a result of the Uruguay Round.

 

A.1.13.4 Chile — Price Band System (Article 21.5 — Argentina), para. 155
(WT/DS207/AB/RW)

 

… as the Appellate Body found, “variable import levies” are measures which themselves — as a mechanism — impose the variability of the duties, that is, measures that are “inherently” variable because they “incorporate a scheme or formula that causes and ensures that levies change automatically and continuously”. The presence of this underlying formula distinguishes variable import levies from ordinary customs duties, which are also subject to variation, but through discrete changes in applied tariff rates that occur independently and as a result of separate administrative or legislative action.

 

A.1.13.5 Chile — Price Band System (Article 21.5 — Argentina), para. 156
(WT/DS207/AB/RW)

 

The Appellate Body further observed that variable import levies are characterized by certain additional features which include “a lack of transparency and a lack of predictability in the level of duties that will result from such measures”. In making this statement, the Appellate Body was not identifying a “lack of transparency” and a “lack of predictability” as independent or absolute characteristics that a measure must display in order to be considered a variable import levy. Rather, the Appellate Body was simply explaining that the level of duties generated by variable import levies is less transparent and less predictable than is the case with ordinary customs duties. Thus, the Appellate Body considered transparency and predictability in tandem and in relation to the level of resulting duties, observing that “an exporter is less likely to ship to a market if that exporter does not know and cannot reasonably predict what the amount of duties will be”. This is why variable import levies are “liable to restrict the volume of imports”. In addition, they “contribute to distorting the prices of imports by impeding the transmission of international prices to the domestic market”.

 

A.1.13.6 Chile — Price Band System (Article 21.5 — Argentina), paras. 159-161 and footnote 225
(WT/DS207/AB/RW)

 

Chile contends that the Panel erred in attributing meaning to the word “variable” that did not accord in two ways with the meaning identified by the Appellate Body in the original proceedings: (i) in finding that a measure constitutes a variable import levy merely because the measure makes it likely or possible that resulting duties will change continuously; and (ii) in finding that “periodic variability” is equivalent to the automatic and continuous variability that is emblematic of variable import levies. …

 

On the first point, … [w]e consider that the Panel properly recognized that measures containing underlying formulas, which produce automatic changes in duties, display the same type of “inherent variability” that characterizes variable import levies.

 

Secondly, … [t]he Panel did not equate periodic change with automatic and continuous change. Rather, it defined an inherently variable measure as one that causes and ensures automatic and continuous changes in duty levels, and properly recognized that a measure produces such automatic changes when it incorporates an underlying scheme or formula. … Moreover, although we need not resolve the issue here, it does not seem to us that the concepts of “periodic change”, on the one hand, and “automatic and continuous change”, on the other hand, are necessarily mutually exclusive, as Chile asserts.225

 

A.1.13.7 Chile — Price Band System (Article 21.5 — Argentina), para. 211
(WT/DS207/AB/RW)

 

As our interpretation of footnote 1 above has shown, the frequency of change effected by a measure may be relevant in determining whether it is “variable”. However, this criterion is not determinative in and of itself. No specific frequency of change in resulting duties is required in order for a measure to be considered “variable” within the meaning of footnote 1. That a measure produces duties that vary with every transaction is not a necessary condition for a measure to be “variable”. Rather, “variability” must be assessed on the basis of the overall configuration of a measure and the interaction of its specific features. Thus, although the measure at issue involves less frequent changes in duties than the original price band system, the frequency of change is but one of the features to be considered in an assessment of the “variability” of the measure at issue. That assessment must also take account of the extent to which the changes are automatic and based on an underlying mechanism or formula.

 

A.1.13.8 Chile — Price Band System (Article 21.5 — Argentina), paras. 214-215
(WT/DS207/AB/RW)

 

As a preliminary matter, we note that Chile seems to assign too prominent a role to these “additional features”. In the original proceedings, … the Appellate Body remarked that variable import levies have additional features that undermine one of the objectives of the Agreement on Agriculture, namely, to improve market access conditions for imports of agricultural products by permitting the application of only ordinary customs duties. The Appellate Body observed that these additional features “include a lack of transparency and a lack of predictability in the level of duties that will result from such measures” that “are liable to restrict the volume of imports” and which “will also contribute to distorting the prices of imports by impeding the transmission of international prices to the domestic market”.

 

The Appellate Body thus envisaged that an analysis of the “additional features” that make a “variable” duty a “variable import levy” within the meaning of footnote 1 would be undertaken in the light of the function of that provision — to enhance market access for agricultural products. …

 

A.1.13.9 Chile — Price Band System (Article 21.5 — Argentina), paras. 220-222
(WT/DS207/AB/RW)

 

… Chile contests various aspects of the Panel’s reasoning explaining why, in the Panel’s view, both the reference price and the band thresholds lacked transparency. To an extent, Chile’s arguments rest on the mistaken assumption that “transparency” is an independent criterion that, if satisfied, conclusively establishes that a measure cannot be similar to a variable import levy. As we have seen, this is not the case. Moreover, in the original proceedings, the Appellate Body analysed “transparency” in tandem with the predictability of the level of the duties resulting from the operation of the original price band system.

 

It is true that Chile has enacted certain modifications that render the measure at issue more transparent than the original price band system, …Yet, in its analysis of additional features of the measure at issue, the issue before the Panel was how those modifications affected the transparency and predictability of the levels of duties resulting from the measure at issue, in particular, as compared to variable import levies. In examining this issue, the Panel expressed the view that, … in general, the use of a reference price “entails a systematic lack of transparency and predictability”, particularly when the reference price is periodically determined and constantly changing, and detached from the transaction value, volume, and origin of a shipment. We believe that the Panel did not err in finding that the measure at issue lacks transparency and predictability even though the system of fixing the reference price is more transparent than was the case under the original price band system, and the band thresholds are now pre-determined and known in advance.

 

We are, however, concerned by certain aspects of the Panel’s analysis of transparency. For example, the Panel found that the reference price lacked transparency because it was insufficiently representative of world market prices. In so finding, the Panel seems to have used transparency as an independent criterion, rather than examining, as it should have done, whether the various elements of the measure at issue in their interaction and configuration are sufficiently transparent to enable traders to anticipate their duty liability. Overall, however, we do not think that these concerns materially affect the analysis undertaken by the Panel, or vitiate its conclusions.

 

A.1.13.10 Chile — Price Band System (Article 21.5 — Argentina), para. 224
(WT/DS207/AB/RW)

 

In sum, the measure at issue shares the following characteristics with variable import levies, all of which were also characteristics exhibited by the original price band system: (i) when an administratively determined reference price falls below a specified threshold, an additional charge is imposed on the basis of the difference between these two parameters; (ii) the amount of any specific duty automatically changes in response to movements in either or both of these parameters; (iii) it is highly improbable that the entry prices of wheat and wheat flour in the Chilean market will fall below the lower band threshold; (iv) the lower the reference price relative to the lower band threshold, the higher the specific duty and the greater its protective effects; and (v) the mode of operation of the measure compromises the transparency and predictability of the resulting duties and distorts the transmission of declines in world prices to the domestic market. As the Panel found, the measure at issue, in its overall nature, design and structure, and the way it operates, is “similar” to a variable import levy.

 
A.1.14 Article 5 — Special safeguard     back to top

A.1.14.1 EC — Poultry, para. 153
(WT/DS69/AB/R)

 

… we interpret the “price at which the product concerned may enter the customs territory of the Member granting the concession, as determined on the basis of the c.i.f. import price” in Article 5.1(b) as the c.i.f. import price not including ordinary customs duties. …

 

A.1.14.2 EC — Poultry, para. 168
(WT/DS69/AB/R)

 

… neither the text nor the context of Article 5.5 of the Agreement on Agriculture permits us to conclude that the additional duties imposed under the special safeguard mechanism in Article 5 of the Agreement on Agriculture may be established by any method other than a comparison of the c.i.f. price of the shipment with the trigger price.

 

A.1.14.3 Chile — Price Band System, para. 217
(WT/DS207/AB/R, WT/DS207/AB/R/Corr.1)

 

Article 5, also found in Part III of the Agreement on Agriculture on “Market Access”, lends contextual support to our interpretation of Article 4.2. In our view, the existence of a market access exemption in the form of a special safeguard provision under Article 5 implies that Article 4.2 should not be interpreted in a way that permits Members to maintain measures that a Member would not be permitted to maintain but for Article 5, and, much less, measures that are even more trade-distorting than special safeguards. In particular, if Article 4.2 were interpreted in a way that allowed Members to maintain measures that operate in a way similar to a special safeguard within the meaning of Article 5 — but without respecting the conditions set out in that provision for invoking such measures — it would be difficult to see how proper meaning and effect could be given to those conditions set forth in Article 5.

 

A.1.14.4 Chile — Price Band System (Article 21.5 — Argentina), paras. 173-174
(WT/DS207/AB/RW)

 

… Article 4.2 expressly identifies two exceptions to the obligations that it imposes on all WTO Members, namely, Article 5 and Annex 5 to the Agreement on Agriculture. The provisions of Article 5 establish the conditions in which a Member may have recourse to such a special safeguard, set out rules on the form and duration of such safeguard measures, and establish certain transparency requirements that attach to their use. One circumstance in which a qualifying Member may be authorized to adopt a special safeguard is when the price of imports of a relevant agricultural product falls below a specified trigger price. However, pursuant to Article 5, a special safeguard can be imposed only on those agricultural products for which measures within the meaning of footnote 1 were converted into ordinary customs duties and for which a Member has reserved in its Schedule of Concessions a right to resort to these safeguards. …

 

The existence of an exemption from the market access requirements in the form of a special safeguard under Article 5 suggests that this provision (in addition to Annex 5) was the narrowly circumscribed vehicle to be used by those Members who reserved their rights to do so in order to derogate from the requirements of Article 4.2. We note that paragraph 9 of Article 5 provides that Article 5 is to remain in force for the duration of the process of reform. Negotiations for the process of reform are envisaged in Article 20 of the Agreement on Agriculture and form part of the Doha Development Agenda. The establishment of a special safeguard mechanism for developing country Members forms part of the Doha Work Programme on agriculture. We, however, are charged with reviewing the Panel’s interpretation of an existing obligation. We recall, in this regard, that Article 4.2 must be interpreted in a way that does not deprive Article 5 of proper meaning and effect.

 
A.1.14A Article 6.3 — Domestic support commitments     back to top

A.1.14A.1 US — Upland Cotton, para. 544
(WT/DS267/AB/R)

 

… Article 6.3 deals with domestic support. It establishes only a quantitative limitation on the amount of domestic support that a WTO Member can provide in a given year. The quantitative limitation in Article 6.3 applies generally to all domestic support measures that are included in a WTO Member’s AMS. …

 

A.1.14A.2 US — Upland Cotton, para. 545
(WT/DS267/AB/R)

 

Article 6.3 does not authorize subsidies that are contingent on the use of domestic over imported goods. It only provides that a WTO Member shall be considered to be in compliance with its domestic support reduction commitments if its Current Total AMS does not exceed that Member’s annual or final bound commitment level specified in its Schedule. It does not say that compliance with Article 6.3 of the Agreement on Agriculture insulates the subsidy from the prohibition in Article 3.1(b). …

 

A.1.14A.3 US — Upland Cotton, para. 546
(WT/DS267/AB/R)

 

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture do not deal specifically with the same matter as Article 3.1(b) of the SCM Agreement, that is, subsidies contingent upon the use of domestic over imported goods.

 
A.1.14B Article 8 — “export competition commitments”     back to top

A.1.14B.1 EC — Export Subsidies on Sugar, para. 216
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

It is clear from the plain wording of Article 8 that Members are prohibited from providing export subsidies otherwise than in conformity with the Agreement on Agriculture and the commitments as specified in their Schedules. Thus, compliance with both is obligatory. As compliance with the provisions of the Agreement on Agriculture is obligatory, it is clear that the commitments specified in a Member’s Schedule must be in conformity with the provisions of the Agreement. …

 

A.1.14B.2 EC — Export Subsidies on Sugar, para. 220
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… we find no provision under the Agreement on Agriculture that authorizes Members to depart, in their Schedules, from their obligations under that Agreement. Indeed, as we have noted, Article 8 requires that, in providing export subsidies, Members must comply with the provisions of both the Agreement on Agriculture and the export subsidy commitments specified in their Schedules. This is possible only if the commitments in the Schedules are in conformity with the provisions of the Agreement on Agriculture. Thus, we see no basis for the European Communities’ assertion that it could depart from the obligations under the Agreement on Agriculture through the claimed commitment provided in Footnote 1.

Article 9.1 — Relationship with Article 10.1. See Agreement on Agriculture, Article 10.1 — Relationship with Article 9.1 (A.1.33)     back to top

 
A.1.14C Article 9.1 — “export subsidies”     back to top

A.1.14C.1 EC — Export Subsidies on Sugar, para. 269
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

The chapeau of Article 9.1 provides: “The following export subsidies are subject to reduction commitments”. Hence, Article 9.1 sets forth a list of practices that, by definition, involve export subsidies. In other words, a measure falling within Article 9.1 is deemed to be an export subsidy within the meaning of Article 1(e) of the Agreement on Agriculture. We observe that Article 9.1(c) requires no independent enquiry into the existence of a “benefit”.

 
A.1.14D Article 9.1 — “subject to reduction commitments”     back to top

A.1.14D.1 EC — Export Subsidies on Sugar, para. 206
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

The chapeau of Article 9.1 says that the subsidies listed in that Article “are subject to reduction commitments under this Agreement”. The export subsidies given to ACP/India equivalent sugar, which admittedly fall within the ambit of Article 9.1(a), are therefore subject to reduction commitments. Furthermore, as noted by the Panel, the provisions of Article 9.2(b)(iv) apply to Members that take advantage of the flexibility provisions of Article 9.2(b). Article 9.2(b)(iv) specifies the reduction levels to be achieved at the conclusion of the implementation period with respect to both budgetary outlays and quantities. The provisions of Article 9.2(b)(iv) lend contextual support to the view that export subsidies listed in Article 9.1 are subject to reduction commitments. We further note that Article 9.2(a)(i) and (ii) also make it clear that both budgetary outlay and quantity commitments specified in a Member’s Schedule for each year of the implementation period are “reduction” commitments. It follows that the export subsidies provided to ACP/India equivalent sugar are subject to reduction commitments in terms of Article 9.1 of the Agreement on Agriculture.

 
A.1.15 Article 9.1(a) — “direct subsidies, including payments-in-kind”     back to top

A.1.15.1 Canada — Dairy, para. 87
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

In our view, the term “payments-in-kind” describes one of the forms in which “direct subsidies” may be granted. Thus, Article 9.1(a) applies to “direct subsidies”, including “direct subsidies” granted in the form of “payments-in-kind”. We believe that, in its ordinary meaning, the word “payments”, in the term “payments-in-kind”, denotes a transfer of economic resources, in a form other than money, from the grantor of the payment to the recipient. However, the fact that a “payment-in-kind” has been made provides no indication as to the economic value of the transfer effected, either from the perspective of the grantor of the payment or from that of the recipient. A “payment-in-kind” may be made in exchange for full or partial consideration or it may be made gratuitously. Correspondingly, a “subsidy” involves a transfer of economic resources from the grantor to the recipient for less than full consideration. As we said in our Report in Canada — Aircraft, a “subsidy”, within the meaning of Article 1.1 of the SCM Agreement, arises where the grantor makes a “financial contribution” which confers a “benefit” on the recipient, as compared with what would have been otherwise available to the recipient in the marketplace. Where the recipient gives full consideration in return for a “payment-in-kind” there can be no “subsidy”, for the recipient is paying market-rates for what it receives. It follows, in our view, that the mere fact that a “payment-in-kind” has been made does not, by itself, imply that a “subsidy”, “direct” or otherwise, has been granted.

 
A.1.16 Article 9.1(a) — “governments or their agencies”     back to top

A.1.16.1 Canada — Dairy, para. 97
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

… According to Black’s Law Dictionary, “government” means, inter alia, “[t]he regulation, restraint, supervision, or control which is exercised upon the individual members of an organized jural society by those invested with authority” (emphasis added). This is similar to meanings given in other dictionaries. The essence of “government” is, therefore, that it enjoys the effective power to “regulate”, “control” or “supervise” individuals, or otherwise “restrain” their conduct, through the exercise of lawful authority. This meaning is derived, in part, from the functions performed by a government and, in part, from the government having the powers and authority to perform those functions. A “government agency” is, in our view, an entity which exercises powers vested in it by a “government” for the purpose of performing functions of a “governmental” character, that is, to “regulate”, “restrain”, “supervise” or “control” the conduct of private citizens. As with any agency relationship, a “government agency” may enjoy a degree of discretion in the exercise of its functions.

 
A.1.16A Article 9.1(a) — “contingent on export performance”     back to top

A.1.16A.1 US — Upland Cotton, para. 582
(WT/DS267/AB/R)

 

In sum, we agree with the Panel’s view that Step 2 payments are export-contingent and, therefore, an export subsidy for purposes of Article 9 of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement. The statute and regulations pursuant to which Step 2 payments are granted, on their face, condition payments to exporters on exportation. In order to claim payment, an exporter must show proof of exportation. If an exporter does not provide proof of exportation, the exporter will not receive a payment. This is sufficient to establish that Step 2 payments to exporters of United States upland cotton are “conditional upon export performance” or “dependent for their existence on export performance”. That domestic users may also be eligible to receive payments under different conditions does not eliminate the fact that an exporter will receive payment only upon proof of exportation.

 
A.1.17 Article 9.1(c) — “payments”     back to top

A.1.17.1 Canada — Dairy, para. 107
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

We have found that the word “payments”, in the term “payments-in-kind” in Article 9.1(a), denotes a transfer of economic resources. We believe that the same holds true for the word “payments” in Article 9.1(c). The question which we now address is whether, under Article 9.1(c), the economic resources that are transferred by way of a “payment” must be in the form of money, or whether the resources transferred may take other forms. As the Panel observed, the dictionary meaning of the word “payment” is not limited to payments made in monetary form. In support of this, the Panel cited the Oxford English Dictionary, which defines “payment” as “the remuneration of a person with money or its equivalent” (emphasis added). Similarly, the Shorter Oxford English Dictionary describes a “payment” as a “sum of money (or other thing) paid” (emphasis added). Thus, according to these meanings, a “payment” could be made in a form, other than money, that confers value, such as by way of goods or services. A “payment” which does not take the form of money is commonly referred to as a “payment in kind”.

 

A.1.17.2 Canada — Dairy, para. 108
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

We agree with the Panel that the ordinary meaning of the word “payments” in Article 9.1(c) is consistent with the dictionary meaning of the word. Under Article 9.1(c), “payments” are “financed by virtue of governmental action” and they may or may not involve “a charge on the public account”. Neither the word “financed” nor the term “a charge” suggests that the word “payments” should be interpreted to apply solely to money payments. A payment made in the form of goods or services is also “financed” in the same way as a money payment, and, likewise, “a charge on the public account” may arise as a result of a payment, or a legally binding commitment to make payment by way of goods or services, or as a result of revenue forgone.

 

A.1.17.3 EC — Export Subsidies on Sugar, paras. 262-265
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Article 9.1(c) does not qualify the term “payments” by reference to the entity making, or the entity receiving the payment. This may be contrasted with, for instance, Articles 9.1(a) and 9.1(b) of the Agreement on Agriculture, which specifically refer to the entities making and also, in the case of Article 9.1(a), to the entity receiving the alleged export subsidy. Moreover, Article 9.1(c), on its face, does not qualify the meaning of the term “payments”, other than by requiring that the alleged “payments” be “on the export of an agricultural product” and “financed by virtue of governmental action”.

 

As we noted above, the European Communities submits, first, that a “payment” within the meaning of Article 9.1(c) requires, by definition, the presence of two distinct legal entities. We agree with the European Communities that a “payment”, within the meaning of Article 9.1(c), certainly occurs when one entity transfers economic resources to another entity. …

 

This, however, does not imply that the term “payment” necessarily requires, in each and every case, the presence of two distinct entities. In other words, contrary to the European Communities’ argument, we do not see, a priori, any reason why “payments”, within the meaning of Article 9.1(c), cannot include, in the particular circumstances of this dispute, transfers of resources within one economic entity. The “payment” in this case is not merely a “purely notional” one but, rather, reflects a very concrete transfer of economic resources to C sugar production. In the specific dispute before us, C sugar is being sold on the world market by European Communities’ sugar producers/exporters at a price that does not “even remotely” cover its average total cost of production. In the light of the enormous difference between the price of C sugar and its average total cost of production, we do not see how the “payment” identified by the Panel was “purely notional”.

 

The European Communities’ approach is, in our view, too formalistic. To illustrate, one could envisage a scenario under which the producers of C sugar are legally distinct from the producers of A and B sugar. In this situation, the European Communities’ approach could recognize that a “payment” under Article 9.1(c) could exist because there would be a transfer of economic resources between different parties. If, however, these same producers of A, B, and C sugar were integrated producers and organized as single legal entities, a payment under Article 9.1(c) would not exist, because the transfer would be merely “internal”. We do not believe that the applicability of Article 9.1(c) should depend on how an economic entity is legally organized.

 

A.1.17.4 EC — Export Subsidies on Sugar, paras. 268-269
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

…The European Communities argues that, because the alleged “cross-subsidization” involves no “transfer of resources” to the sugar producers, it confers no benefit upon these producers and, therefore, cannot be considered to provide a subsidy. The European Communities disagrees with the Panel’s finding that Article 9.1(c) does not require the demonstration of a benefit for a measure to constitute a “payment” within the meaning of that provision.

 

The chapeau of Article 9.1 provides: “The following export subsidies are subject to reduction commitments”. Hence, Article 9.1 sets forth a list of practices that, by definition, involve export subsidies. In other words, a measure falling within Article 9.1 is deemed to be an export subsidy within the meaning of Article 1(e) of the Agreement on Agriculture. We observe that Article 9.1(c) requires no independent enquiry into the existence of a “benefit”.

 
A.1.18 Article 9.1(c) — Benchmark for payments-in-kind     back to top

A.1.18.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 73
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Although we did not have to examine whether the benchmarks used by the panel in the original proceedings were appropriate, our findings in those proceedings provide guidance in identifying when “payments” are made under Article 9.1(c).We recall that we upheld the original panel’s finding that “the provision of discounted milk to processors or exporters under Special Classes 5(d) and 5(e) involves ‘payments’ within the meaning of Article 9.1(c) of the Agreement on Agriculture” (emphasis added). In reaching this conclusion, we noted that, where milk is sold at “reduced rates (that is, at below market-rates), ‘payments’ are, in effect, made to the recipient of the portion of the price that is not charged” (emphasis added). We noted that the producer of the milk “forgoes” the uncharged portion of the price. In short, we indicated that there are “payments” under Article 9.1(c) when the price charged by the producer of the milk is less than the milk’s proper value to the producer.

 

A.1.18.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 74
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Thus, the determination of whether “payments” are involved requires a comparison between the price actually charged by the provider of the goods or services — the prices of CEM in this case — and some objective standard or benchmark which reflects the proper value of the goods or services to their provider — the milk producer in this case. We do not accept Canada’s argument that as the producer negotiates freely the price with the processor, and CEM prices are, therefore, market-determined, it is not necessary to compare these prices with an objective standard.

 

A.1.18.3 Canada — Dairy (Article 21.5 — New Zealand and US), para. 75
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Article 9.1(c) of the Agreement on Agriculture does not expressly identify any standard for determining when a measure involves “payments” in the form of payments-in-kind. The absence of an express standard in Article 9.1(c) may be contrasted with several other provisions involving export subsidies which do provide an express standard. Thus, for instance, even within Article 9.1 itself, sub-paragraphs (b) and (e) expressly provide that the domestic market constitutes the appropriate basis for comparison.

 

A.1.18.4 Canada — Dairy (Article 21.5 — New Zealand and US), para. 76
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

We believe that it is significant that Article 9.1(c) of the Agreement on Agriculture does not expressly identify a standard or benchmark for determining whether a measure involves “payments”. It is clear that the notion of “payments” encompasses a diverse range of practices involving a transfer of resources, either monetary or in-kind. Moreover, the “payments” may take place in many different factual and regulatory settings. Accordingly, we believe that it is necessary to scrutinize carefully the facts and circumstances of a disputed measure, including the regulatory framework surrounding that measure, to determine the appropriate basis for comparison in assessing whether the measure involves “payments” under Article 9.1(c).

 

A.1.18.5 Canada — Dairy (Article 21.5 — New Zealand and US), para. 81
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

… There can be little doubt, however, that the administered price is a price that is favourable to the domestic producers. Consequently, sale of CEM by the producer at less than the administered domestic price does not, necessarily, imply that the producer has forgone a portion of the proper value of the milk to it. In the situation where the producer, rather than the government, chooses to produce and sell CEM in the marketplace at a price it freely negotiates, we do not believe it is appropriate to use, as a basis for comparison, a domestic price that is fixed by the government.

 
A.1.19 Article 9.1(c) — Benchmark —World market prices vs. Domestic prices     back to top

A.1.19.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 83
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

… If a producer wishes to sell milk for export processing, it is obvious that the price of the milk to the processor must be competitive with world market prices. If it is not, the processor will not buy the milk, as it will not be able to produce a final product that is competitive in export markets. Accordingly, the range of world market prices determines the price which the producer can charge for milk destined for export markets. World market prices do, therefore, provide one possible measure of the value of the milk to the producer.

 

A.1.19.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 84
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

However, world market prices do not provide a valid basis for determining whether there are “payments”, under Article 9.1(c) of the Agreement on Agriculture, for it remains possible that the reason CEM can be sold at prices competitive with world market prices is precisely because sales of CEM involve subsidies that make it competitive. Thus, a comparison between CEM prices and world market prices gives no indication on the crucial question, namely, whether Canadian export production has been given an advantage. Furthermore, if the basis for comparison were world market prices, it would be possible for WTO Members to subsidize domestic inputs for export processing, while taking care to maintain the price of these inputs to the processors at a level which equalled or marginally exceeded world market prices. …

 
A.1.20 Article 9.1(c) — Benchmark — Cost of production     back to top

A.1.20.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 87
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Although the proceeds from sales at domestic or world market prices represent two possible measures of the value of milk to the producer, we do not see these as the only possible measures of this value. For any economic operator, the production of goods or services involves an investment of economic resources. In the case of a milk producer, production requires an investment in fixed assets, such as land, cattle and milking facilities, and an outlay to meet variable costs, such as labour, animal feed and health-care, power and administration. These fixed and variable costs are the total amount which the producer must spend in order to produce the milk and the total amount it must recoup, in the long-term, to avoid making losses. To the extent that the producer charges prices that do not recoup the total cost of production, over time, it sustains a loss which must be financed from some other source, possibly “by virtue of governmental action”.

 

A.1.20.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 88
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

In our view, reliance upon the total cost of production, in this dispute, as a basis for determining whether there are “payments” within the meaning of Article 9.1(c), is in harmony with the domestic support and export subsidies disciplines of the Agreement on Agriculture. Under Article 3 of the Agreement on Agriculture, WTO Members are entitled to provide “domestic support” to agricultural producers within the limits of their domestic support commitments. The same Article establishes separate disciplines on export subsidies which prohibit WTO Members from providing such subsidies in excess of their export subsidy commitments.

 

A.1.20.3 Canada — Dairy (Article 21.5 — New Zealand and US), para. 89
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

It is possible that the economic effects of WTO-consistent domestic support in favour of producers may “spill over” to provide certain benefits to export production, especially as many agricultural products result from a single line of production that does not distinguish whether the production is destined for consumption in the domestic or export market.

 

A.1.20.4 Canada — Dairy (Article 21.5 — New Zealand and US), para. 90
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

We believe that it would erode the distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture if WTO-consistent domestic support measures were automatically characterized as export subsidies because they produced spill-over economic benefits for export production. Indeed, this is another reason why we do not agree with the Panel that sales of CEM at any price below the administered domestic price for milk can be regarded as “payments” under Article 9.1(c) of the Agreement on Agriculture. Such a basis for comparison would tend to collapse the distinction between these two different disciplines.

 

A.1.20.5 Canada — Dairy (Article 21.5 — New Zealand and US), para. 91
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

However, we consider that the distinction between the domestic support and export subsidies disciplines in the Agreement on Agriculture would also be eroded if a WTO Member were entitled to use domestic support, without limit, to provide support for exports of agricultural products. Broadly stated, domestic support provisions of that Agreement, coupled with high levels of tariff protection, allow extensive support to producers, as compared with the limitations imposed through the export subsidies disciplines. Consequently, if domestic support could be used, without limit, to provide support for exports, it would undermine the benefits intended to accrue through a WTO Member’s export subsidy commitments.

 

A.1.20.6 Canada — Dairy (Article 21.5 — New Zealand and US), para. 92
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

In our view, by relying upon the total cost of production in this dispute, to determine whether there are “payments”, the integrity of the two disciplines is best respected. The existence of “payments” is determined by reference to a standard that focuses upon the motivations of the independent economic operator who is making the alleged “payments” — here the producer — and not upon any government intervention in the marketplace. More importantly, using this basis for comparison, the potential for WTO Members to export their agricultural production is preserved, provided that any export-destined sales by a producer at below the total cost of production are not financed by virtue of governmental action. The export subsidy disciplines of the Agreement on Agriculture will also be maintained without erosion.

 

A.1.20.7 Canada — Dairy (Article 21.5 — New Zealand and US), para. 93
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Our approach is supported by the standards used in items (j) and (k) of the Illustrative List of the SCM Agreement. Item (j) is concerned with export subsidies that arise through the provision by the government of a variety of export credit guarantee and insurance programmes. Under item (j), the provision of such services by the government involves export subsidies when the premium rates charged do not “cover the long-term operating costs and losses of the programmes” (emphasis added). Thus, the measure of value under item (j) is the overall cost to the government, as the service provider, of providing the service. Likewise, in item (k), where the government provides export credits, the measure of the value of the service provided by the government is the amount “which [governments] actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets …)”. Again, the measure of value is by reference to the cost to the government, as the service provider, of providing the service. Therefore, items (j) and (k) give contextual support and rationale, for using the cost of production as a standard for determining whether there are “payments” under Article 9.1(c) of the Agreement on Agriculture in these proceedings.

 

A.1.20.8 Canada — Dairy (Article 21.5 — New Zealand and US), paras. 94-95
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

A producer’s cost of production may be measured in, at least, two ways. First, for any given unit of production, for instance a hectolitre of milk, there is an average total cost of production, which is the total cost of production divided by the total number of units produced, regardless of whether the production is destined for the domestic or export markets. The total cost of production includes all fixed and variable costs incurred in the production of all the units in question. Second, there is also the marginal cost of production which includes only the additional costs incurred by the producer in producing an extra unit of production. Generally, the marginal cost of production does not include any amount for the fixed costs of production. Although a producer may very well decide to sell goods or services if the sales price covers its marginal costs, the producer will make losses on such sales unless all of the remaining costs associated with making these sales, essentially the fixed costs, are financed through some other source, such as through highly profitable sales of the product in another market.

 

In the ordinary course of business, an economic operator chooses to invest, produce and sell, not only to recover the total cost of production, but also in the hope of making profits.

 

A.1.20.9 Canada — Dairy (Article 21.5 — New Zealand and US), para. 96
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Accordingly, in the circumstances of these proceedings, where the alleged payment is made by an independent economic operator and where the domestic price is administered, we believe that the average total cost of production represents the appropriate standard for determining whether sales of CEM involve “payments” under Article 9.1(c) of the Agreement on Agriculture. The average total cost of production would be determined by dividing the fixed and variable costs of producing all milk, whether destined for domestic or export markets, by the total number of units of milk produced for both these markets.

 

A.1.20.10 Canada — Dairy (Article 21.5 — New Zealand and US), para. 97
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

… The export subsidy described in Article 9.1(c) comprises of several elements, the first of which is that there must be “payments”. But the “payments” will be an export subsidy only when they are financed by virtue of governmental action. Thus, on the basis of the standard of average total cost of production, there will be an export subsidy only if the below-cost portion of an export sale is “financed by virtue of governmental action”.

 

A.1.20.11 EC — Export Subsidies on Sugar, para. 266
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

…In this respect, we are also mindful of the fact that, in the ordinary course of business, an economic operator makes a decision to produce and sell a product expecting to recover the total cost of production and to make profits. Clearly, sales below total cost of production cannot be sustained in the long term, unless they are financed from some other sources. This is especially true when the volume of the loss-making sales is substantial. …

 

A.1.20.12 EC — Export Subsidies on Sugar, para. 267
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Finally, we believe that the Panel did not err when it applied, in ascertaining the existence of “payments” under Article 9.1(c), the average total cost of production benchmark, which the Appellate Body held was appropriate in the circumstances in Canada — Dairy (Article 21.5 — New Zealand and US). Given the huge volumes of C sugar exports and the price at which C sugar is being sold on the world market, we concur with the Panel that such production quantities cannot be deemed “incidental”. We note in this context that C sugar represents between 11 and 21 per cent of the European Communities’ total quota production, and that between 1997 and 2002, exports ranged between 1.3 and 3.3 million tonnes. As we have already noted, C sugar is being sold on the world market for prices that do not “even remotely” cover its average total cost of production.

 

A.1.20.13 EC — Export Subsidies on Sugar, paras. 287-288
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

The European Communities argues that, even if the Appellate Body were to conclude that “cross-subsidization” may constitute a “payment” within the meaning of Article 9.1(c), the Panel’s finding is “seriously flawed”. The European Communities contends that, in ascertaining the existence of “payments”, the Panel erred in using as a benchmark the average total cost of production of all sugar. According to the European Communities, the Panel should have used, instead, the average total cost of producing C sugar, because the beet used in the production of C sugar is purchased at prices that are “generally lower” than the minimum prices for A and B beet.

 

The average total cost of production of sugar includes the cost of all economic resources used in sugar production, which means the cost of all economic resources invested in beet production, transport, and processing of beet into sugar, which is only notionally classified into A, B, and C sugar. It is for this reason that the Panel emphasized that “[s]ugar is sugar whether or not produced under an EC created designation of A, B or C sugar.” The Panel further emphasized that “A, B or C sugar are part of the same line of production” and that “[t]here is no independent production of C sugar.” It follows, in our view, that the average total cost of production of C sugar must be the same as the average total cost of production of all sugar. The European Communities’ argument is flawed because the price of C beet does not determine the average total cost of production of C sugar. For these reasons, we do not agree with the European Communities that the Panel’s use of the average total cost of production of all sugar as a benchmark for ascertaining the existence of payments was flawed in the particular circumstances of this case.

 
A.1.21 Article 9.1(c) — Industry-wide vs. Individual standard     back to top

A.1.21.1 Canada — Dairy (Article 21.5 — New Zealand and US II), paras. 96-97
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

We believe that the standard for determining the existence of “payments”, under Article 9.1(c), should reflect the fact that the obligation at issue is an international obligation imposed on Canada. The question is not whether one or more individual milk producers, efficient or not, are selling CEM at a price above or below their individual costs of production. The issue is whether Canada, on a national basis, has respected its WTO obligations and, in particular, its commitment levels. It, therefore, seems to us that the benchmark should be a single, industry-wide cost of production figure, rather than an indefinite number of cost of production figures for each individual producer. The industry-wide figure enables cost of production data for producers, as a whole, to be aggregated into a single, national standard that can be used to assess Canada’s compliance with its international obligations.

 

By contrast, if the benchmark were to operate at the level of each individual producer, there would be a proliferation of standards, requiring individual-level inquiry and application of Article 9.1(c), as if the obligations under the Agreement on Agriculture involved rights and obligations of individual producers, rather than WTO Members.

 
A.1.22 Article 9.1(c) — “imputed” costs     back to top

A.1.22.1 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 102
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… the purpose of the COP standard is precisely to determine whether supplies of CEM involve payments-in-kind that are made in a form other than money. If the COP standard were confined solely to cash costs, as Canada argues, this would overlook the possibility of “payments” being made in the form of non-cash resources invested in the production of milk. Thus, the COP standard must cover all of the economic resources invested in the production of milk and which may be transferred, irrespective of whether the resources involve an actual cash cost.

 

A.1.22.2 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 103
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

We are satisfied that any labour or management services provided by the farmer’s family to the dairy enterprise are relevant economic resources invested in the production of milk and must be included in the COP standard. For the dairy farmer, and his or her family, the investment of services in the dairy enterprise has an economic cost, as those services cannot be put to an alternative remunerative use.… Moreover, we believe that remuneration of family labour and management services is not part of the profits of the dairy farm. Rather, profits are the proceeds remaining after all costs, including such salary costs, have been accounted for.

 

A.1.22.3 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 104
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

The same is also true of any equity the owner invests in the dairy enterprise. The allocation of such capital is, clearly, an investment of economic resources and carries an economic opportunity cost to the owner because the capital cannot simultaneously be invested elsewhere. Again, the profits of the dairy enterprise are the proceeds after all costs, including the cost of equity, have been accounted for.

 

A.1.22.4 Canada — Dairy (Article 21.5 — New Zealand and US II), paras. 107-108
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Although it is clear that the COP standard includes all economic costs, even if they are non-cash costs, we acknowledge that a specific value cannot be as readily ascribed to non-cash costs as it can to cash costs. …

 

In some situations, it may be appropriate for a panel to value non-monetary costs using a methodology set forth in a Member’s Generally Accepted Accounting Principles (“GAAP”). In that respect, we observe that Canada did not contest the amounts the Canadian Dairy Commission (the “CDC”) ascribed to depreciation using the rules in Canadian GAAP. However, although GAAP provide an objective valuation methodology for some non-monetary costs, they may not address all such costs. If GAAP rules do not provide an appropriate basis for valuing a particular cost, a panel should attempt to determine a value for relevant non-monetary costs using an objective methodology that is reasonable in the circumstances. Clearly, a panel must base itself on the evidence before it, applying the applicable rules on burden of proof.

 
A.1.23 Article 9.1(c) — Selling and quota costs     back to top

A.1.23.1 Canada — Dairy (Article 21.5 — New Zealand and US II), paras. 113-114
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

We recall that the COP standard represents the producer’s investment of economic resources in milk and, hence, in these proceedings, the proper value of the milk to the producer. In our view, costs incurred by the producer in selling milk are as much a part of the economic resources the producer invests in the milk as are farm-based production costs. Indeed, the costs incurred to make sales are a vital part of the process by which the producer earns revenues through producing milk. …

 

In addition, we can see no reason to exclude the cost of quota from the COP standard. On the contrary, to the extent that the acquisition or retention of quota involves economic costs for the dairy producer, these costs should be reflected in the COP standard. In that respect, we are not persuaded by Canada that the cost of quota should be excluded from the COP standard because it relates solely to the domestic market. In the first Article 21.5 proceedings, we held that the COP standard must be determined for “all milk, whether destined for domestic or export markets”. Thus, in principle, the costs of quota form part of the COP standard. …

 
A.1.24 Article 9.1(c) — “governmental action”     back to top

A.1.24.1 Canada — Dairy (Article 21.5 — New Zealand and US), paras. 112-113
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

Although the phrase “financed by virtue of governmental action” must be understood as a whole, it is useful to consider separately the meaning of the different parts of this phrase. Taking the words “governmental action” first, we observe that the text of Article 9.1(c) does not place any qualifications on the types of “governmental action” which may be relevant under Article 9.1(c). In the original proceedings, we stated that “[t]he essence of ‘government’ is …that it enjoys the effective power to ‘regulate’, ‘control’ or ‘supervise’ individuals, or otherwise ‘restrain’ their conduct, through the exercise of lawful authority.” In our opinion the word “action” embraces the full range of these activities, including governmental action regulating the supply and price of milk in the domestic market.

 

Mere governmental action is not, however, sufficient for a finding that there is an export subsidy under Article 9.1(c). The words “by virtue of” indicate that there must be a demonstrable link between the governmental action at issue and the financing of the payments, whereby the payments are, in some way, financed as a result of, or as a consequence of, the governmental action. In our view, the link between governmental action and the financing of payments will be more difficult to establish, as an evidentiary matter, when the payment is in the form of a payment-in-kind rather than in monetary form, and all the more so when the payment-in-kind is made, not by the government, but by an independent economic operator. In any event, it will not be sufficient simply to demonstrate that a payment occurs as a consequence of governmental action because the word “financed”, in Article 9.1(c), must also be given meaning.

 

A.1.24.2 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 87
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… Article 9.1(c) of the Agreement on Agriculture describes an unusual form of subsidy in that “payments” can be made by private parties, and need not be made by government. Moreover, “payments” need not be funded from government resources, provided they are “financed by virtue of governmental action”. Article 9.1(c), therefore, contemplates that “payments” may be made and funded by private parties, without the type of governmental involvement ordinarily associated with a subsidy. Furthermore, the notion of payments encompasses a diverse range of practices involving monetary transfers, or transfers-in-kind. We, therefore, determined that, in identifying whether “payments” are made, it is necessary to consider the particular features of the alleged “payments”, by whom they are made, and in what circumstances. Thus, we found that the standard for determining the existence of “payments” under Article 9.1(c) must be identified after careful scrutiny of the factual and regulatory setting of the measure.

 
A.1.25 Article 9.1(c) — Governmental action vs. Private action     back to top

A.1.25.1 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 95
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… under Article 9.1(c) of the Agreement on Agriculture, it is not solely the conduct of WTO Members that is relevant. We have noted that Article 9.1(c) describes an unusual form of export subsidy in that “payments” can be made and funded by private parties, and not just by government. The conduct of private parties, therefore, may play an important role in applying Article 9.1(c). Yet, irrespective of the role of private parties under Article 9.1(c), the obligations imposed in relation to Article 9.1(c) remain obligations imposed on Canada. It is Canada, and not private parties, which is responsible for ensuring that it respects its export subsidy commitments under the covered agreements. Thus, under the Agreement on Agriculture, any “export subsidies” provided through private party action in Canada are deemed to be provided by Canada, and count towards Canada’s export subsidy commitment levels.

 

A.1.25.2 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 127
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

As regards “governmental action”, we held in the first Article 21.5 proceedings that “the text of Article 9.1(c) does not place any qualifications on the types of ‘governmental action’ which may be relevant under Article 9.1(c)”. Instead, the provision gives but one example of governmental action that is “included” in Article 9.1(c) — however, this example is merely illustrative. Accordingly, we stated that Article 9.1(c) “embraces the full range” of activities by which governments “‘regulate’, ‘control’ or ‘supervise’ individuals”. In particular, we said that governmental action “regulating the supply and price of milk in the domestic market” might be relevant “action” under Article 9.1(c). Moreover, the governmental action may be a single act or omission, or a series of acts or omissions.

 

A.1.25.3 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 128 and footnote 113
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

We observe that Article 9.1(c) does not require that payments be financed by virtue of government “mandate”, or other “direction”. Although the word “action” certainly covers situations where government mandates or directs that payments be made, it also covers other situations where no such compulsion is involved.113

 

A.1.25.4 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 152
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… Canada may act inconsistently with [its] commitments [under the Agreement on Agriculture] even if some producers never make payments financed by virtue of governmental action.

 
A.1.26 Article 9.1(c) — “by virtue of”     back to top

A.1.26.1 Canada — Dairy, para. 119
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

In assessing whether the Panel erred in finding that the “payments” made under Special Classes 5(d) and 5(e) are “financed by virtue of governmental action”, it is appropriate to look to the “governmental” involvement as a whole and not just to the role of the provincial milk marketing boards. The functioning of the system depends on a complex regulatory web involving the CDC and the CMSMC, acting together with the provincial milk marketing boards. It is, therefore, the “action” of all these bodies together which must be examined.

 

A.1.26.2 Canada — Dairy, para. 120
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

 

While the “cost of selling milk at a reduced price for export is not borne by the government”, “governmental action” is, in our view, indispensable to the transfer of resources that takes place as a result of the operation of Special Classes 5(d) and 5(e). The factors relied upon by the Panel, which we have summarized above, demonstrate that at every stage in the supply of milk under Special Classes 5(d) and 5(e), from the determination of the volume and the authorization of the purchase of milk for processing for export, to the calculation of the price of the milk to the processors and the return to the producers, “governmental action” is not simply involved; it is, in fact, indispensable to enable the supply of milk to processors for export, and hence the transfer of resources, to take place. In the regulatory framework, “government agencies” stand so completely between the producers of the milk and the processors or the exporters that we have no doubt that the transfer of resources takes place “by virtue of governmental action”.

 

A.1.26.3 Canada — Dairy (Article 21.5 — New Zealand and US II), paras. 130-131
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

The words “by virtue of”, therefore, express the relationship between “governmental action” and the “financing” of payments for the purpose of Article 9.1(c). The essence of that relationship is the “nexus” or “link” between “action” and “financing”.

 

Thus, although Article 9.1(c) extends, in principle, to any “governmental action”, not every governmental action will have the requisite nexus to the financing of payments. …

 

A.1.26.4 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 134
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

These general remarks illustrate well that “[i]t is extremely difficult to define in the abstract the precise character of the required link between the governmental action and the financing of the payments, particularly where payments-in-kind are at issue.” In each case, the alleged link must be examined taking account of the particular character of the governmental action at issue and its relationship to the payments made.

 

A.1.26.5 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 144
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… We have agreed with the Panel that a significant percentage of producers are likely to finance sales of CEM at below the costs of production as a result of participation in the domestic market. Canadian “governmental action” controls virtually every aspect of domestic milk supply and management. In particular, government agencies fix the price of domestic milk that renders it highly remunerative to producers. Government action also controls the supply of domestic milk through quota, thereby protecting the administered price. The imposition by government of financial penalties on processors that divert CEM into the domestic market is another element of governmental control over the supply of milk. Further, the degree of government control over the domestic market is emphasized by the fact that government pools, allocates, and distributes revenues to producers from all domestic sales. Finally, governmental action also protects the domestic market from import competition through tariffs.

 

A.1.26.6 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 145
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

In our view, the effect of these different governmental actions is to secure a highly remunerative price for sales of domestic milk by producers. In turn, it is due to this price that a significant proportion of producers cover their fixed costs in the domestic market and, as a result, have the resources profitably to sell export milk at prices that are below the costs of production.

 

A.1.26.7 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 146
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Accordingly, we agree with the Panel that “governmental action” in the domestic market plays a critical part in the “financing” of payments made by a significant percentage of producers on the sale of CEM. As such, we agree with the Panel that payments made through the supply of CEM at below the COP standard are financed by virtue of this governmental action. …

 

A.1.26.8 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 147
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

We do not agree with Canada that the circumstances indicate that the Canadian government has merely created a regulatory framework whereby it has enabled producers to sell CEM at prices that are below the costs of production. Certainly, producers decide for themselves whether and when to sell CEM. However, governmental action in the domestic market goes further than simply creating a regulatory environment in which producers choose to make export payments using their own resources. Rather, as we have said, Canadian governmental action is instrumental in providing a significant percentage of producers with the resources that enable them to sell CEM at below the costs of production.

 

A.1.26.9 EC — Export Subsidies on Sugar, para. 237
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

With respect to the words “by virtue of”, the Appellate Body has previously held that there must be a “nexus” or “demonstrable link” between the governmental action at issue and the financing of payments. The Appellate Body clarified that not every governmental action will have the requisite “nexus” to the financing of payments. For instance, the Appellate Body held that the “demonstrable link” between “governmental action” and the “financing” of payments would not exist in a scenario in which “governmental action establish[es] a regulatory framework merely enabling a third person freely to make and finance ‘payments’ ”. In this situation, the link between the governmental action and the financing of payments would be “too tenuous”, such that the “payments” could not be regarded as “financed by virtue of governmental action” within the meaning of Article 9.1(c). Rather, according to the Appellate Body, there must be a “tighter nexus” between the mechanism or process by which the payments are financed (even if by a third person) and governmental action. In this respect, the Appellate Body clarified that, although governmental action is essential, Article 9.1(c) contemplates that “payments may be financed by virtue of governmental action even though significant aspects of the financing might not involve government”. Thus, even if government does not fund the payments itself, it must play a sufficiently important part in the process by which a private party funds “payments”, such that the requisite nexus exists between “governmental action” and the “financing”. The alleged link must be examined on a case-by-case basis, taking account of the particular character of the governmental action at issue and its relationship to the payments made.

 

A.1.26.10 EC — Export Subsidies on Sugar, paras. 238-239
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… in its finding that “payments” in the form of sales of C beet below its total cost of production are “financed by virtue of governmental action”, the Panel relied on a number of aspects of the EC sugar regime. The Panel considered, inter alia, that: the EC sugar regime regulates prices of A and B beet and establishes a framework for the contractual relationships between beet growers and sugar producers with a view to ensuring a stable and adequate income for beet growers; C beet is invariably produced together with A and B beet in one single line of production; a significant percentage of beet growers are likely to finance sales of C beet below the total cost of production as a result of participation in the domestic market by making “highly remunerative” sales of A and B beet; the European Communities “controls virtually every aspect of domestic beet and sugar supply and management”, including through financial penalties imposed on sugar producers that divert C sugar into the domestic market; the European Communities’ Sugar Management Committee “overviews, supervises and protects the [European Communities’] domestic sugar through, inter alia, supply management”; the growing of C beet is not “incidental”, but rather an “integral” part of the governmental regulation of the sugar market; and C sugar producers “have incentives to produce C sugar so as to maintain their share of the A and B quotas”, while C beet growers “have an incentive to supply as much as is requested by C sugar producers with a view to receiving the high prices for A and B beet and their allocated amount of C beet”.

 

We agree with the Panel that, in the circumstances of the present case, all of these aspects of the EC sugar regime have a direct bearing on whether below-cost sales of C beet are financed by virtue of governmental action. As a result, we are unable to agree with the European Communities’ first argument on appeal, namely, that the Panel applied a test under which an Article 9.1(c) subsidy was deemed to exist “simply because [governmental] action ‘enabled’ the beet growers to finance and make payments”. Rather, we believe that the Panel relied on aspects of the EC sugar regime that go far beyond merely “enabling” or “permitting” beet growers to make payments to sugar producers. …

 

A.1.26.11 EC — Export Subsidies on Sugar, para. 244
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

We now turn to the European Communities’ argument that governmental action under the EC sugar regime is “less pervasive” than governmental action in Canada — Dairy (Article 21.5 — New Zealand and the US II). We do not consider it inherently useful to compare the governmental action at issue and the governmental action in the context of a different dispute. The issue before us is not a comparison between two governmental regimes, but rather, whether “payments” under the EC sugar regime are “financed by virtue of governmental action”. As the Appellate Body stated in Canada — Dairy (Article 21.5 — New Zealand and the US), “the existence of a demonstrable link [between governmental action and the financing of payments] must be identified on a case-by-case basis, taking account of the particular governmental action at issue and its effects on payments made by a third person”. …

 
A.1.27 Article 9.1(c) — “financed”     back to top

A.1.27.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 114
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

The word “financed” might be given a rather specific meaning such that it would be confined to the financing of “payments” in monetary form or to the funding of “payments” from government resources. However, we have already recalled that “payments”, under Article 9.1(c), include payments-in-kind, so the word “financed” needs to cover both the financing of monetary payments and payments-in-kind. In addition, Article 9.1(c) explicitly excludes a reading of the word “financed” whereby payments must be funded from government resources, as the provision states that payments can be financed by virtue of governmental action “whether or not a charge on the public account is involved”. Thus, under Article 9.1(c), it is not necessary that the economic resources constituting the “payment” actually be paid by the government or even that they be paid from government resources. Accordingly, although the words “by virtue of” render governmental action essential, Article 9.1(c) contemplates that payments may be financed by virtue of governmental action even though significant aspects of the financing might not involve government.

 

A.1.27.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 115
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

It is extremely difficult, however, to define in the abstract the precise character of the required link between the governmental action and the financing of the payments, particularly where payments-in-kind are at issue. Governments are constantly engaged in regulation of different kinds in pursuit of a variety of objectives. For instance, we can envisage that governmental action might establish a regulatory framework merely enabling a third person freely to make and finance “payments”. In this situation, the link between the governmental action and the financing of the payments is too tenuous for the “payments” to be regarded as “financed by virtue of governmental action” (emphasis added) within the meaning of Article 9.1(c). Rather, there must be a tighter nexus between the mechanism or process by which the payments are financed, even if by a third person, and governmental action. In our opinion, the existence of such a demonstrable link must be identified on a case-by-case basis, taking account of the particular governmental action at issue and its effects on payments made by a third person.

 

A.1.27.3 Canada — Dairy (Article 21.5 — New Zealand and US), para. 117
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

It is true that Canadian governmental action establishes a regulatory regime whereby some milk producers can make additional profits only if they choose to sell CEM. However, even though Canadian governmental action prevents further domestic sales, we do not see how producers are obliged or driven to produce additional milk for export sale. As we said above, each producer is free to decide whether or not to produce additional milk for sale as CEM. Furthermore, as we also said, the majority of Canadian milk producers choose not to sell CEM. For these reasons, we disagree with the Panel’s characterization of the measure as “obliging producers, at least de facto, to sell outside-quota milk for export”.

 

A.1.27.4 Canada — Dairy (Article 21.5 — New Zealand and US II), paras. 132-133
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… The word [“financing”] refers generally to the mechanism or process by which financial resources are provided to enable “payments” to be made. The word could, therefore, be read to mean that government itself must provide the resources for producers to make payments. However, Article 9.1(c) expressly precludes such a reading, as it states that “payments” need not involve “a charge on the public account”. This is borne out by the fact that the text indicates that “financing” need only be “by virtue of governmental action”, rather than “by government” itself. Article 9.1(c), therefore, contemplates that “payments may be financed by virtue of governmental action even though significant aspects of the financing might not involve government”. Indeed, as we have said, payments may be made, and funded, by private parties.

 

The word “financing” must, nonetheless, be given meaning. Accordingly, even if government does not fund the payments itself, it must play a sufficiently important part in the process by which a private party funds “payments”, such that the requisite nexus exists between “governmental action” and “financing”.

 

A.1.27.5 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 139
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Where fungible goods, such as milk, are produced using a single line of production, but sold in two different markets, the fixed costs of production are, in principle, shared between sales revenues from both markets. However, in the event that one of the two markets offers much higher revenues, a disproportionately large part, possibly even all, of the shared fixed costs may be borne by sales made in the more remunerative market.

 

A.1.27.6 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 140
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Where sales in the more remunerative market bear more than their relative proportion of shared fixed costs, sales in the other market do not need to cover their relative proportion of the shared fixed costs in order to be profitable. Rather, these sales can be made profitably below the average total cost of production. If the more remunerative sales cover all fixed costs, sales in the other market can be made profitably at any price above marginal cost. In these situations, the higher revenue sales effectively “finance” a part of the lower revenue sales by funding the portion of the shared fixed costs attributable to the lower priced products.

 

A.1.27.7 EC — Export Subsidies on Sugar, para. 236
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Addressing the word “financed”, the Appellate Body held that this word generally refers to the “mechanism” or “process” by which financial resources are provided, such that payments are made. Article 9.1(c), by stating “whether or not a charge on the public account is involved”, expressly provides that the government itself need not provide the resources for producers to make payments. Instead, payments may be made and funded by private parties.

 
A.1.28 Article 9.1(c) — Cross-subsidization     back to top

A.1.28.1 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 148
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Canada also objects that this reasoning brings “cross-subsidization” under Article 9.1(c) of the Agreement on Agriculture. We have explained that the text of Article 9.1(c) applies to any “governmental action” which “finances” export “payments”. The text does not exclude from the scope of the provision any particular governmental action, such as regulation of domestic markets, to the extent that this action may become an instrument for granting export subsidies. Nor does the text exclude any particular form of financing, such as “cross-subsidization”. Moreover, the text focuses on the consequences of governmental action (“by virtue of which”) and not the intent of government. Thus, the provision applies to governmental action that finances export payments, even if this result is not intended. As stated in our Report in the first Article 21.5 proceedings, this reading of Article 9.1(c) serves to preserve the legal “distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture”. Subsidies may be granted in both the domestic and export markets, provided that the disciplines imposed by the Agreement on the levels of subsidization are respected. If governmental action in support of the domestic market could be applied to subsidize export sales, without respecting the commitments Members made to limit the level of export subsidies, the value of these commitments would be undermined. Article 9.1(c) addresses this possibility by bringing, in some circumstances, governmental action in the domestic market within the scope of the “export subsidies” disciplines of Article 3.3.

 


A.1.28.2 EC — Export Subsidies on Sugar
, paras. 263-265
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

As we noted above, the European Communities submits, first, that a “payment” within the meaning of Article 9.1(c) requires, by definition, the presence of two distinct legal entities. We agree with the European Communities that a “payment”, within the meaning of Article 9.1(c), certainly occurs when one entity transfers economic resources to another entity. …

 

This, however, does not imply that the term “payment” necessarily requires, in each and every case, the presence of two distinct entities. In other words, contrary to the European Communities’ argument, we do not see, a priori, any reason why “payments”, within the meaning of Article 9.1(c), cannot include, in the particular circumstances of this dispute, transfers of resources within one economic entity. The “payment” in this case is not merely a “purely notional” one but, rather, reflects a very concrete transfer of economic resources to C sugar production. In the specific dispute before us, C sugar is being sold on the world market by European Communities’ sugar producers/exporters at a price that does not “even remotely” cover its average total cost of production. In the light of the enormous difference between the price of C sugar and its average total cost of production, we do not see how the “payment” identified by the Panel was “purely notional”.

 

The European Communities’ approach is, in our view, too formalistic. To illustrate, one could envisage a scenario under which the producers of C sugar are legally distinct from the producers of A and B sugar. In this situation, the European Communities’ approach could recognize that a “payment” under Article 9.1(c) could exist because there would be a transfer of economic resources between different parties. If, however, these same producers of A, B, and C sugar were integrated producers and organized as single legal entities, a payment under Article 9.1(c) would not exist, because the transfer would be merely “internal”. We do not believe that the applicability of Article 9.1(c) should depend on how an economic entity is legally organized.

 

A.1.28.3 EC — Export Subsidies on Sugar, paras. 273-275
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

The European Communities argues that the Panel misinterpreted the requirement that a payment be “on the export” of an agricultural product, as contained in Article 9.1(c). …

 

… the Panel based its findings on the following reasoning:

 

C sugar [can] only be sold for export. If not reclassified, C sugar “may not be disposed of in the Community’s internal market and must be exported without further processing”. Because of that legal requirement, advantages, payments or subsidies to C sugar, that must be exported, are subsidies “on the export” of that product.

 

We agree with the Panel. Under Article 13(1) of EC Regulation 1260/2001, C sugar “must be exported”. It follows that payments in the form of “cross-subsidization” are, by definition, “payments” “on the export”.

 
A.1.29 Article 9.1(d) — “costs of marketing”     back to top

A.1.29.1 US — FSC, paras. 130-131
(WT/DS108/AB/R)

 

The text of Article 9.1(d) lists “handling, upgrading and other processing costs, and the costs of international transport and freight” as examples of “costs of marketing”. The text also states that “export promotion and advisory services” are covered by Article 9.1(d), provided that they are not “widely available”. These are not examples of just any “cost of doing business” that “effectively reduce[s] the cost of marketing” products. Rather, they are specific types of costs that are incurred as part of and during the process of selling a product. They differ from general business costs, such as administrative overhead and debt financing costs, which are not specific to the process of putting a product on the market, and which are, therefore, related to the marketing of exports only in the broadest sense.

 

… Income tax liability under the FSC measure arises only when goods are actually sold for export, that is, when they have been the subject of successful marketing. Such liability arises because goods have, in fact, been sold, and not as part of the process of marketing them. Furthermore, at the time goods are sold, the costs associated with putting them on the market — costs such as handling, promotion and distribution costs — have already been incurred and the amount of these costs is not altered by the income tax, the amount of which is calculated by reference to the sale price of the goods. In our view, if income tax liability arising from export sales can be viewed as among the “costs of marketing exports”, then so too can virtually any other cost incurred by a business engaged in exporting. …

 
A.1.29A Article 9.2 — Budgetary outlay and quantity commitment levels     back to top

A.1.29A.1 EC — Export Subsidies on Sugar, para. 194
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

We find contextual support for the above interpretation in Article 9.2(b)(iv) of the Agreement on Agriculture, which provides:

 

(iv) the Member’s budgetary outlays for export subsidies and the quantities benefiting from such subsidies, at the conclusion of the implementation period, are no greater than 64 per cent and 79 per cent of the 1986-1990 base period levels, respectively. For developing country Members these percentages shall be 76 and 86 per cent, respectively.

 

This provision prescribes the export subsidy commitment levels to be reached at the conclusion of the implementation period (and to be maintained thereafter), and those commitment levels are expressed in terms of both budgetary outlays and quantities. We do not see how a Member could comply with Article 9.2(b)(iv), or for that matter Article 9.2(a), without having specified its export subsidy commitments in terms of both budgetary outlays and quantities. We also consider it significant that both Article 9.2(b)(iii) and Article 9.2(b)(iv) use the expression “budgetary outlays for export subsidies and the quantities benefiting from such subsidies” (emphasis added). This shows the drafters’ recognition of the need to address the budgetary outlays and quantities together.

 
A.1.29B Article 10 — General     back to top

A.1.29B.1 US — Upland Cotton, para. 616
(WT/DS267/AB/R)

 

We find it significant that paragraph 2 of Article 10 is included in an Article that is titled the “Prevention of Circumvention of Export Subsidy Commitments”. As Brazil correctly points out, each paragraph in Article 10 pursues this aim. Article 10.1 provides that WTO Members shall not apply export subsidies not listed in Article 9.1 of the Agreement on Agriculture “in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments; nor shall non-commercial transactions be used to circumvent such commitments”. Article 10.3 pursues the aim of preventing circumvention of export subsidy commitments by providing special rules on the reversal of burden of proof where a Member exports an agricultural product in quantities that exceed its reduction commitment level; in such a situation a WTO Member is treated as if it has granted WTO inconsistent export subsidies for the excess quantities, unless the Member presents adequate evidence to “establish” the contrary. Article 10.4 provides disciplines to prevent WTO Members from circumventing their export subsidy commitments through food aid transactions. Similarly, Article 10.2 must be interpreted in a manner that is consistent with the aim of preventing circumvention of export subsidy commitments that pervades Article 10. Otherwise, it would not have been included in that provision.

 
A.1.30 Article 10.1 — “export subsidy commitments”     back to top

A.1.30.1 US — FSC, para. 144
(WT/DS108/AB/R)

 

The word “commitments” generally connotes “engagements” or “obligations”. Thus, the term “export subsidy commitments” refers to commitments or obligations relating to export subsidies assumed by Members under provisions of the Agreement on Agriculture, in particular, under Articles 3, 8 and 9 of that Agreement.

 
A.1.31 Article 10.1 — “export subsidies” not listed in Article 9.1     back to top

A.1.31.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 121
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

It is clear from the opening clause of Article 10.1 that this provision is residual in character to Article 9.1 of the Agreement on Agriculture. If a measure is an export subsidy listed in Article 9.1, it cannot simultaneously be an export subsidy under Article 10.1. In light of the facts available to us, we have found that we are unable to determine whether the measure at issue is an export subsidy listed in Article 9.1(c). However, it remains possible that the measure is such an export subsidy. Clearly, in that event, the opening clause of Article 10.1 means that the measure could not also be an export subsidy under Article 10.1. In these circumstances, where we are unable to determine the legal character of the measure under Article 9.1 of the Agreement on Agriculture, we are similarly unable to rule upon the legal character of the measure under Article 10.1 of that Agreement.

 
A.1.32 Article 10.1 — Actual circumvention     back to top

A.1.32.1 US — FSC, para. 148
(WT/DS108/AB/R)

 

… The verb “circumvent” means, inter alia, “find a way round, evade …”. Article 10.1 is designed to prevent Members from circumventing or “evading” their “export subsidy commitments”. This may arise in many different ways. …

 

A.1.32.2 US — FSC, para. 149
(WT/DS108/AB/R)

 

In determining whether the FSC measure in this case is “applied in a manner which threatens to lead to circumvention of export subsidy commitments”, it is important to consider the structure and other characteristics of that measure. The FSC measure creates, in itself, a legal entitlement for recipients to receive export subsidies, not listed in Article 9.1, with respect to agricultural products, both scheduled and unscheduled. As we understand it, that legal entitlement arises in the recipient when it complies with the statutory requirements and, at that point, the government of the United States must grant the FSC tax exemptions. There is, therefore, no discretionary element in the provision by the government of the FSC export subsidies. If the statutory eligibility requirements are met, then an FSC is entitled by law to the statutorily established tax exemption. Furthermore, there is no limitation on the amount of exempt foreign trade income that may be earned by an FSC. Therefore, the legal entitlement that the FSC measure establishes is unqualified as to the amount of export subsidies that may be claimed by FSCs. There is, in other words, no mechanism in the measure for stemming, or otherwise controlling, the flow of FSC subsidies that may be claimed with respect to any agricultural products. In this respect, the FSC measure is unlimited.

 

A.1.32.3 US — FSC, para. 150
(WT/DS108/AB/R)

 

With respect to unscheduled agricultural products, Members are prohibited under Article 3.3 from providing any export subsidies as listed in Article 9.1. Article 10.1 prevents the application of export subsidies which “results in, or which threatens to lead to, circumvention” of that prohibition. Members would certainly have “found a way round”, a way to “evade”, this prohibition if they could transfer, through tax exemptions, the very same economic resources that they are prohibited from providing in other forms under Articles 3.3 and 9.1. …

 

A.1.32.4 US — FSC, para. 151
(WT/DS108/AB/R)

 

… Given that the nature of the “export subsidy commitment” differs as between scheduled and unscheduled products, we believe that what constitutes “circumvention” of those commitments, under Article 10.1, may also differ.

 

A.1.32.5 US — FSC, para. 152
(WT/DS108/AB/R)

 

… In our view, Members would have found “a way round”, a way to “evade”, their commitments under Articles 3.3 and 9.1, if they could transfer, through tax exemptions, the very same economic resources that they were, at that time, prohibited from providing through other methods under the first clause of Article 3.3 and under 9.1.

 

A.1.32.6 US — Upland Cotton, para. 626
(WT/DS267/AB/R)

 

… Export credit guarantees are subject to the export subsidy disciplines in the Agreement on Agriculture only to the extent that such measures include an export subsidy component. If no such export subsidy component exists, then the export credit guarantees are not subject to the Agreement’s export subsidy disciplines. Moreover, even when export credit guarantees contain an export subsidy component, such an export credit guarantee would not be inconsistent with Article 10.1 of the Agreement on Agriculture unless the complaining party demonstrates that it is “applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments”. Thus, under the Agreement on Agriculture, the complaining party must first demonstrate that an export credit guarantee programme constitutes an export subsidy. If it succeeds, it must then demonstrate that such export credit guarantees are applied in a manner that results in, or threatens to lead to, circumvention of the responding party’s export subsidy commitments within the meaning of Article 10.1 of the Agreement on Agriculture.

 

A.1.32.7 US — Upland Cotton, para. 692
(WT/DS267/AB/R)

 

We find nothing wrong in the Panel having relied on an admission by the United States relating to rice to conclude that the United States had failed to rebut Brazil’s initial allegation of circumvention. This did not excuse the Panel, however, from specifically analysing Brazil’s claim in respect of the other products. Consequently, we find no basis to support the Panel’s finding that “[i]t has not been established, however, that such actual circumvention has resulted in respect of the twelve other United States scheduled commodities”.

 

A.1.32.8 US — Upland Cotton, para. 693
(WT/DS267/AB/R)

 

We must determine next whether there are sufficient uncontested facts in the record to permit us to complete the analysis with respect to the other commodities. In our view, there are not. First, the parties disagree about the time period covered by Brazil’s claim. The United States asserts that Brazil’s claim was limited to the period July 2001 to June 2002, while Brazil contends that its claim was not limited to that period. Second, as we noted previously, different time periods are used for the sets of data that have to be compared. The data regarding United States exports under the export credit guarantee programmes are maintained on a fiscal year basis, which extends from 1 October to 30 September of the following year. The United States’ export subsidy commitments are registered based on a year that extends from 1 July to 30 June of the following year. Both Brazil and the United States have sought to reconcile the data. In each case, Brazil and the United States assert that the data support their position. Given the differences between the participants in respect of the data that we would have to examine to determine whether the United States applied export credit guarantees in a manner that results in circumvention of its export subsidy commitments for pig meat and poultry meat, we do not believe there are sufficient undisputed facts in the record to enable us to complete the analysis.

 
A.1.32A Article 10.1 — Threat of circumvention     back to top

A.1.32A.1 US — Upland Cotton, para. 704
(WT/DS267/AB/R)

 

The Appellate Body has explained that “under Article 10.1, it is not necessary to demonstrate actual ‘circumvention’ of ‘export subsidy commitments’ ”. It suffices that “export subsidies” are “applied in a manner which threatens to lead to circumvention of export subsidy commitments”. We note that the ordinary meaning of the term “threaten” includes “[c]onstitute a threat to”, “be likely to injure” or “be a source of harm or danger”. Article 10.1 is concerned not with injury, but rather with “circumvention”. Accordingly, based on its ordinary meaning, the phrase “threaten to lead to circumvention” would imply that the export subsidies are applied in a manner that is “likely to” lead to circumvention of a WTO Member’s export subsidy commitments. Furthermore, we observe that the ordinary meaning of the term “threaten” refers to a likelihood of something happening; the ordinary meaning of “threaten” does not connote a sense of certainty.

 

A.1.32A.2 US — Upland Cotton, para. 705
(WT/DS267/AB/R)

 

The concept of “threat” has been discussed by the Appellate Body within the context of the Agreement on Safeguards and the Anti-Dumping Agreement. It has explained that “threat” refers to something that “has not yet occurred, but remains a future event whose actual materialization cannot, in fact, be assured with certainty”. In US — Line Pipe, the Appellate Body stated that there is a continuum that ascends from a “threat of serious injury” up to the “serious injury” itself. We emphasize that the Appellate Body’s discussion of the concept of “threat” in previous appeals related to the interpretation of other covered agreements that contain obligations relating to injury that differ from those relating to circumvention of export subsidy reduction commitments contained in Article 10.1 of the Agreement on Agriculture. Our interpretation of “threat” in Article 10.1 of the Agreement on Agriculture is consistent with the Appellate Body’s interpretation of the term “threat” in these other contexts.

 

A.1.32A.3 US — Upland Cotton, para. 706
(WT/DS267/AB/R)

 

The Panel explained that, in its view, “threat” of circumvention under Article 10.1 requires that there be “an unconditional legal entitlement”. We see no basis for this requirement in Article 10.1. The Panel also stated that “[i]n order to pose a ‘threat’ within the meaning of Article 10.1 of the Agreement on Agriculture, [it did] not believe that it is sufficient that an export credit guarantee programme might possibly, or theoretically, be used in a manner which threatens to lead to circumvention of export subsidy commitments”. In both of these statements, the Panel seems to conflate the phrase “threaten to lead to circumvention” with certainty that the circumvention will happen. We find it difficult, moreover, to reconcile the Panel’s interpretation with the ordinary meaning of the term “threaten”, which, as we indicated earlier, connotes that something is “likely” to happen. We also find it difficult to reconcile these statements of the Panel with its own view that it did “not believe that the ‘mandatory/discretionary’ distinction is the sole legally determinative one for our examination of whether or not ‘threat’ of circumvention of export subsidy commitments within the meaning of Article 10.1 of the Agreement on Agriculture has been proven to the required standard”.

 

A.1.32A.4 US — Upland Cotton, para. 707
(WT/DS267/AB/R)

 

Nor are we prepared to accept Brazil’s suggestion that the concept of “threat” in Article 10.1 should be read in a manner that requires WTO Members to take “anticipatory or precautionary action”. The obligation not to apply export subsidies in a manner that “threatens to lead to” circumvention of their export subsidy commitments does not extend that far. There is no basis in Article 10.1 for requiring WTO Members to take affirmative, precautionary steps to ensure that circumvention of their export subsidy reduction commitments does not occur.

 

A.1.32A.5 US — Upland Cotton, para. 708
(WT/DS267/AB/R)

 

In concluding as it did, the Panel appears to have relied on the Appellate Body Report in US — FSC for guidance. In our view, however, the Panel misapplies that analysis. We recall that, in US — FSC, the Appellate Body underscored the importance of considering “the structure and other characteristics of [the] measure” when examining whether the specific measure at issue is “applied in a manner which threatens to lead to circumvention of export subsidy commitments”. The Appellate Body then went on to note that the specific measure at issue in that dispute created “a legal entitlement for recipients to receive export subsidies, not listed in Article 9.1, with respect to agricultural products, both scheduled and unscheduled”. This meant that there was “no discretionary element in the provision by the government of the FSC export subsidies”. Furthermore, the Appellate Body noted that the “legal entitlement that the FSC measure establishes is unqualified as to the amount of export subsidies that may be claimed”. This meant that the measure was “unlimited” because there was “no mechanism in the measure for stemming, or otherwise controlling the flow of subsidies that may be claimed with respect to any agricultural products”.

 

A.1.32A.6 US — Upland Cotton, paras. 709-710
(WT/DS267/AB/R)

 

A proper reading of the Appellate Body’s statement in US — FSC, however, reveals that it did not intend to provide an exhaustive interpretation of threat of circumvention under Article 10.1 of the Agreement on Agriculture. In noting that the measure at issue in that dispute created a “legal entitlement” and had no “discretionary element”, the Appellate Body was merely describing characteristics of the measure at issue in that case that it found relevant for its analysis of “threat”. In other words, the Appellate Body did not foreclose, in US — FSC, the possibility that a measure that does not create a “legal entitlement” or that has a “discretionary element” could be found to “threaten to lead to circumvention” under Article 10.1 of the Agreement on Agriculture.

 

We therefore modify the Panel’s interpretation of the phrase “threatens to lead to circumvention” in Article 10.1 of the Agreement on Agriculture to the extent that the Panel’s interpretation requires “an unconditional legal entitlement” to receive the relevant export subsidies as a condition for a finding of threat of circumvention.

 

A.1.32A.7 US — Upland Cotton, para. 713
(WT/DS267/AB/R)

 

We are not persuaded that the arguments put forward by Brazil establish that the United States’ export credit guarantee programmes are applied in a manner that threatens to lead to circumvention of the United States’ export subsidy commitments in respect of scheduled products other than rice and unscheduled products not supported under the programmes. In our view, the fact alone that exports of certain products are eligible for export credit guarantees is not sufficient to establish a threat of circumvention. This is particularly the case where there is no evidence in the record that exports of such products have been “supported” by export credit guarantees in the past. As we stated earlier, Article 10.1 of the Agreement on Agriculture does not require WTO Members to take affirmative, precautionary steps to ensure that circumvention of their export subsidy reduction commitments never happens. Nor is it sufficient for Brazil to have alleged that the United States has provided export credit guarantees to exports of other unscheduled products or to exports of scheduled products in excess of its export subsidy reduction commitments. Therefore, we agree with the Panel that Brazil has not established that the United States applies its export credit guarantee programmes to scheduled agricultural products other than rice and other unscheduled agricultural products (not “supported” under the programmes) “in a manner which threatens to lead to circumvention” of the United States’ export subsidy commitments.

 

A.1.32A.8 US — Upland Cotton, para. 717
(WT/DS267/AB/R)

 

We believe the Panel was within its discretion in declining to examine whether scheduled products other than rice and unscheduled products supported by the programmes are applied in a manner that “threatens to lead to” circumvention. The Panel had already found that the United States acted inconsistently with Article 10.1 of the Agreement on Agriculture because it applied its export credit guarantee programme in a manner that “results in” (actual) circumvention of its export subsidy commitments for these products. We do not see why the Panel had to examine also whether the United States acted inconsistently with the same provision in respect of the same products, but on the basis of there being a threat of circumvention, rather than actual circumvention.

 
A.1.32B Article 10.1 — “non-commercial transactions”     back to top

A.1.32B.1 US — Upland Cotton, para. 619
(WT/DS267/AB/R)

 

… International food aid is covered by the second clause of Article 10.1 to the extent that it is a “non-commercial transaction”. Article 10.4 provides specific disciplines that may be relied on to determine whether international food aid is being “used to circumvent” a WTO Member’s export subsidy commitments. … WTO Members are free to grant as much food aid as they wish, provided that they do so consistently with Articles 10.1 and 10.4. Thus, Article 10.4 does not support the United States’ reading of Article 10.2.

 
A.1.33 Article 10.1 — Relationship with Article 9.1     back to top

A.1.33.1 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 158
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

As we have concluded that the CEM scheme involves export subsidies under Article 9.1(c) of the Agreement on Agriculture, those subsidies cannot, by definition, simultaneously be export subsidies under Article 10.1. … In these circumstances, both the Panel’s reasoning and its finding under Article 10.1 of the Agreement on Agriculture are moot and of no legal effect. …

 

A.1.33.2 US — Upland Cotton, para. 615
(WT/DS267/AB/R)

 

Although Article 10.2 commits WTO Members to work toward the development of internationally agreed disciplines on export credit guarantees, export credits and insurance programmes, it is in Article 10.1 that we find the disciplines that currently apply to export subsidies not listed in Article 9.1. A plain reading of Article 10.1 indicates that the only export subsidies that are excluded from its scope are those “listed in paragraph 1 of Article 9”. … Thus, to the extent that an export credit guarantee meets the definition of an “export subsidy” under the Agreement on Agriculture, it would be covered by Article 10.1. Article 1(e) of the Agreement on Agriculture defines “export subsidies” as “subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement” (emphasis added). The use of the word “including” suggests that the term “export subsidies” should be interpreted broadly and that the list of export subsidies in Article 9 is not exhaustive. Even though an export credit guarantee may not necessarily include a subsidy component, there is nothing inherent about export credit guarantees that precludes such measures from falling within the definition of a subsidy. An export credit guarantee that meets the definition of an export subsidy would be covered by Article 10.1 of the Agreement on Agriculture because it is not an export subsidy listed in Article 9.1 of that Agreement.

 
A.1.33A Article 10.2 — Export credit guarantees     back to top

A.1.33A.1 US — Upland Cotton, para. 607
(WT/DS267/AB/R)

 

Article 10.2 refers expressly to export credit guarantee programmes, along with export credits and insurance programmes. Under Article 10.2,WTO Members have taken on two distinct commitments in respect of these three types of measures: (i) to work toward the development of internationally agreed disciplines to govern their provision; and (ii) after agreement on such disciplines, to provide them only in conformity therewith. The text includes no temporal indication with respect to the first commitment. There is no deadline for beginning or ending the negotiations. The second commitment does have a temporal connotation, in the sense that it is triggered only “after agreement on such disciplines”. This means that “after” international disciplines have been agreed upon, Members shall provide export credit guarantees, export credits and insurance programmes only in conformity with those agreed disciplines. There is no dispute between the parties that, to date, no disciplines have been agreed internationally pursuant to Article 10.2.

 

A.1.33A.2 US — Upland Cotton, paras. 608-609
(WT/DS267/AB/R)

 

Article 10.2 does not, however, expressly define the disciplines that currently apply to export credits, export credit guarantees and insurance programmes under the Agreement on Agriculture. …

 

We agree with the Panel’s view that Article 10.2 does not expressly exclude export credit guarantees from the export subsidy disciplines in Article 10.1 of the Agreement on Agriculture. As the Panel observes, were such an exemption intended, it could have been easily achieved by, for example, inserting the words “[n]otwithstanding the provisions of Article 10.1”, or other similar language at the beginning of Article 10.2. Article 10.2 does not include express language suggesting that it is intended as an exception, nor does it expressly state that the application of any export subsidy disciplines to export credits or export credit guarantees is “deferred”, as the United States suggests. Given that the drafters were aware that subsidized export credit guarantees, export credits and insurance programmes could fall within the export subsidy disciplines in the Agreement on Agriculture and the SCM Agreement, it would be expected that an exception would have been clearly provided had this been the drafters’ intention.

 

A.1.33A.3 US — Upland Cotton, para. 615
(WT/DS267/AB/R)

 

Although Article 10.2 commits WTO Members to work toward the development of internationally agreed disciplines on export credit guarantees, export credits and insurance programmes, it is in Article 10.1 that we find the disciplines that currently apply to export subsidies not listed in Article 9.1. A plain reading of Article 10.1 indicates that the only export subsidies that are excluded from its scope are those “listed in paragraph 1 of Article 9”. … Thus, to the extent that an export credit guarantee meets the definition of an “export subsidy” under the Agreement on Agriculture, it would be covered by Article 10.1. Article 1(e) of the Agreement on Agriculture defines “export subsidies” as “subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement” (emphasis added). The use of the word “including” suggests that the term “export subsidies” should be interpreted broadly and that the list of export subsidies in Article 9 is not exhaustive. Even though an export credit guarantee may not necessarily include a subsidy component, there is nothing inherent about export credit guarantees that precludes such measures from falling within the definition of a subsidy. An export credit guarantee that meets the definition of an export subsidy would be covered by Article 10.1 of the Agreement on Agriculture because it is not an export subsidy listed in Article 9.1 of that Agreement.

 

A.1.33A.4 US — Upland Cotton, para. 616
(WT/DS267/AB/R)

 

… Similarly, Article 10.2 must be interpreted in a manner that is consistent with the aim of preventing circumvention of export subsidy commitments that pervades Article 10. Otherwise, it would not have been included in that provision.

 

A.1.33A.5 US — Upland Cotton, para. 617
(WT/DS267/AB/R)

 

The United States submits that Article 10.2 contributes to the prevention of circumvention because it commits WTO Members to work toward the development of internationally agreed disciplines and to provide export credit guarantees, export credits and insurance programmes only in conformity with these disciplines once an agreement has been reached. We are not persuaded by this argument. The necessary implication of the United States’ interpretation of Article 10.2 is that, until WTO Members reach an agreement on international disciplines, export credit guarantees, export credits and insurance programmes are subject to no disciplines at all. In other words, under the United States’ interpretation, WTO Members are free to “circumvent” their export subsidy commitments through the use of export credit guarantees, export credits and insurance programmes until internationally agreed disciplines are developed, whenever that may be. We find it difficult to believe that the negotiators would not have been aware of and did not seek to address the potential that subsidized export credit guarantees, export credits and insurance programmes could be used to circumvent a WTO Member’s export subsidy reduction commitments. Indeed, such an interpretation would undermine the objective of preventing circumvention of export subsidy commitments, which is central to the Agreement on Agriculture.

 

A.1.33A.6 US — Upland Cotton, para. 619
(WT/DS267/AB/R)

 

… Article 10.4 provides specific disciplines that may be relied on to determine whether international food aid is being “used to circumvent” a WTO Member’s export subsidy commitments. There is no contradiction in the Panel’s approach to Article 10.2 and its approach to Article 10.4. The measures in Article 10.2 and the transactions in Article 10.4 are both covered within the scope of Article 10.1. …

 

A.1.33A.7 US — Upland Cotton, para. 623
(WT/DS267/AB/R)

 

We agree with the Panel that the meaning of Article 10.2 is clear from the provision’s text, in its context and in the light of the object and purpose of the Agreement on Agriculture, consistent with Article 31 of the Vienna Convention. The Panel did not think it necessary to resort to negotiating history for purposes of its interpretation of Article 10.2. Even if the negotiating history were relevant for our inquiry, we do not find that it supports the United States’ position. This is because it does not indicate that the negotiators did not intend to discipline export credit guarantees, export credits and insurance programmes at all. To the contrary, it shows that negotiators were aware of the need to impose disciplines on export credit guarantees, given their potential as a mechanism for subsidization and for circumvention of the export subsidy commitments under Article 9. Although the negotiating history reveals that the negotiators struggled with this issue, it does not indicate that the disagreement among them related to whether export credit guarantees, export credits and insurance programmes were to be disciplined at all. In our view, the negotiating history suggests that the disagreement between the negotiators related to which kinds of specific disciplines were to apply to such measures. The fact that negotiators felt that internationally agreed disciplines were necessary for these three measures also suggests that the disciplines that currently exist in the Agreement on Agriculture must apply pending new disciplines because, otherwise, it would mean that subsidized export credit guarantees, export credits, and insurance programmes could currently be extended without any limit or consequence.

 

A.1.33A.8 US — Upland Cotton, para. 625
(WT/DS267/AB/R)

 

We do not agree with the United States’ submission in this regard. There could have been several reasons why Members chose not to include export credit guarantees, export credits and insurance programmes under Article 9.1 of the Agreement on Agriculture. One reason, for instance, may be that they considered that their export credit guarantee, export credit or insurance programmes did not include a subsidy component, so that there was no need to subject them to export subsidy reduction commitments. There could have been other reasons. Thus, the fact that export credit guarantees, export credits and insurance programmes were not included in Article 9.1 does not support the United States’ interpretation of Article 10.2. We also observe that whether WTO Members with export credit guarantee programmes have reported them in their export subsidy notifications is not determinative for purposes of our inquiry into the meaning of Article 10.2. In any event, the United States and Brazil disagree about whether such programmes are subject to notification requirements.

 

A.1.33A.9 US — Upland Cotton, para. 626
(WT/DS267/AB/R)

 

Accordingly, we do not believe that Article 10.2 of the Agreement on Agriculture exempts export credit guarantees, export credits and insurance programmes from the export subsidy disciplines in the Agreement on Agriculture. This does not mean that export credit guarantees, export credits and insurance programmes will necessarily constitute export subsidies for purposes of the Agreement on Agriculture. Export credit guarantees are subject to the export subsidy disciplines in the Agreement on Agriculture only to the extent that such measures include an export subsidy component. If no such export subsidy component exists, then the export credit guarantees are not subject to the Agreement’s export subsidy disciplines. Moreover, even when export credit guarantees contain an export subsidy component, such an export credit guarantee would not be inconsistent with Article 10.1 of the Agreement on Agriculture unless the complaining party demonstrates that it is “applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments”. Thus, under the Agreement on Agriculture, the complaining party must first demonstrate that an export credit guarantee programme constitutes an export subsidy. If it succeeds, it must then demonstrate that such export credit guarantees are applied in a manner that results in, or threatens to lead to, circumvention of the responding party’s export subsidy commitments within the meaning of Article 10.1 of the Agreement on Agriculture.

 

A.1.33A.10 US — Upland Cotton, para. 628
(WT/DS267/AB/R)

 

Before proceeding further, we refer to the order followed by the Panel in its analysis of Brazil’s claims against the United States’ export credit guarantee programmes. We do not find that the Panel’s order of analysis was wrong or that it constituted legal error. Nor has the United States made such a claim on appeal. Nevertheless, we are struck by the fact that the Panel addressed Article 10.2 only at the end of its analysis, especially given that this provision constituted the core of the United States’ defence that the disciplines of the Agreement on Agriculture currently do not apply to export credit guarantees at all.

 
A.1.34 Article 10.3 — Reversal of burden of proof.
See also Burden of Proof, Reversal (B.3.4)     back to top

A.1.34.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 98
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

As we have reversed the Panel’s findings regarding the standard for determining the existence of “payments” and have, instead, identified the appropriate standard for these proceedings, namely, the average total cost of production, we now consider whether we can resolve this aspect of the dispute by completing the analysis. The Panel found that, in these proceedings, Article 10.3 of the Agreement on Agriculture reverses the burden of proof so that Canada must establish “that no export subsidy has been granted”. Although the burden of proof is on Canada, we must nonetheless complete the analysis solely on the basis of factual findings made by the Panel and uncontested facts in the Panel record.

 

A.1.34.2 Canada — Dairy (Article 21.5 — New Zealand and US II), paras. 66, 68
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… under the usual allocation of the burden of proof, a responding Member’s measure will be treated as WTO-consistent, until sufficient evidence is presented to prove the contrary. We will not readily find that the usual rules on burden of proof do not apply, as they reflect a “canon of evidence” accepted and applied in international proceedings.

 

 

[Article 10.3] requires that a specific Member, in defined circumstances, “establish that no export subsidy has been granted”. … The provision refers to a Member making a “claim” that certain exports are “not [being] subsidized”. Although the word “claim” usually refers to an assertion by a complaining Member that a measure is WTO-inconsistent, in this provision the word “claim” refers to an assertion by a responding Member that a measure is WTO-consistent. The “claim” to which Article 10.3 refers is, therefore, a defensive argument made by the responding Member.

 

A.1.34.3 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 69
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Article 10.3 does not impose any substantive obligations regulating the grant of export subsidies under the Agreement on Agriculture. Rather, Article 10.3 provides a special rule for proof of export subsidies that applies in certain disputes under Articles 3, 8, 9, and 10 of the Agreement on Agriculture.

 

A.1.34.4 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 70
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

In identifying the nature of the special rule, it is useful to analyse the character of claims brought under these provisions. Pursuant to Article 3 of the Agreement on Agriculture, a Member is entitled to grant export subsidies within the limits of the reduction commitment specified in its Schedule. Where a Member claims that another Member has acted inconsistently with Article 3.3 by granting export subsidies in excess of a quantity commitment level, there are two separate parts to the claim. First, the responding Member must have exported an agricultural product in quantities exceeding its quantity commitment level. If the quantities exported do not reach the quantity commitment level, there can be no violation of that commitment, under Article 3.3. However, merely exporting a product in quantities that exceed the quantity commitment level is not inconsistent with the commitment. The commitment is an undertaking to limit the quantity of exports that may be subsidized and not a commitment to restrict the volume or quantity of exports as such. The second part of the claim is, therefore, that the responding Member must have granted export subsidies with respect to quantities exceeding the quantity commitment level. There is, in other words, a quantitative aspect and an export subsidization aspect to the claim.

 

A.1.34.5 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 71
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

Under the usual rules on burden of proof, the complaining Member would bear the burden of proving both parts of the claim. However, Article 10.3 of the Agreement on Agriculture partially alters the usual rules. The provision cleaves the complaining Member’s claim in two, allocating to different parties the burden of proof with respect to the two parts of the claim we have described.

 

A.1.34.6 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 73
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… The language of Article 10.3 is clearly intended to alter the generally accepted rules on burden of proof. The verb “establish” is synonymous with the verbs “demonstrate” and “prove”. Moreover, the auxiliary verb “must” conveys that the responding Member has an obligation — or legal burden — to “establish” or “prove” that “no export subsidy has been granted”.

 

A.1.34.7 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 74
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

… The significance of Article 10.3 is that, where a Member exports an agricultural product in quantities that exceed its quantity commitment level, that Member will be treated as if it has granted WTO-inconsistent export subsidies, for the excess quantities, unless the Member presents adequate evidence to “establish” the contrary. This reversal of the usual rules obliges the responding Member to bear the consequences of any doubts concerning the evidence of export subsidization. Article 10.3 thus acts as an incentive to Members to ensure that they are in a position to demonstrate compliance with their quantity commitments under Article 3.3.

 

A.1.34.8 Canada — Dairy (Article 21.5 — New Zealand and US II), para. 75
(WT/DS103/AB/RW2, WT/DS113/AB/RW2)

 

With respect to the export subsidization part of the claim, the complaining Member, therefore, is relieved of its burden, under the usual rules, to establish a prima facie case of export subsidization of the excess quantity, provided that this Member has established the quantitative part of the claim. …

 

A.1.34.9 US — Upland Cotton, para. 616
(WT/DS267/AB/R)

 

… Article 10.3 pursues the aim of preventing circumvention of export subsidy commitments by providing special rules on the reversal of burden of proof where a Member exports an agricultural product in quantities that exceed its reduction commitment level; in such a situation a WTO Member is treated as if it has granted WTO-inconsistent export subsidies for the excess quantities, unless the Member presents adequate evidence to “establish” the contrary. …

 

A.1.34.10 US — Upland Cotton, para. 647
(WT/DS267/AB/R)

 

We agree with the United States that Article 10.3 of the Agreement on Agriculture does not apply to claims brought under the SCM Agreement. However, the Panel did not make the error attributed to it by the United States. The Panel made the statement relied on by the United States in the context of its assessment of the United States’ export credit guarantee programme under the Agreement on Agriculture. Although the Panel made use of the criteria set out in item (j) of the Illustrative List of Export Subsidies annexed to the SCM Agreement (providing these programmes at premium rates inadequate to cover long-term operating costs and losses) it did so as contextual guidance for its analysis under the Agreement on Agriculture, and both the United States and Brazil appear to have agreed with the appropriateness of this approach. Thus, the Panel’s reference to Article 10.3 did not relate to its assessment of the United States’ export credit guarantee programmes under the SCM Agreement.

 

A.1.34.11 US — Upland Cotton, para. 652
(WT/DS267/AB/R)

 

We disagree with the Panel’s view that Article 10.3 applies to unscheduled products. Under the Panel’s approach, the only thing a complainant would have to do to meet its burden of proof when bringing a claim against an unscheduled product is to demonstrate that the respondent has exported that product. Once that has been established, the respondent would have to demonstrate that it has not provided an export subsidy. This seems to us an extreme result. In effect, it would mean that any export of an unscheduled product is presumed to be subsidized. In our view, the presumption of subsidization when exported quantities exceed the reduction commitments makes sense in respect of a scheduled product because, by including it in its schedule, a WTO Member is reserving for itself the right to apply export subsidies to that product, within the limits in its schedule. In the case of unscheduled products, however, such a presumption appears inappropriate. Export subsidies for both unscheduled agricultural products and industrial products are completely prohibited under the Agreement on Agriculture and under the SCM Agreement, respectively. The Panel’s interpretation implies that the burden of proof with regard to the same issue would apply differently, however, under each Agreement: it would be on the respondent under the Agreement on Agriculture, while it would be on the complainant under the SCM Agreement.

 
A.1.34A Article 10.3 — Relationship with Article 6.2 of the DSU     back to top

A.1.34A.1 EC — Export Subsidies on Sugar, para. 154
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… Article 6.2 of the DSU and Article 10.3 of the Agreement on Agriculture address different matters and apply at different stages of panel proceedings. A panel request, on its face, must comply with the requirements of Article 6.2 of the DSU, whereas Article 10.3 of the Agreement on Agriculture relates to a Member’s duty to adduce evidence to substantiate its assertions during the course of the panel proceedings. …

 
A.1.34B Article 10.4 — “food aid”     back to top

A.1.34B.1 US — Upland Cotton, para. 616
(WT/DS267/AB/R)

 

… Article 10.4 provides disciplines to prevent WTO Members from circumventing their export subsidy commitments through food aid transactions. …

 

A.1.34B.2 US — Upland Cotton, paras. 618-619
(WT/DS267/AB/R)

 

The United States submits that, under the Panel’s approach, international food aid transactions would be subject to the “full array of export subsidy disciplines” because they are not expressly excluded from Article 10.1. …

 

We are unable to subscribe to the United States’ arguments because we do not see Article 10.4 as excluding international food aid from the scope of Article 10.1. International food aid is covered by the second clause of Article 10.1 to the extent that it is a “non-commercial transaction”. Article 10.4 provides specific disciplines that may be relied on to determine whether international food aid is being “used to circumvent” a WTO Member’s export subsidy commitments. There is no contradiction in the Panel’s approach to Article 10.2 and its approach to Article 10.4. The measures in Article 10.2 and the transactions in Article 10.4 are both covered within the scope of Article 10.1. As Brazil submits, “Article 10.4 provides an example of specific disciplines that have been agreed upon for a particular type of measure and that complement the general export subsidy rules” but, like Article 10.2, it does not “establish any exceptions for the measures that [it] covers”. WTO Members are free to grant as much food aid as they wish, provided that they do so consistently with Articles 10.1 and 10.4. Thus, Article 10.4 does not support the United States’ reading of Article 10.2.

 
A.1.34C Article 13 — “due restraint” (peace clause).
See also Agreement on Agriculture, Relationship between the Agreement on Agriculture and the GATT 1994 (A.1.37)     back to top

A.1.34C.1 SUBPARAGRAPH (A) — GREEN BOX

 

A.1.34C.1.1 US — Upland Cotton, para. 319
(WT/DS267/AB/R)

 

… domestic support that conforms fully to the provisions of Annex 2 — that is “green box” support, which is exempt from the domestic support reduction obligations of the Agreement on Agriculture — is also exempt, during the implementation period, from actions based on Article XVI of GATT 1994 and the actionable subsidies provisions of Part III of the SCM Agreement.

 

A.1.34C.1.2 US — Upland Cotton, para. 342
(WT/DS267/AB/R)

 

… production flexibility contract payments and direct payments are not “decoupled income support” within the meaning of paragraph 6, are not green box measures exempt from the reduction commitments by virtue of Annex 2 of the Agreement on Agriculture, and are not, therefore, sheltered from challenge by virtue of paragraph (a) of Article 13 of the Agreement on Agriculture. Rather, these measures are support covered by the chapeau to paragraph (b) of Article 13, and are to be taken into account in the analysis of that provision.

 

A.1.34C.2 SUBPARAGRAPH (B) — INTERPRETATION

 

A.1.34C.2.1 US — Upland Cotton, para. 347
(WT/DS267/AB/R)

 

Subparagraph (ii) to Article 13(b) exempts non-green box domestic support measures described in the chapeau from actions based on Article XVI:1 of GATT 1994 and Articles 5 and 6 of the SCM Agreement. This exemption is, however, subject to a proviso and is thus made conditional upon a requirement that “such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year”. …

 

A.1.34C.2.2 US — Upland Cotton, para. 361
(WT/DS267/AB/R)

 

We turn to our analysis of the phrase “such measures grant[ing] support to a specific commodity” in Article 13(b)(ii). The Panel found and the participants do not dispute that the relevant United States measures grant “support”; similarly, the Panel found and the participants agree that upland cotton is a “commodity” in the sense of that provision.

 

A.1.34C.2.3 US — Upland Cotton, para. 362
(WT/DS267/AB/R)

 

The key element is the significance of the qualifying word “specific” in this phrase. The Panel described the ordinary meaning of the term “specific” as “clearly or explicitly defined; precise; exact; definite” and as “specially or peculiarly pertaining to a particular thing or person, or a class of these; peculiar (to)”. In our view, the term “specific” in the phrase “support to a specific commodity” means the “commodity” must be clearly identifiable. The use of the term “to” connecting “support” with “a specific commodity” means that support must “specially pertain” to a particular commodity in the sense of being conferred on that commodity. In addition, the term “such measures grant” indicates that a discernible link must exist between “such measures” and the particular commodity to which support is granted. Thus, it is not sufficient that a commodity happens to benefit from support, or that support ends up flowing to that commodity by mere coincidence. Rather, the phrase “such measures” granting “support to a specific commodity” implies a discernible link between the support-conferring measure and the particular commodity to which support is granted.

 

A.1.34C.2.4 US — Upland Cotton, para. 363
(WT/DS267/AB/R)

 

Therefore, we agree with the Panel insofar as it found that the ordinary meaning of the phrase “such measures grant[ing] support to a specific commodity” includes “non-green box measures that clearly or explicitly define a commodity as one to which they bestow or confer support”. This is because the Panel’s test requires that a commodity be specified in the measure, and that the support be conferred on that commodity. We believe, however, that the terms of this definition do not exhaust the scope of measures that may grant “support to a specific commodity”. We note in this regard that the Panel looked, in applying its test, to factors such as eligibility criteria and payment rates, as well as the relationship between payments and current market prices of the commodity in question. In our view, the Panel was correct to consider such matters, as the requisite link between a measure granting support and a specific commodity may be discerned not just from an explicit specification of the commodity in the text of a measure, as the Panel’s test — on its face — seems to imply, but also from an analysis of factors such as the characteristics, structure or design of that measure.

 

A.1.34C.2.5 US — Upland Cotton, para. 367
(WT/DS267/AB/R)

 

… The proviso to Article 13(b)(ii) mentions only the term “such measures” granting support; but the meaning of this term can be clarified by reference to the chapeau of Article 13(b) because, as the Panel noted, “[t]he chapeau of paragraph (b) and subparagraph (ii) form part of a single sentence.” The chapeau identifies the categories of support measures covered by that provision. These are:

 

… domestic support measures that conform fully to the provisions of Article 6 of this Agreement including direct payments that conform to the requirements of paragraph 5 thereof, as reflected in each Member’s Schedule, as well as domestic support within de minimis levels and in conformity with paragraph 2 of Article 6 …

 

A.1.34C.2.6 US — Upland Cotton, para. 368
(WT/DS267/AB/R)

 

Measures covered by Article 6 include both product-specific and non-product-specific amber box support subject to reduction commitments. In addition, measures covered by the chapeau also include product-specific and non-product-specific support within de minimis levels. They further include blue box support provided in accordance with Article 6.5, as well as development box support, provided according to the provisions of Article 6.2, for both of which the distinction between product-specific and non-product specific support for purposes of the AMS calculation has little practical relevance. Like the Panel, we believe that the use of the term “such measures” in the proviso to Article 13(b)(ii) indicates that all such measures identified in the chapeau of Article 13(b) may qualify as granting “support to a specific commodity” and are eligible to be included in the analysis. By contrast, under the United States’ argument, domestic support measures listed in the chapeau (with the exception of product-specific amber box support) could not be “support to a specific commodity” even if they confer support on a specific commodity and there is a discernible link between the measure and that commodity.

 

A.1.34C.3 SUBPARAGRAPH (B) — APPLICATION

 

A.1.34C.3.1 US — Upland Cotton, paras. 371-372
(WT/DS267/AB/R)

 

The proviso to Article 13(b)(ii) requires an assessment of whether the relevant United States non-green box domestic support measures grant, during the implementation period, “support to a specific commodity in excess of that decided during the 1992 marketing year”.

 

As we have explained above, the term “such measures grant support to a specific commodity” comprises two elements: first, a non-green box measure actually confers support on the specific commodity in question; and second, there is a discernible link between the measure and the commodity, such that the measure is directed at supporting that commodity. Such a discernible link may be evident where a measure explicitly defines a specific commodity as one to which it bestows support. Such a link might also be ascertained, as a matter of fact, from the characteristics, structure or design of the measure under examination. Conversely, support that does not actually flow to a commodity or support that flows to a commodity by coincidence rather than by the inherent design of the measure cannot be regarded as falling within the ambit of the term “support to a specific commodity”.

 

A.1.34C.3.2 US — Upland Cotton, paras. 375-376
(WT/DS267/AB/R)

 

We agree with the United States that payments made with respect to historical upland cotton base acres to commodities other than upland cotton or to producers who produced no commodities at all cannot be deemed to be support granted to upland cotton for purposes of the Article 13(b)(ii) comparison. The Article 13(b)(ii) assessment must be limited to support conferred on planted upland cotton; support flowing to other commodities that were planted, or support that was given where no commodities were produced must of course be removed from the assessment. We reject, therefore, the Panel’s calculation methodology to the extent that it failed to limit the Article 13(b)(ii) calculation to payments with respect to upland cotton base acres corresponding to physical acres actually planted with upland cotton.

 

We observe, however, that the Panel acknowledged that a producer with upland cotton base acres may plant any crop other than the excluded fruits, vegetables, and wild rice, but it found that there was “a strongly positive relationship between those recipients who hold upland cotton base acres and those who continue to plant upland cotton, despite their entitlement to plant other crops”. …

 

A.1.34C.3.3 US — Upland Cotton, paras. 377-378
(WT/DS267/AB/R)

 

…The “cotton to cotton” methodology limits the Article 13(b)(ii) calculation to payments with respect to cotton base acres corresponding to physical acres that were actually planted with upland cotton.

 

We turn next to the United States’ contention that the mere fact that a measure is based on historical production of upland cotton is not a sufficient basis for a finding that the measure grants at present “support to [the] specific commodity” upland cotton. We agree that none of the base acre dependent programmes expressly ties support to continued production of upland cotton. However, the absence of an express reference in the legislation to continued production of upland cotton does not mean that the payments do not grant support to upland cotton. This is because a link between the four measures at issue and the continued production of upland cotton is discernible from the characteristics, structure and operation of those measures.

 

A.1.34C.3.4 US — Upland Cotton, para. 380
(WT/DS267/AB/R)

 

We underline that these Panel findings do not pertain to all payments to current producers of upland cotton, but rather are limited to payments to producers with respect to historic upland cotton base acres. Indeed, we see little in the Panel’s finding or on the record that would allow us to discern a link between the support-conferring measures with respect to non-cotton historical base acres and current production of upland cotton. We do not, therefore, accept the methodology submitted by Brazil that included, in the Article 13(b)(ii) calculation, payments with respect to both cotton and non-cotton base acres flowing to current production of upland cotton. We believe that only the “cotton to cotton” methodology, included by the Panel in “Attachment to Section VII:D” to its Report as an “appropriate” alternative calculation, sufficiently demonstrates a discernible link between payments under base acre dependent measures (related to upland cotton) and upland cotton.

 

A.1.34C.4 SUBPARAGRAPH (B) — “GRANT” VS. “DECIDED”

 

A.1.34C.4.1 US — Upland Cotton, paras. 381-382
(WT/DS267/AB/R)

 

Finally, we address the United States’ argument that the calculation methodology under Article 13(b)(ii) must be based on only those factors that the government of a Member can control, excluding, for example, producer decisions regarding what crops to grow within the scope of production flexibility allowed by the measures. In advancing this contention, the United States relies upon the following statement of the Panel:

 

[If] the proviso [to Article 13(b)(ii)] focused on where support was spent due to reasons beyond the control of the government, such as producer decisions on what to produce within a programme, it would introduce a major element of unpredictability into Article 13, and render it extremely difficult to ensure compliance.

 

The United States finds support for this view in the terms “grant” and “decided” in Article 13(b)(ii), and claims that “the focus of the Peace Clause comparison is on the support a Member decides”. We note that the verbs “grant” and “decided” have distinct meanings. We agree with the observation of the Panel that “ ‘[d]ecided’ refers to what the government determines, but ‘grant’ refers to what its measures provide.” In Article 13(b)(ii), each of these words has been chosen to govern one side of the comparison required by that proviso. In the light of the distinct meanings of these words, and the distinct roles they play in the context of Article 13(b)(ii), we reject the idea that the word “grant”, which is applicable to implementation period support, must be read to mean the same thing as “decided”, which is applicable to the 1992 benchmark level of support.

 

A.1.34C.4.2 US — Upland Cotton, para. 383
(WT/DS267/AB/R)

 

Moreover, we do not accept that unpredictability of producer decisions under planting flexibility rules, per se, could modify the specific requirements set out in the proviso to Article 13(b)(ii). What is relevant for the comparison is the support that the measure actually grants during the implementation period. Indeed, we agree with Brazil that a certain degree of unpredictability in the volume of the payments flowing to particular commodities is inherent in many of the support measures disciplined by the Agreement on Agriculture, including measures granting support to a specific commodity. The existence of such unpredictability cannot be a ground to alter the basis of comparison under the proviso to Article 13(b)(ii) from what is actually “grant[ed]” in the implementation period to what is only “decided”.

 

A.1.34C.5 SUBPARAGRAPH (B) — CALCULATION METHOD

 

A.1.34C.5.1 US — Upland Cotton, paras. 388-389
(WT/DS267/AB/R)

 

In addressing this issue, we — like the Panel — note that Article 13(b)(ii) gives no specific guidance regarding how the “support” that measures granted in the implementation period or that was decided during the 1992 marketing year should be calculated. The Panel therefore turned to the broader context of the Agreement on Agriculture and chose to “apply the principles of AMS methodology” in accordance with Annex 3 of the Agreement on Agriculture, with certain modifications. We observe that, on appeal, neither of the participants, nor indeed any of the third participants that addressed this issue, suggested that the Panel erred in seeking guidance for its calculations in the principles set out in Annex 3.

 

Against this background, we observe that paragraph 10 of Annex 3 provides that “non-exempt direct payments dependent on a price gap” may be measured using either price gap methodology or budgetary outlay methodology. …

 
A.1.34D Annex 2 — “green box”     back to top

A.1.34D.1 PARAGRAPH 1 — “FUNDAMENTAL REQUIREMENT”

 

A.1.34D.1.1 US — Upland Cotton, para. 333
(WT/DS267/AB/R)

 

We note that the first sentence of paragraph 1 of Annex 2 lays down a “fundamental requirement” for green box measures, such that they must have “no, or at most minimal, trade-distorting effects or effects on production”. The second sentence of paragraph 1 provides that, “[a]ccordingly”, green box measures must conform to the basic criteria stated in that sentence, “plus” the policy-specific criteria and conditions set out in the remaining paragraphs of Annex 2, including those in paragraph 6.

 

A.1.34D.1.2 US — Upland Cotton, para. 334
(WT/DS267/AB/R)

 

As we have noted, the Panel found that the planting flexibility limitations in this case “significantly constrain” production decisions. However one reads the “fundamental requirement” in paragraph 1 of Annex 2, given the factual findings of the Panel, the facts of this case do not present a situation in which the planting flexibility limitations demonstrably have “no, or at most minimal,” trade-distorting effects or effects on production.

 

A.1.34D.2 PARAGRAPH 6 — “DECOUPLED INCOME SUPPORT”

 

A.1.34D.2.1 US — Upland Cotton, para. 321
(WT/DS267/AB/R)

 

Paragraph 6, entitled, “[d]ecoupled income support” applies to one type of “direct payment” to producers that may benefit from exemption from reduction commitments and protection under the peace clause. Paragraph 6(a) sets forth that eligibility for payments under a decoupled income support programme must be determined by reference to certain “clearly defined criteria” in a “defined and fixed base period”. Paragraph 6(b) requires the severing of any link between the amount of payments under such a programme and the type or volume of production undertaken by recipients of payments under that programme in any year after the base period. Paragraphs 6(c) and 6(d) serve to require that payments are also decoupled from prices and factors of production employed after the base period. Paragraph 6(e) makes it clear that “[n]o production shall be required in order to receive payments” under a decoupled income support programme.

 

A.1.34D.2.2 US — Upland Cotton, para. 322
(WT/DS267/AB/R)

 

… the question before us regarding the consistency of production flexibility contract payments and direct payments with paragraph 6(b) of Annex 2 is a limited one. It does not concern a measure requiring producers to grow certain crops in order to receive payments; it also does not concern a measure with complete planting flexibility that provides payments without regard whatsoever to the crops that are grown. Indeed, it does not concern a measure that requires the production of any crop at all; nor does it involve a measure that totally prohibits the growing of any crops as a condition for payments. The question before us in this appeal thus concerns a measure with a partial exclusion combining planting flexibility and payments with the reduction or elimination of the payments when the excluded crops are produced, while providing payments even when no crops are produced at all.

 

A.1.34D.2.3 US — Upland Cotton, para. 323
(WT/DS267/AB/R)

 

In addressing the question of the consistency of such a measure with paragraph 6(b), we note that under this provision, for income support to be decoupled, the “amount of such payments shall not be related to the type or volume of production undertaken by the producer in any year after the base period”. …

 

A.1.34D.2.4 US — Upland Cotton, para. 324
(WT/DS267/AB/R)

 

The ordinary meaning of the term “related to” in paragraph 6(b) of Annex 2 denotes some degree of relationship or connection between two things, here the amount of payment, on the one hand, and the type or volume of production, on the other. It covers a broader set of connections than “based on”, which term is also used to describe the relationship between two things covered by paragraph 6(b). Nothing in the ordinary meaning of the term “related to” suggests that the connections covered by this expression may not encompass connections of either a “positive” nature (including directions or requirements to do something) or a “negative” nature (including prohibitions or requirements not to do something) or a combination of both. …

 

A.1.34D.2.5 US — Upland Cotton, para. 325
(WT/DS267/AB/R)

 

Paragraph 6 of Annex 2, entitled “[d]ecoupled income support”, seeks to decouple or de-link direct payments to producers from various aspects of their production decisions and thus aims at neutrality in this regard. Subparagraph (b) decouples the payments from production; subparagraph (c) decouples payments from prices; and subparagraph (d) decouples payments from factors of production. Subparagraph (e) completes the process by making it clear that no production shall be required in order to receive such payments. Decoupling of payments from production under paragraph 6(b) can only be ensured if the payments are not related to, or based upon, either a positive requirement to produce certain crops or a negative requirement not to produce certain crops or a combination of both positive and negative requirements on production of crops.

 

A.1.34D.2.6 US — Upland Cotton, para. 326
(WT/DS267/AB/R)

 

In contrast to the other subparagraphs of paragraph 6, paragraph 6(e) does explicitly distinguish between positive and negative production requirements, because it prohibits positive requirements to produce. The Panel reasoned that “[i]f paragraph 6(b) could be satisfied by ensuring that no production was required to receive payments, paragraph 6(e) would be redundant”. We agree with the Panel that the context provided by paragraph 6(e) indicates that a measure that provided payments, even if a producer undertook no production at all, would not, for that reason alone, necessarily comply with paragraph 6(b). This is because other elements of that measure might still relate the amount of payments to the type or volume of production, contrary to the requirement of paragraph 6(b).

 

A.1.34D.2.7 US — Upland Cotton, para. 327
(WT/DS267/AB/R)

 

The United States seems to argue that the Panel’s interpretation of the relationship between paragraphs 6(b) and 6(e) would subsume paragraph 6(e) within the scope of paragraph 6(b), thereby rendering it redundant. In our view, however, paragraph 6(e) continues to serve a purpose distinct from that of paragraph 6(b). It highlights a different aspect of decoupling income support. In prohibiting Members from making green-box measures contingent on production, paragraph 6(e) implies that Members are allowed, in principle, to require no production at all. Accordingly, payments conditioned on a total ban on any production may qualify as decoupled income support under paragraph 6(e). Even assuming that payments contingent on a total production ban could be seen to relate the amount of the payment to the volume of production within the meaning of paragraph 6(b) — the volume of production being nil — giving meaning and effect to both paragraphs 6(b) and 6(e) suggests a reading of paragraph 6(b) that would not disallow a total ban on any production.

 

A.1.34D.2.8 US — Upland Cotton, para. 329
(WT/DS267/AB/R)

 

We agree with the Panel that a partial exclusion of some crops from payments has the potential to channel production towards the production of crops that remain eligible for payments. In contrast to a total production ban, the channelling of production that may follow from a partial exclusion of some crops from payments will have positive production effects as regards crops eligible for payments. The extent of this will depend on the scope of the exclusion. …

 

A.1.34D.2.9 US — Upland Cotton, para. 340
(WT/DS267/AB/R)

 

… Our interpretation of paragraph 6(b) would not prevent a WTO Member from making illegal the production of certain crops. Nor would it prevent a Member from providing decoupled income support while at the same time making the production of certain crops illegal. As Brazil states, there is nothing in the Agreement on Agriculture to suggest that the term “production” in paragraph 6 of Annex 2 refers to anything other than lawful production. In addition, we observe that specific provisions of the Agreement on Agriculture recognize, and exempt from reduction commitments, domestic support programmes that address the problem of production of illicit narcotic crops in developing countries or payments under certain environmental programmes.

 

A.1.34D.3 PARAGRAPH 11 — “STRUCTURAL ADJUSTMENT ASSISTANCE”

 

A.1.34D.3.1 US — Upland Cotton, para. 335
(WT/DS267/AB/R)

 

We find further support for our interpretation of paragraph 6(b) in the context provided by paragraph 11 of Annex 2, entitled “Structural adjustment assistance provided through investment aids”. Several of the subparagraphs of paragraph 11 are phrased in similar terms to those of paragraph 6. Indeed, like paragraph 6(b), paragraph 11(b) requires that the “amount of payments shall not be related to the type or volume of production undertaken by the producer in any year after the base period”. However, unlike paragraph 6(b), paragraph 11(b) ends with the phrase “other than as provided for under criterion (e) below”. Criterion 11(e) specifically envisages that “payments shall not mandate or in any way designate the agricultural products to be produced by the recipients except to require them not to produce a particular product”.

 

A.1.34D.3.2 US — Upland Cotton, para. 336
(WT/DS267/AB/R)

 

We note that the exception provided by paragraph 11(e) and the link to paragraph 11(e) in paragraph 11(b) explicitly authorize the type of “negative” requirements not to produce that the United States argues is implicitly permitted by the terms of paragraph 6(b). In the light of the similarity of the language chosen in paragraphs 6(b) and 11(b), like the Panel, we attach significance to the fact that the drafters saw as necessary an explicit authorization of negative requirements not to produce under paragraph 11(b). In our view, this indicates that the ordinary meaning of the terms in paragraph 11(b) would otherwise exclude an interpretation allowing such negative requirements. The use of identical language in paragraphs 6(b) and 11(b), except for the reference in paragraph 11(b) to paragraph 11(e), suggests that the meaning of the terms in paragraph 6(b) must be the same as in paragraph 11(b). Accordingly, a comparison of these provisions confirms that the terms of paragraph 6(b) encompass both positive as well as negative connections between the amount of payments under a programme and the type of production undertaken.

 
A.1.34E Annex 3, paragraph 7 — Measures directed at processors benefiting producers     back to top

A.1.34E.1 US — Upland Cotton, para. 537 and footnote 777
(WT/DS267/AB/R)

 

… we will proceed with our examination on the assumption that Step 2 payments to domestic users of United States cotton are contemplated by paragraph 7 of Annex 3 of the Agreement on Agriculture.777

 

A.1.34E.2 US — Upland Cotton, para. 540
(WT/DS267/AB/R)

 

… The second sentence of paragraph 7 recognizes situations where subsidies are not provided directly to the agricultural producer, but rather to an agricultural processor, yet the measures may benefit the producers of the basic agricultural good. This sentence also clarifies that only the portion of the subsidy that benefits the producers of the basic agricultural good, and not the entire amount, shall be included in a Member’s AMS.

 

A.1.34E.3 US — Upland Cotton, para. 541
(WT/DS267/AB/R)

 

… There is nothing in the text of paragraph 7 [of Annex 3 of the Agreement on Agriculture] that suggests that such measures, when they are import substitution subsidies, are exempt from the prohibition in Article 3.1(b) of the SCM Agreement. …

 

A.1.34E.4 US — Upland Cotton, para. 542
(WT/DS267/AB/R)

 

… paragraph 7 of Annex 3 refers more broadly to measures directed at agricultural processors that benefit producers of a basic agricultural product and, contrary to the United States’ assertion, it is not rendered inutile by the Panel’s interpretation. WTO Members may still provide subsidies directed at agricultural processors that benefit producers of a basic agricultural commodity in accordance with the Agreement on Agriculture, as long as such subsidies do not include an import substitution component.

 

A.1.34E.5 US — Upland Cotton, para. 546
(WT/DS267/AB/R)

 

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture do not deal specifically with the same matter as Article 3.1(b) of the SCM Agreement, that is, subsidies contingent upon the use of domestic over imported goods.

 
A.1.35 Annex 3, paragraph 8 — “market price support”     back to top

A.1.35.1 Korea — Various Measures on Beef, para. 120
(WT/DS161/AB/R, WT/DS169/AB/R)

 

… the words “production eligible to receive the applied administered price” in paragraph 8 of Annex 3 have a different meaning in ordinary usage from “production actually purchased”. The ordinary meaning of “eligible” is “fit or entitled to be chosen”. Thus, “production eligible” refers to production that is “fit or entitled” to be purchased rather than production that was actually purchased. In establishing its programme for future market price support, a government is able to define and to limit “eligible” production. Production actually purchased may often be less than eligible production.

 
A.1.36 Relationship between domestic support and export subsidies disciplines     back to top

A.1.36.1 Canada — Dairy (Article 21.5 — New Zealand and US), paras. 90-92
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

We believe that it would erode the distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture if WTO-consistent domestic support measures were automatically characterized as export subsidies because they produced spill-over economic benefits for export production. Indeed, this is another reason why we do not agree with the Panel that sales of CEM at any price below the administered domestic price for milk can be regarded as “payments” under Article 9.1(c) of the Agreement on Agriculture. Such a basis for comparison would tend to collapse the distinction between these two different disciplines.

 

However, we consider that the distinction between the domestic support and export subsidies disciplines in the Agreement on Agriculture would also be eroded if a WTO Member were entitled to use domestic support, without limit, to provide support for exports of agricultural products. Broadly stated, domestic support provisions of that Agreement, coupled with high levels of tariff protection, allow extensive support to producers, as compared with the limitations imposed through the export subsidies disciplines. Consequently, if domestic support could be used, without limit, to provide support for exports, it would undermine the benefits intended to accrue through a WTO Member’s export subsidy commitments.

 

In our view, by relying upon the total cost of production in this dispute, to determine whether there are “payments”, the integrity of the two disciplines is best respected. The existence of “payments” is determined by reference to a standard that focuses upon the motivations of the independent economic operator who is making the alleged “payments” — here the producer — and not upon any government intervention in the marketplace. More importantly, using this basis for comparison, the potential for WTO Members to export their agricultural production is preserved, provided that any export-destined sales by a producer at below the total cost of production are not financed by virtue of governmental action. The export subsidy disciplines of the Agreement on Agriculture will also be maintained without erosion.

 

A.1.36.2 EC — Export Subsidies on Sugar, paras. 279-282
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… WTO Members are entitled to provide “domestic support” to agricultural producers within the limits of their domestic subsidy commitments. We observe, however, that the Appellate Body has also held that economic effects of WTO consistent domestic support may “spill over” to benefit export production. Such spill-over effects may arise, in particular, in circumstances where agricultural products result from a single line of production that does not distinguish between production destined for the domestic market and production destined for the export market.

 

In this respect, the Appellate Body has cautioned that, “if domestic support could be used, without limit, to provide support for exports, it would undermine the benefits intended to accrue through a WTO Member’s export subsidy commitments”. We believe that these statements are relevant to the present case. In this case, we note that C sugar is produced and exported in huge quantities, and that there is a considerable difference between the world market price and the average total cost of production of sugar in the European Communities. As we have noted above, the subsidized production and export of C sugar is not the incidental effect of the domestic support system, but is a direct consequence of the EC sugar regime.

 

We also disagree with the European Communities’ argument that the Panel’s finding blurs the distinction between domestic support and export subsidies; we disagree, because the European Communities’ legislation requires the exportation of C sugar, and prices obtained for C sugar on the world market are significantly be low the average total cost of production of sugar in the European Communities. In our view, European Communities’ legislation leaves the sugar producer wishing to sell C sugar with no choice but to export, short of the limited option of “carry over”. We also note that the operation of the EC sugar regime enables sugar producers to cover the fixed costs of producing sugar and to sell C sugar profitably, even though the prices obtained for C sugar are significantly below the average total cost of production of sugar.

 

Thus, we do not consider that our interpretation erodes the boundary between “domestic support” and “export subsidies” recognized under the Agreement on Agriculture. Rather, our interpretation respects the boundary between the two and operates to ensure that Members provide domestic support and export subsidies in conformity with their obligations under the Agreement on Agriculture. As we noted earlier, our interpretation is based on the specific facts and circumstances of this dispute.

 
A.1.37 Relationship between the Agreement on Agriculture and the GATT 1994.
See also Tariff Concessions, Relationship between Member’s Schedules and the Agreement on Agriculture (T.1.4)     back to top

A.1.37.1 EC — Bananas III, para. 155
(WT/DS27/AB/R)

 

… The relationship between the provisions of the GATT 1994 and of the Agreement on Agriculture is set out in Article 21.1 of the Agreement on Agriculture:

 

The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the provisions of this Agreement.

 

Therefore, the provisions of the GATT 1994, including Article XIII, apply to market-access commitments concerning agricultural products, except to the extent that the Agreement on Agriculture contains specific provisions dealing specifically with the same matter.

 

A.1.37.2 EC — Bananas III, para. 157
(WT/DS27/AB/R)

 

… we do not see anything in Article 4.1 to suggest that market access concessions and commitments made as a result of the Uruguay Round negotiations on agriculture can be inconsistent with the provisions of Article XIII of the GATT 1994. … we believe it is significant that Article 13 of the Agreement on Agriculture does not, by its terms, prevent dispute settlement actions relating to the consistency of market access concessions for agricultural products with Article XIII of the GATT 1994. As we have noted, the negotiators of the Agreement on Agriculture did not hesitate to specify such limitations elsewhere in that agreement; had they intended to do so with respect to Article XIII of the GATT 1994, they could, and presumably would, have done so. We note further that the Agreement on Agriculture makes no reference to the Modalities document or to any “common understanding” among the negotiators of the Agreement on Agriculture that the market-access commitments for agricultural products would not be subject to Article XIII of the GATT 1994.

 

A.1.37.3 EC — Export Subsidies on Sugar, para. 211
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

… we examine whether the claimed commitment in Footnote 1 “limiting” subsidization of exports of sugar can prevail over the provisions of the Agreement on Agriculture, despite such a commitment being inconsistent with Articles 3.3 and 9.1 of the Agreement on Agriculture.

 

A.1.37.4 EC — Export Subsidies on Sugar, paras. 221-223
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

In any event, we note that Article 21 of the Agreement on Agriculture provides that: “[t]he provisions of [the] GATT 1994 and of other Multilateral Trade Agreements in Annex 1A to the WTO Agreement shall apply subject to the provisions of this Agreement.” In other words, Members explicitly recognized that there may be conflicts between the Agreement on Agriculture and the GATT 1994, and explicitly provided, through Article 21, that the Agreement on Agriculture would prevail to the extent of such conflicts. Similarly, the General interpretative note to Annex 1A to the WTO Agreement states that, “[i]n the event of conflict between a provision of the [GATT 1994] and a provision of another agreement in Annex 1A …, the provision of the other agreement shall prevail to the extent of the conflict.” The Agreement on Agriculture is contained in Annex 1A to the WTO Agreement.

 

As we noted above, Footnote 1, being part of the European Communities’ Schedule, is an integral part of the GATT 1994 by virtue of Article 3.1 of the Agreement on Agriculture. Therefore, pursuant to Article 21 of the Agreement on Agriculture, the provisions of the Agreement on Agriculture prevail over Footnote 1. …

 

As a separate matter, we note that the European Communities asserts that Footnote 1 was “negotiated” with its partners in the Uruguay Round negotiations and that it has been “respected”. Accordingly, Footnote 1 forms part of the treaty ratified by the WTO Members. Similarly, the ACP Countries allege that Footnote 1 “was negotiated and agreed upon” or acquiesced in by the Complaining Parties before the end of the Uruguay Round. The Panel found, however, that “[t]he evidence and submissions produced by all parties show that the Complainants did not agree to any European Communities’ deviations from the Agreement on Agriculture.” The Panel concluded that “participants in the Uruguay Round and WTO Members did not agree to the European Communities’ inclusion of Footnote 1 as an agreed departure from the European Communities’ basic obligations under the Agreement on Agriculture”. Accordingly, we see no basis in the Panel Reports for the contention of the European Communities and the ACP Countries that the Complaining Parties or the WTO Members negotiated or agreed to Footnote 1 as a departure from the European Communities’ obligations under the Agreement on Agriculture.

 
A.1.37A Relationship between the Agreement on Agriculture and the Modalities Paper     back to top

A.1.37A.1 EC — Bananas III, para. 157
(WT/DS27/AB/R)

 

… We note further that the Agreement on Agriculture makes no reference to the Modalities document or to any “common understanding” among the negotiators of the Agreement on Agriculture that the market-access commitments for agricultural products would not be subject to Article XIII of the GATT 1994.

 

A.1.37A.2 EC — Export Subsidies on Sugar, para. 199
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

We do not find it necessary to decide in this appeal on the relevance of the “Modalities Paper”. The “Modalities Paper” is not an agreement among the WTO Members and, by its terms, cannot be the basis of dispute settlement under the Marrakesh Agreement Establishing the World Trade Organization (the “WTO Agreement”). Furthermore, as the Appellate Body noted in EC — Bananas III, “the Agreement on Agriculture makes no reference to the Modalities document”. …

 

A.1.37A.3 EC — Bananas III (Article 21.5 — Ecuador II) / EC — Bananas III (Article 21.5 — US), para. 442
(WT/DS27/AB/RW2/ECU, WT/DS27/AB/RW/USA, WT/DS27/AB/RW2/ECU/Corr.1, WT/DS27/AB/RW/USA/Corr.1)

 

The introduction to the Modalities Paper states that it is “being re-issued for the purpose of completing draft Schedules of concession and commitments in the agricultural negotiations and for facilitating the verification process leading to the establishment of formal Schedules to be annexed to the Uruguay Round Protocol”. In our view, this introductory language and the content of the Modalities Paper make clear that it qualifies as “preparatory work of the treaty” within the meaning of Article 32 of the Vienna Convention. The Modalities Paper explicitly states that it “shall not be used as a basis for dispute settlement proceedings”; this means that it does not in itself confer on WTO Members rights and obligations enforceable in dispute settlement. However, this does not preclude reference to the Modalities Paper when interpreting the WTO agreements and Members’ Schedules of Concessions that were prepared in accordance with these modalities. Therefore, we consider that it is not inappropriate to refer to the Modalities Paper as supplementary means of interpretation to confirm our interpretation of the European Communities’ Schedule of Concessions and of the Bananas Framework Agreement.

 

A.1.37A.4 EC — Bananas III (Article 21.5 — Ecuador II) / EC — Bananas III (Article 21.5 — US), para. 443
(WT/DS27/AB/RW2/ECU, WT/DS27/AB/RW/USA, WT/DS27/AB/RW2/ECU/Corr.1, WT/DS27/AB/RW/USA/Corr.1)

 

… Moreover, the Modalities Paper does not envisage temporal limitations to this commitment resulting from the tariffication process. However, if the Panel’s interpretation of the European Communities’ Schedule of Concessions were accepted, from 31 December 2002 onwards, the Schedule would no longer provide for such “current access opportunities” for bananas to be maintained.

 
A.1.38 Relationship between the Agreement on Agriculture and the SCM Agreement.
See also Agreement on Agriculture, Article 1(e) — “subsidy” (A.1.3); SCM Agreement, Article 3.1 — “except as provided in the Agreement on Agriculture” (S.2.11)     back to top

A.1.38.1 Canada — Dairy (Article 21.5 — New Zealand and US), paras. 123-124
(WT/DS103/AB/RW, WT/DS113/AB/RW)

 

The relationship between the Agreement on Agriculture and the SCM Agreement is defined, in part, by Article 3.1 of the SCM Agreement, which states that certain subsidies are “prohibited” “[e]xcept as provided in the Agreement on Agriculture”. This clause, therefore, indicates that the WTO-consistency of an export subsidy for agricultural products has to be examined, in the first place, under the Agreement on Agriculture.

 

 

This is borne out by Article 13(c)(ii) of the Agreement on Agriculture, which provides that “export subsidies that conform fully to the [export subsidy] provisions of Part V” of the Agreement on Agriculture, “as reflected in each Member’s Schedule, shall be exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the Subsidies Agreement”.

 

A.1.38.2 US — Upland Cotton, paras. 532-533
(WT/DS267/AB/R)

 

We agree that Article 21.1 could apply in the three situations described by the Panel, namely:

 

… where, for example, the domestic support provisions of the Agreement on Agriculture would prevail in the event that an explicit carve-out or exemption from the disciplines in Article 3.1(b) of the SCM Agreement existed in the text of the Agreement on Agriculture. Another situation would be where it would be impossible for a Member to comply with its domestic support obligations under the Agreement on Agriculture and the Article 3.1(b) prohibition simultaneously. Another situation might be where there is an explicit authorization in the text of the Agreement on Agriculture that would authorize a measure that, in the absence of such an express authorization, would be prohibited by Article 3.1(b) of the SCM Agreement. [Panel Report, para. 7.1038 (original emphasis)]

 

The Appellate Body has interpreted Article 21.1 to mean that the provisions of the GATT 1994 and of other Multilateral Trade Agreements in Annex 1A apply, “except to the extent that the Agreement on Agriculture contains specific provisions dealing specifically with the same matter”. There could be, therefore, situations other than those identified by the Panel where Article 21.1 of the Agreement on Agriculture may be applicable.

 

The key issue before us is whether the Agreement on Agriculture contains “specific provisions dealing specifically with the same matter” as Article 3.1(b) of the SCM Agreement, that is, subsidies contingent upon the use of domestic over imported goods. We, therefore, turn to the relevant provisions of the Agreement on Agriculture.

 

A.1.38.3 US — Upland Cotton, para. 536
(WT/DS267/AB/R)

 

Before determining whether Article 6.3 and paragraph 7 of Annex 3 of the Agreement on Agriculture deal specifically with the same matter as Article 3.1(b) of the SCM Agreement, we must address the question whether the Step 2 payments to domestic users of United States upland cotton fall within paragraph 7 of Annex 3 because the United States claims that they are “[m]easures directed at agricultural processors” and “benefit the producers of the basic agricultural products”. …

 

A.1.38.4 US — Upland Cotton, para. 538
(WT/DS267/AB/R)

 

We thus turn to the issue raised by the United States’ appeal, that is, whether Article 6.3 and paragraph 7 of Annex 3 of the Agreement on Agriculture are “specific provisions dealing specifically with the same matter” as Article 3.1(b) of the SCM Agreement, namely, subsidies contingent upon the use of domestic over imported goods.

 

A.1.38.5 US — Upland Cotton, para. 542
(WT/DS267/AB/R)

 

… Like the Panel, we do not believe that the scope of paragraph 7 is limited to measures that have an import substitution component in them. There could be other measures covered by paragraph 7 of Annex 3 that do not necessarily have such a component. Indeed, Brazil submits that if the Step 2 payments were provided to United States processors of cotton, regardless of the origin of the cotton, these processors “would still buy at least some U.S. upland cotton, so producers would continue to derive some benefit”. Thus, paragraph 7 of Annex 3 refers more broadly to measures directed at agricultural processors that benefit producers of a basic agricultural product and, contrary to the United States’ assertion, it is not rendered inutile by the Panel’s interpretation. WTO Members may still provide subsidies directed at agricultural processors that benefit producers of a basic agricultural commodity in accordance with the Agreement on Agriculture, as long as such subsidies do not include an import substitution component.

 

A.1.38.6 US — Upland Cotton, para. 545
(WT/DS267/AB/R)

 

Article 6.3 does not authorize subsidies that are contingent on the use of domestic over imported goods. It only provides that a WTO Member shall be considered to be in compliance with its domestic support reduction commitments if its Current Total AMS does not exceed that Member’s annual or final bound commitment level specified in its Schedule. It does not say that compliance with Article 6.3 of the Agreement on Agriculture insulates the subsidy from the prohibition in Article 3.1(b). …

 

A.1.38.7 US — Upland Cotton, para. 546
(WT/DS267/AB/R)

 

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture do not deal specifically with the same matter as Article 3.1(b) of the SCM Agreement, that is, subsidies contingent upon the use of domestic over imported goods.

 

A.1.38.8 US — Upland Cotton, para. 547
(WT/DS267/AB/R)

 

We are mindful that the introductory language of Article 3.1 of the SCM Agreement clarifies that this provision applies “[e]xcept as provided in the Agreement on Agriculture”. Furthermore, as the United States has pointed out, this introductory language applies to both the export subsidy prohibition in paragraph (a) and to the prohibition on import substitution subsidies in paragraph (b) of Article 3.1. As we explained previously, in our review of the provisions of the Agreement on Agriculture [paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture] relied on by the United States, we did not find a provision that deals specifically with subsidies that have an import substitution component. By contrast, the prohibition on the provision of subsidies contingent upon the use of domestic over imported goods in Article 3.1(b) of the SCM Agreement is explicit and clear. Because Article 3.1(b) treats subsidies contingent on the use of domestic over imported products as prohibited subsidies, it would be expected that the drafters would have included an equally explicit and clear provision in the Agreement on Agriculture if they had indeed intended to authorize such prohibited subsidies provided in connection with agricultural goods. We find no provision in the Agreement on Agriculture dealing specifically with subsidies contingent upon the use of domestic over imported agricultural goods.

 

A.1.38.9 US — Upland Cotton, para. 548
(WT/DS267/AB/R)

 

Our approach in this case is consistent with the Appellate Body’s approach in EC — Bananas III. In that case, the European Communities relied on Article 4.1 of the Agreement on Agriculture in arguing that the market access concessions it made for agricultural products pursuant to the Agreement on Agriculture prevailed over Article XIII of the GATT 1994. The Appellate Body, however, found that “[t]here is nothing in Articles 4.1 or 4.2, or in any other article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products”. It further explained that “[i]f the negotiators had intended to permit Members to act inconsistently with Article XIII of the GATT 1994, they would have said so explicitly”. The situation before us is similar. We have found nothing in Article 6.3, paragraph 7 of Annex 3 or anywhere else in the Agreement on Agriculture that “deals specifically” with subsidies that are contingent on the use of domestic over imported agricultural products.

 

A.1.38.10 US — Upland Cotton, para. 549
(WT/DS267/AB/R)

 

We recall that the Agreement on Agriculture and the SCM Agreement “are both Multilateral Agreements on Trade in Goods contained in Annex 1A of the Marrakesh Agreement Establishing the World Trade Organization (the ‘WTO Agreement’), and, as such, are both ‘integral parts’ of the same treaty, the WTO Agreement, that are ‘binding on all Members’ ”. Furthermore, as the Appellate Body has explained, “a treaty interpreter must read all applicable provisions of a treaty in a way that gives meaning to all of them, harmoniously”. We agree with the Panel that “Article 3.1(b) of the SCM Agreement can be read together with the Agreement on Agriculture provisions relating to domestic support in a coherent and consistent manner which gives full and effective meaning to all of their terms”.

 

A.1.38.11 US — Upland Cotton, para. 570
(WT/DS267/AB/R)

 

In previous appeals, the Appellate Body has explained that the WTO-consistency of an export subsidy for agricultural products has to be examined, in the first place, under the Agreement on Agriculture; the examination under the SCM Agreement would follow if necessary. Turning, then, to the Agreement on Agriculture, we note that Article 1(e) of that Agreement defines “export subsidies” as “subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement”.

 

A.1.38.12 US — Upland Cotton, para. 571
(WT/DS267/AB/R)

 

Although an export subsidy granted to agricultural products must be examined, in the first place, under the Agreement on Agriculture, we find it appropriate, as has the Appellate Body in previous disputes, to rely on the SCM Agreement for guidance in interpreting provisions of the Agreement on Agriculture. Thus, we consider the export-contingency requirement in Article 1(e) of the Agreement on Agriculture having regard to that same requirement contained in Article 3.1(a) of the SCM Agreement.

 

A.1.38.13 US — Upland Cotton, paras. 629-630
(WT/DS267/AB/R)

 

… According to the United States, “Article 3 of the SCM Agreement …is subject in its application to Article 21.1 of the Agreement on Agriculture”. The United States then argues that, because “export credit guarantees are not subject to the disciplines of export subsidies for purposes of the Agreement on Agriculture, Article 21.1 of that Agreement renders Article 3.1(a) of the SCM Agreement inapplicable to such measures”. …

 

… Therefore, because it is premised on an incorrect interpretation of Article 10.2 of the Agreement on Agriculture, we reject the United States’ argument. …

 

A.1.38.14 US — Upland Cotton, para. 647
(WT/DS267/AB/R)

 

We agree with the United States that Article 10.3 of the Agreement on Agriculture does not apply to claims brought under the SCM Agreement. However, the Panel did not make the error attributed to it by the United States. The Panel made the statement relied on by the United States in the context of its assessment of the United States’ export credit guarantee programme under the Agreement on Agriculture. Although the Panel made use of the criteria set out in item (j) of the Illustrative List of Export Subsidies annexed to the SCM Agreement (providing these programmes at premium rates inadequate to cover long-term operating costs and losses) it did so as contextual guidance for its analysis under the Agreement on Agriculture, and both the United States and Brazil appear to have agreed with the appropriateness of this approach. Thus, the Panel’s reference to Article 10.3 did not relate to its assessment of the United States’ export credit guarantee programmes under the SCM Agreement.

 

A.1.38.15 EC — Export Subsidies on Sugar, paras. 338-339 and footnote 537
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

 

Turning to the specific case before us, we note that the Complaining Parties argue that their claims under the SCM Agreement are closely related to their claims under the Agreement on Agriculture. We are not persuaded, however, that Articles 3, 8, and 9.1 of the Agreement on Agriculture, on the one hand, and Articles 3.1(a), 3.2, and items (a) and (d) of the Illustrative List of the SCM Agreement, on the other hand, are “closely related”, because the issues presented under the two Agreements are different in several respects.

 

Furthermore, in the instant case, we note that the Panel made reference to the limited arguments made by the Complaining Parties under the SCM Agreement: Although, on appeal, the Complaining Parties did argue their claims under the SCM Agreement to some extent, they did not address, in a sufficient manner, the question whether Article 3 of the SCM Agreement applies to export subsidies listed in Article 9.1 of the Agreement on Agriculture that are provided to scheduled agricultural products in excess of a responding Member’s commitment levels. We believe that, in the light of Article 21 of the Agreement on Agriculture and the chapeau of Article 3 of the SCM Agreement, the question of the applicability of the SCM Agreement to the export subsidies in this dispute raises a number of complex issues.537 We also consider that, in the absence of a full exploration of these issues, completing the analysis might affect the due process rights of the participants.

 

113. Article 9.1(c) of the Agreement on Agriculture may be contrasted with Article 9.1(e) of the Agreement on Agriculture, as well as with Article 1.1(a)(1)(iv) of the SCM Agreement, and items (c), (d), (j), and (k) of the Illustrative List of Export Subsidies (the “Illustrative List”) of the SCM Agreement. In these provisions, some kind of government mandate, direction, or control is an element of a subsidy provided through a third party.     back to text

280. In particular: (i) the measure at issue does not operate on the basis of the transaction value of a shipment, but instead involves a comparison between the lower threshold and a reference price not directly related to that transaction value; (ii) the measure at issue does not operate only to bring the entry price of a shipment up to the level of the lower threshold, but instead ensures that the entry price of wheat and wheat imports will almost always exceed the lower band threshold; and (iii) the lower band thresholds under the measure at issue are fixed as a function of historical international prices rather than domestic market prices.     back to text

225. Even periodic changes may amount to automatic and continuous change in circumstances where those changes are frequent enough to render the resulting duties “inherently variable”.     back to text

777. In this dispute we do not decide whether subsidies paid to textile manufacturers on their purchases of cotton could be regarded as measures directed at “agricultural processors” within the meaning of paragraph 7 of Annex 3.     back to text

537. These issues include, for instance, whether the Agreement on Agriculture contains “specific provisions dealing specifically with the same matter” (Appellate Body Report, US — Upland Cotton, paras. 532-533 (quoting Appellate Body Report, EC — Bananas III, para. 155; and referring to Appellate Body Report, Chile — Price Band System, para. 186)); whether the SCM Agreement applies to the subsidy as a whole, or whether it applies to the subsidy only to the extent that the subsidy exceeds the responding Members’ commitment levels as specified in its Schedule; and whether, in the event the SCM Agreement applies, a panel could make a recommendation to withdraw the subsidy in whole, or whether that recommendation would apply to the subsidy only to the extent that it exceeds the responding Member’s commitment levels.     back to text


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