Dispute Settlement: United States - Subsidies on Upland Cotton

WTO News: Issue No. 127 March 2005

On 6 February 2003, Brazil requested the establishment of a panel to examine the conformity with WTO law of certain US agricultural-support measures to producers, users and exporters of upland cotton (WT/DS267/R). Brazil alleged the inconsistency of these measures with various provisions of the Agreement on Agriculture (AoA), the Agreement on Subsidies and Countervailing Measures (SCM) and the GATT. In its report - which was issued on 8 September 2004 - the panel decided with regard to crucial issues in favour of the applicant and found various support measures and payments to be in violation of obligations under the AoA and SCM. Meanwhile, the US have appealed the panel report. A closer examination of the panel report appears worthwhile, since it comments -at times in a surprising fashion - on some important questions as to the permissibility of agricultural domestic support measures.

Rigid Interpretation of Green Box Requirements Inter alia, the panel remarkably sets forth the inconsistency of US direct payments with green box requirements under Annex 2 AoA, (No. 7.354 ff.). The US claimed that their direct payments (and underlying schemes) to producers of upland cotton represented decoupled income support that fully complies with the criteria in Annex 2:6(b) AoA. This provision states that the amount of support in any given year shall not be related to, or based on, the type or volume of production undertaken in any year after the base period. Although US support schemes contained no programme requirements to produce any particular type or volume of a product, support could be reduced where a producer undertook certain types of production (fruit, vegetables) in a year after the base period.

Hereunto, the panel found that even in the case of such planting flexibility limitations, the amount of payment is related to the production undertaken by the producer after the base period. Therefore, the US direct payments did not fully conform to Annex 2:6(b) AoA. This is the first panel proceeding concerned with the interpretation of green box criteria and the findings appear to construe the requirements of Annex 2 AoA as rather restrictive. With regard to trade liberalisation, one must welcome the panel ruling. However, it will certainly be a cause for grave concern in Brussels, Tokyo and Berne. In the first place, the modification of various support schemes (hitherto considered to be WTO-consistent) could become necessary. The findings would be even more far-reaching, if the Cotton case became the cornerstone for a restrictive application of the green box in the future. Given the great freedom traditionally presumed to be offered by Annex 2, the panel report will surely not facilitate the successful conclusion of the ongoing Doha negotiations.

SCM Provisions as Additional Requirements The section of the report with the probably most explosive content can be found under No. 7.1019 ff. There, the report addresses the question of to what extent domestic support measures that fully comply with the AoA can violate obligations under the SCM. If the Appellate Body (AB) were to affirm the panel's findings as to the relationship between AoA and SCM obligations in the area of domestic support measures, this could have significant consequences to the lawfulness of existing agricultural support programmes and would probably influence the further development of the Doha round.

Specifically, the panel examined subsidies to users and exporters of upland cotton. The right to receive such payments was contingent on the use of domestic upland cotton. Brazil claimed these support measures to be illegal import substitution subsidies following Art. 3.1(b), 3.2 SCM.The US did not contest the import substitution character but strongly challenged the general applicability of Art. 3.1(b) SCM, since the support measures at issue were so-called amber box subsidies that complied entirely with Art. 3, 6, 7, Annex 3 AoA (fulfilment of reduction commitments and inclusion in the AMS calculation). The crucial question was now how SCM obligations correlate with the AoA in the case of domestic support measures that fully meet the terms of the AoA.

The panel held that even if the requirements of the amber box are fully complied with, the obligations under Art. 3.1(b) SCM would run parallel and thus need to be observed. With regard to the specific case, the panel ruled that the support measures violate Art. 3.1(b) SCM. If the report's argumentation can be considered a main determinant for agricultural domestic support with regard to the relationship between the obligations under the AoA and under the SCM, this could have some explosive effects. Support schemes that contain requirements as to the use of domestic raw materials may then prove to be illegal under the SCM.

Potentially Far-Reaching Argumentation of the Panel By underlining the interlocking nature of the SCM and AoA and primarily invoking Art. 21.1 AoA, the panel decided as follows: In principle, the SCM is applicable to agricultural products and the obligations under the SCM run parallel to the AoA provisions. Only in the event, and to the extent, of a conflict between the provisions of the AoA and SCM, the AoA would take precedence. In a footnote - but with a surprisingly clear-cut wording - the panel stressed that the AoA may not necessarily contain provisions that would have the effect of carving out certain domestic support measures from SCM provisions or rendering those disciplines inapplicable to agricultural domestic support. Accordingly, a conflict between AoA and SCM provisions cannot automatically be assumed. It is recalled that the WTO Agreement is rather to be understood as a single undertaking. Consequently, the same measure can be subject to more than one WTO obligation. With regard to the case at hand the panel denied the existence of a conflict. The amber box provisions would not comment on the obligations contained in Art. 3.1(b) SCM (prohibition on import substitution subsidies). According to the panel, the domestic support reduction commitments in the AoA only relate to the object and purpose of imposing quantitative limitations and do not address all of the qualitative aspects of subsidization exhaustively. Art. 3.1(b) SCM comprises some qualitative obligations which are not addressed in the amber box provisions. Therefore, there is no conflict as to the qualitative obligations in Art. 3.1(b) SCM.

An application of the panel's argumentation to all categories of agricultural domestic support (e.g. green and blue box) would require in future cases additional complex examination: Namely, whether the AoA provisions - that contain the requirements for granting a subsidy - deal in fact exhaustively with all potential characteristics of the support measure. If this question is answered negatively, since the SCM comprises qualitative aspects which are not addressed by the AoA provisions, to that extent the existence of a conflict must be denied.

Consequently, the relevant SCM obligations would apply concurrently.

Unresolved Questions

It is difficult to predict the AB's position with regard to the panel's theory of conflict. Although one must appreciate the report because of its implied liberalising effects upon agricultural markets, it leaves a few questions unresolved. The theory of conflict that is developed in the report does not seem to be the one and only interpretation of Art. 21.1 AoA. The mere existence of Art. 13 AoA appears to support the panel's view. However, given the exceptional position of the agricultural sector within the WTO, an absolute primacy of the AoA over the SCM (at least concerning domestic support) may be supposed as well.

Moreover, the report hardly addresses the question of which party bears the burden of proof as to the (non-) existence of a conflict. Concerning the amber box support under consideration, the panel fails to examine thoroughly whether the absence of qualitative aspects could be construed as a tacit assumption that no qualitative requirements need to be met.Finally, the panel report does not pronounce on the questions of how one can determine whether a AoA provision deals exhaustively with all potential characteristics of a support measure, and how to proceed when the AoA does in fact contain qualitative requirements but these requirements are potentially nonexhaustive.

Given the potential impact of the panel report on the WTO-conformity of agricultural domestic support and the various unresolved problems that have been alluded to, the AB's report will be awaited with great interest.

Christian Wurzbacher The author is research associate at the Department of Public International and European Law, University of St. Gallen.St. Gallen (Switzerland), 7 March 2005WTO News: Issue No. 12from the Swiss Institute for International Economics and Applied Economic Research (SIAW-HSG) ISSN 1660-3311 (English ed. online)