back to top

I. Preamble 

A. Text of the Preamble

Members,

 

    Having decided to establish a basis for initiating a process of reform of trade in agriculture in line with the objectives of the negotiations as set out in the Punta del Este Declaration;

 

    Recalling that their long-term objective as agreed at the Mid-Term Review of the Uruguay Round “is to establish a fair and market-oriented agricultural trading system and that a reform process should be initiated through the negotiation of commitments on support and protection and through the establishment of strengthened and more operationally effective GATT rules and disciplines?

 

    Recalling further that “the above-mentioned long-term objective is to provide for substantial progressive reductions in agricultural support and protection sustained over an agreed period of time, resulting in correcting and preventing restrictions and distortions in world agricultural markets?

 

    Committed to achieving specific binding commitments in each of the following areas: market access; domestic support; export competition; and to reaching an agreement on sanitary and phytosanitary issues;

 

    Having agreed that in implementing their commitments on market access, developed country Members would take fully into account the particular needs and conditions of developing country Members by providing for a greater improvement of opportunities and terms of access for agricultural products of particular interest to these Members, including the fullest liberalization of trade in tropical agricultural products as agreed at the Mid-Term Review, and for products of particular importance to the diversification of production from the growing of illicit narcotic crops;

 

    Noting that commitments under the reform programme should be made in an equitable way among all Members, having regard to non-trade concerns, including food security and the need to protect the environment; having regard to the agreement that special and differential treatment for developing countries is an integral element of the negotiations, and taking into account the possible negative effects of the implementation of the reform programme on least-developed and net food-importing developing countries;

B. Interpretation and Application of the Preamble

1.   Panels and the Appellate Body have referred to the Preamble in a number of cases. For example, in EC ?Bananas III the Appellate Body referred to the Preamble in the context of addressing the relationship between the Agreement on Agriculture and Article XIII of the GATT 1994:

“The question remains whether the provisions of the Agreement on Agriculture allow market access concessions on agricultural products to deviate from Article XIII of the GATT 1994. The preamble of the Agreement on Agriculture states that it establishes ‘a basis for initiating a process of reform of trade in agriculture?and that this reform process ‘should be initiated through the negotiation of commitments on support and protection and through the establishment of strengthened and more operationally effective GATT rules and disciplines? 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: ?/p>

 

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.?sup id="fntext-1">(1)

2.   In Canada ?Dairy, the Panel referred to the Preamble and identified the “main purpose?of the Agreement on Agriculture:

“As enunciated in the preamble to the Agreement on Agriculture, the main purpose of the Agreement is to ‘establish a basis for initiating a process of reform of trade in agriculture?in line with, inter alia, the long-term objective of establishing ‘a fair and market-oriented agricultural trading system? This objective is pursued in order ‘to provide for substantial progressive reductions in agricultural support and protection sustained over an agreed period of time, resulting in correcting and preventing restrictions and distortions in world agricultural markets??sup id="fntext-2">(2)

3.   In Canada ?Dairy (Article 21.5 ?New Zealand and US), the Panel considered that Article 9.1(c) “should be read having regard to the object and purpose?of the Agreement on Agriculture, and considered that “the Preamble of the Agreement on Agriculture provides useful guidance to identify the object and purpose of that Agreement? After quoting several recitals from the Preamble, the Panel stated that:

“This language makes clear that the working assumption in agricultural trade is not that of a market free of government intervention. The establishment of a fair and market-oriented agricultural trading system, through progressive reductions in agricultural support and protection, is the long-term objective, and the Agreement on Agriculture has established a ‘basis for initiating the process of reform?aimed at achieving that long-term objective. In the meantime, markets subject to a certain degree of government regulation would appear to be rather the rule in agricultural trade, and regulation-free markets the exception. Claiming that, under Article 9.1(c), the right benchmark to determine whether a ‘payment? exists is the extent to which government has decided to intervene in the market, depending on whether a good is destined by the buyer for export or not, ignores that fundamental economic reality, as reflected in the object and purpose of the Agreement on Agriculture.?sup id="fntext-3">(3)

4.   In Chile ?Price Band System, the Appellate Body recalled the Preamble prior to addressing the specific issues raised under Article 4.2 of the Agreement on Agriculture:

“Before addressing these specific issues appealed by Chile, we recall that the preamble to the Agreement on Agriculture states that an objective of that Agreement is ‘to establish a fair and market-oriented agricultural trading system? and to initiate a reform process ‘through the negotiation of commitments on support and protection and through the establishment of strengthened and more operationally effective GATT rules and disciplines? The preamble further states that, to achieve this objective, it is necessary to provide for reductions in protection, ‘resulting in correcting and preventing restrictions and distortions in world agricultural markets,? through achieving ‘specific binding commitments,?inter alia, in the area of market access.
 

We are certainly aware of the importance of agricultural and primary products to many developing country Members of the WTO. We are mindful also that the significance of trade in such products is reflected in a number of places in the covered agreements, including the Agreement on Agriculture. In the preamble to the Agreement on Agriculture, it is said that developed country Members agreed that, in implementing their commitments on market access, they ‘would take fully into account the particular needs and conditions of developing country Members by providing for a greater improvement of opportunities and terms of access for agricultural products of particular interest to these Members??sup id="fntext-4">(4)

5.   The Panel in Turkey ?Rice explained that:

“The objectives of the Agreement on Agriculture are described in its preamble: ‘to establish a fair and market-oriented agricultural trading system? and to initiate a reform process ‘through the negotiation of commitments on support and protection and through the establishment of strengthened and more operationally effective GATT rules and disciplines? To achieve this objective, the preamble states that it is necessary to provide for reductions in protection, ‘resulting in correcting and preventing restrictions and distortions in world agricultural markets? through achieving ‘specific binding commitments? inter alia, in the area of market access.?sup id="fntext-5">(5)

 

Part I

 

back to top

II. Article 1  

A. Text of Article 1

Article 1: Definition of Terms

In this Agreement, unless the context otherwise requires:

 

(a)   “Aggregate Measurement of Support?and “AMS?mean the annual level of support, expressed in monetary terms, provided for an agricultural product in favour of the producers of the basic agricultural product or non-product-specific support provided in favour of agricultural producers in general, other than support provided under programmes that qualify as exempt from reduction under Annex 2 to this Agreement, which is:

 

(i)   with respect to support provided during the base period, specified in the relevant tables of supporting material incorporated by reference in Part IV of a Member’s Schedule; and

 

(ii)   with respect to support provided during any year of the implementation period and thereafter, calculated in accordance with the provisions of Annex 3 of this Agreement and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule;

 

(b)   “basic agricultural product?in relation to domestic support commitments is defined as the product as close as practicable to the point of first sale as specified in a Member’s Schedule and in the related supporting material;

 

(c)   “budgetary outlays?or “outlays?includes revenue foregone;

 

(d)   “Equivalent Measurement of Support?means the annual level of support, expressed in monetary terms, provided to producers of a basic agricultural product through the application of one or more measures, the calculation of which in accordance with the AMS methodology is impracticable, other than support provided under programmes that qualify as exempt from reduction under Annex 2 to this Agreement, and which is:

 

(i)   with respect to support provided during the base period, specified in the relevant tables of supporting material incorporated by reference in Part IV of a Member’s Schedule; and

 

(ii)   with respect to support provided during any year of the implementation period and thereafter, calculated in accordance with the provisions of Annex 4 of this Agreement and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule;

 

(e)   “export subsidies?refers to subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement;

 

(f)   “implementation period?means the six-year period commencing in the year 1995, except that, for the purposes of Article 13, it means the nine-year period commencing in 1995;

 

(g)   “market access concessions?includes all market access commitments undertaken pursuant to this Agreement;

 

(h)   “Total Aggregate Measurement of Support?and “Total AMS? mean the sum of all domestic support provided in favour of agricultural producers, calculated as the sum of all aggregate measurements of support for basic agricultural products, all non-product-specific aggregate measurements of support and all equivalent measurements of support for agricultural products, and which is:

 

(i)   with respect to support provided during the base period (i.e. the “Base Total AMS? and the maximum support permitted to be provided during any year of the implementation period or thereafter (i.e. the “Annual and Final Bound Commitment Levels?, as specified in Part IV of a Member’s Schedule; and

 

(ii)   with respect to the level of support actually provided during any year of the implementation period and thereafter (i.e. the “Current Total AMS?, calculated in accordance with the provisions of this Agreement, including Article 6, and with the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule;

 

(i)   “year?in paragraph (f) above and in relation to the specific commitments of a Member refers to the calendar, financial or marketing year specified in the Schedule relating to that Member.

B. Interpretation and Application of Article 1

1. Article 1(a)(ii)

(a) AMS

6.   The Panel in Korea ?Various Measures on Beef, in a finding later reversed by the Appellate Body⁽⁶⁾, agreed with the complainants that Korea had provided domestic support to its beef industry in excess of its commitment levels for 1997 and 1998. In its notifications, Korea had determined that its Current AMS for beef was below the de minimis threshold as set out in Article 6.4; as a result, Korea argued, this domestic support item did not have to be included in the calculation of its Current Total AMS. The Panel found that Korea’s calculations in this respect were in error. Korea argued that its calculation was correct, because it was based on the “constituent data and methodology?used in its Schedule, in accordance with Articles 1(a)(ii) and 1(h)(ii) of the Agreement on Agriculture. The Appellate Body, with respect to the calculation of the Current AMS, first recalled the wording of Article 1(a)(ii) of the Agreement on Agriculture which contains the definition of the term “Current AMS? stating:

“To determine whether Korea’s Current AMS for beef exceeds 10 per cent of total value of beef production, we refer again to Article 1(a)(ii) of the Agreement on Agriculture, which defines Current AMS. Under this provision, Current AMS is to be

 

calculated in accordance with the provisions of Annex 3 of this Agreement and taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule; ?(emphasis added)

 

Article 1(a)(ii) contains two express requirements for calculating Current AMS. First, Current AMS is to be ‘calculated in accordance with the provisions of Annex 3 of this Agreement? The ordinary meaning of ‘accordance?is ‘agreement, conformity, harmony?⁽⁷⁾ Thus, Current AMS must be calculated in ‘conformity?with the provisions of Annex 3. Second, Article 1(a)(ii) provides that the calculation of Current AMS is to be made while ‘taking into account the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule.?‘Take into account?is defined as ‘take into consideration, notice?⁽⁸⁾ Thus, when Current AMS is calculated, the ‘constituent data and methodology?in a Member’s Schedule must be ‘taken into account? that is, it must be ‘considered?⁽⁹⁾?sup id="fntext-10">(10)

7.   The Appellate Body then held that Article 1(a)(ii) accorded “higher priority?to the provisions of Annex 3 than to “constituent data and methodology?contained in a Member’s Schedule, but as Korea had no specific “constituent data and methodology?for beef, its Current AMS for beef was to be calculated in accordance with the provisions of Annex 3:

“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?

 

We note, however, that the Panel did not base its reasoning on this apparent hierarchy as between ‘the provisions of Annex 3?and the ‘constituent data and methodology?⁽¹¹⁾ Instead, the Panel considered that where no support was included in the base period calculation for a given product, there is no ‘constituent data or methodology?to refer to, so that the only means available for calculating domestic support is that provided in Annex 3. As beef had not been included in Supporting Table 6 of Korea’s Schedule LX, Part IV, Section I, the Panel concluded that Annex 3 alone is applicable for the purposes of calculating current non-exempt support in respect of Korean beef.

 

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.⁽¹²⁾ 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. We do not believe that the Agreement on Agriculture would sustain such an extrapolation. We, therefore, agree with the Panel that, in this case, Current AMS for beef has to be calculated in accordance with the provisions of Annex 3, and with these provisions alone.?sup id="fntext-13">(13)

8.   In Korea ?Various Measures on Beef, the Panel also held that Korea had miscalculated its Current AMS for beef on the basis of a fixed external reference price for the period 1989?991, rather than the period 1986?8, as set forth in paragraph 9 of Annex 3. Korea argued that its use of the period 1989?991 was justified, because this period was referred to in the constituent data and methodology (used with respect to products other than beef) contained in a table of supporting material incorporated in its Schedule. The Appellate Body agreed with the Panel and recalled its findings referenced in paragraph 7 above:

“The Panel found that in both 1997 and 1998 Korea miscalculated its fixed external reference price, contrary to Article 6 and paragraph 9 of Annex 3, by using a fixed external reference price based on data for 1989?991. Korea justifies this choice by invoking the ‘constituent data and methodology?used in its Supporting Table 6 for all products other than rice, i.e., for barley, soybean, maize (corn) and rape seeds. In Supporting Table 6, all these products use the period 1989?991 for the fixed external reference price.

 

We have already explained above that we share the Panel’s view with respect to Korea’s argument on ‘constituent data and methodology? used in the table of supporting material. We agree with the Panel that, in this case, Current AMS for beef has to be calculated in accordance with Annex 3. According to Annex 3, ‘[t]he fixed external reference price shall be based on the years 1986 to 1988? We, therefore, also agree with the Panel that in calculating the product specific AMS for beef for the years 1997 and 1998, Korea should have used an external reference price based on data for 1986?988, instead of data for 1989?991.?sup id="fntext-14">(14)

(b) “support?/p>

9.   The Panel on US ?Upland Cotton commented regarding “support?

“Disciplines on ‘support?are one of the three pillars of the Agreement on Agriculture, which uses the word ‘support?interchangeably with ‘domestic support? Neither are defined terms, although Articles 3.2, 6.1, 6.3, 7.1 and 7.2(a) clarify their meaning somewhat by referring to ‘support in favour of domestic producers?or ‘domestic support in favour of agricultural producers? ?/p>

 

Annex 3 sets out at great length a methodology for measuring the support granted by those measures which are calculated or can be calculated in an Aggregate Measurement of Support (‘AMS?. Paragraph 1 of Annex 3 lists the following types of support:

 

‘market price support, non-exempt direct payments, or any other subsidy not exempted from the reduction commitment (“other non-exempt policies??/p>

 

The residual type of support in this list refers to any ‘other? subsidy and paragraph 2 refers to ‘subsidies?under paragraph 1. We can also note that the first two types of support in the list are price and income support, which are terms used in paragraph 1 of Article XVI of the GATT 1994 to illustrate the word ‘subsidy? It is clear from all these references that all relevant types of support for the purposes of the Agreement on Agriculture are subsidies.

 

An important feature of the Agreement on Agriculture is that it defines in detail the domestic support measures exempt from reduction commitments, rather than those which are subject to reduction commitments. It is therefore inappropriate to attempt to give an exhaustive definition of ‘support? It is also unnecessary to do so due to the detailed methodology for measuring support contained in the text.?sup id="fntext-15">(15)

(c) Article 1(c)

10.   In Canada ?Dairy, the Appellate Body interpreted “revenue foregone?in relation to scheduled commitments under Article 9.1:

“In terms of [Article 1(c)], ‘revenue foregone?is to be taken into account in determining whether ‘budgetary outlay?commitments, made with respect to export subsidies as listed in Article 9.1, have been exceeded. In our view, the foregoing of revenue usually does not involve a monetary payment.?sup id="fntext-16">(16)

2. Article 1(e)

(a) “subsidies?/p>

11.   In Canada ?Dairy, the Appellate Body recalled its finding in Canada ?Aircraft where it had stated that a subsidy “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?⁽¹⁷⁾

12.   In US ?FSC, the Appellate Body, noting “that the Agreement on Agriculture does not contain a definition of the terms ‘subsidy? or ‘subsidies’”⁽¹⁸⁾, reiterated the approach it followed in Canada ?Dairy as follows:

“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.?sup id="fntext-19">(19)

13.   As regards the definition of a subsidy under the SCM Agreement, see Article 1 of the Chapter on the SCM Agreement.

(b) “contingent upon export performance?/p>

14.   In US ?FSC, the Appellate Body interpreted the requirement of export contingency also with reference to the SCM Agreement, stating that:

“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.?sup id="fntext-20">(20)

15.   The Appellate Body further noted that “provision of subsidies under the FSC measure is dependent or conditional upon either the exportation of ‘export property? or, in the case of services provided before exportation, at the very least, the anticipation of that exportation. For these reasons, we find that the FSC measure involves ‘subsidies contingent upon export performance?under the Agreement on Agriculture.?sup id="fntext-21">(21)

16.   The compliance Panel in US ?FSC found that the statutory provision at issue, “by virtue of the requirement of ‘use outside the United States? involved export subsidies as defined in Article 1(e) of the Agreement on Agriculture for the purposes of Article 10.1 of the Agreement on Agriculture?⁽²²⁾

17.   With respect to the issue of whether the challenged United States export credit guarantee programmes constitute “export subsidies? within the meaning of Article 10.1 of the Agreement on Agriculture, the Panel in US ?Upland Cotton looked to Article 1(e) of the Agreement on Agriculture for guidance before ultimately concluding that it did not see why the concept of “export subsidy?in Article 10.1 of the Agreement on Agriculture should differ from that of the SCM Agreement:

?a href="#article1Ae">Article 1(e) of the Agreement on Agriculture states that the term ‘export subsidies?‘refers to subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement? According to its own terms, and read in conjunction with Article 1(e) of the Agreement on Agriculture, Article 10.1 covers any subsidy contingent on export performance that is not listed in Article 9.1.?sup id="fntext-23">(23)

18.   The compliance Panel in the same dispute also looked to the SCM Agreement:

“The Agreement on Agriculture does not generally define the meaning of the term ‘export subsidies? Article 1(e) of the Agreement provides that export subsidies are ‘subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement? Panels and the Appellate Body have, in interpreting the meaning of ‘export subsidies?in Article 10.1, relied, inter alia, on the relevant provisions of the SCM Agreement (including Articles 1 and 3 and items of the Illustrative List) as ‘context?⁽²⁴⁾ These provisions define what measures constitute, respectively, ‘subsidies? and ‘export subsidies? for the purposes of the SCM Agreement.?sup id="fntext-25">(25)

19.   As regards the concept of export contingency under the SCM Agreement, see Article 3.1(a) of the Chapter on the SCM Agreement.

3. Article 1(h)

20.   In Korea ?Various Measures on Beef, the Panel and the Appellate Body addressed Korea’s argument that its method for calculation of domestic support was justifiable because it was based upon “the constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule? although it was not consistent with the methodology set out in Annex 3 to the Agreement on Agriculture. See paragraphs 6?a href="#8">8 above.

 

back to top

III. Article 2 and Annex 1  

A. Text of Article 2

Article 2: Product Coverage

    This Agreement applies to the products listed in Annex 1 to this Agreement, hereinafter referred to as agricultural products.

B. Text of Annex 1

Annex 1: Product Coverage

1.   This Agreement shall cover the following products:

 

 

2.   The foregoing shall not limit the product coverage of the Agreement on the Application of Sanitary and Phytosanitary Measures.

 

* The product descriptions in round brackets are not necessarily exhaustive

C. Interpretation and Application of Article 2 and Annex 1

21.   In Canada ?Dairy, the Panel referred to Article 2 in finding that the Agreement on Agriculture was applicable in that case:

“Both complainants invoke the Agreement on Agriculture. Article 2 of this agreement provides that it applies to the agricultural products listed in Annex I. The ‘agricultural products?set out in Annex I include the products at issue in this dispute (butter, cheese and ‘other milk products?, all of which fall under HS Chapter 4. We thus find that the Agreement on Agriculture applies to the issue at hand.?sup id="fntext-26">(26)

22.   In Chile ?Price Band System, the Panel noted that:

“[T]he Chilean PBS applies exclusively to agricultural products, as defined in Annex 1 to the Agreement on Agriculture. Consequently, the provisions of the Agreement on Agriculture are applicable to the Chilean PBS.?sup id="fntext-27">(27)

23.   In US ?Upland Cotton, the Panel observed that ?a href="#article2">Article 2 and Annex I of the Agreement on Agriculture set out the product coverage of that agreement; the core distinction between ‘scheduled? and ‘unscheduled?products is rooted in the scheduled commitments under the Agreement on Agriculture?⁽²⁸⁾ The Panel concluded that upland cotton, and the other agricultural products eligible under the export credit guarantee programmes at issue, are products covered by the Agreement on Agriculture.⁽²⁹⁾ The Panel in US ?i> Upland Cotton also referred to Article 2 as relevant context for the purpose of interpreting the term “commodity?in Article 13(b)(ii):

“The word ‘commodity?must be read in the context of Article 2 of the Agreement on Agriculture which provides that the agreement applies to the products listed in Annex 1 to the Agreement. The product coverage of the Agreement is narrower than this dictionary definition, because it covers only agricultural products and not all things of use or value nor all things that are the object of trade nor all raw materials. The product coverage of the Agreement is broader than an agricultural crop because it covers products such as livestock, meat, dairy products and wool. All products within the coverage of the Agreement are covered by the chapeau of paragraph (b) and there is no reason to assume that support to any of them is excluded from the scope of the condition in subparagraph (ii). Therefore, we will treat the word ‘commodity? in this context, as basically synonymous with one of the ‘agricultural products?defined in Article 2 and Annex 1 but it cannot be assumed that any provision which refers to ‘agricultural products? as defined, necessarily applies to a commodity within the meaning of Article 13(b)(ii).?sup id="fntext-30">(30)

24.   In US ?Upland Cotton, the Panel also referred to Article 2 in the context of finding that it could not directly transpose the findings of the panel and Appellate Body in US ?FSC to the case before it:

“The ETI Act of 2000 examined in the US ?FSC (Article 21.5 ?EC) dispute applies in respect of a range of industrial and agricultural products. It therefore applies not only with respect to products falling within the product scope of the Agreement on Agriculture, but also in respect of products outside that scope. By contrast, the measure subject to this particular claim by Brazil is the ETI Act of 2000 in respect of upland cotton only. As we have already noted, upland cotton falls within the product scope of the Agreement on Agriculture.?sup id="fntext-31">(31)

25.   In EC ?Chicken Cuts, the Appellate Body referred to Annex 1 in the context of examining the link between the Harmonized System and the WTO Agreements:

“This close link to the Harmonized System is particularly true for agricultural products.⁽³²⁾ Annex 1 to the Agreement on Agriculture, which forms an integral part of that Agreement, defines the product coverage of that Agreement by reference to headings of the Harmonized System, both at the level of whole chapters and at the four-digit level in respect of specific products. Moreover, it is undisputed that the Uruguay Round tariff negotiations for agricultural products were held on the basis of the Harmonized System and that all WTO Members have followed the Harmonized System in their Schedules to the GATT 1994 with respect to agricultural products.?sup id="fntext-33">(33)

 

Part II

 

back to top

IV. Article 3  

A. Text of Article 3

Article 3: Incorporation of Concessions and Commitments

1.   The domestic support and export subsidy commitments in Part IV of each Member’s Schedule constitute commitments limiting subsidization and are hereby made an integral part of GATT 1994.

 

2.   Subject to the provisions of Article 6, a Member shall not provide support in favour of domestic producers in excess of the commitment levels specified in Section I of Part IV of its Schedule.

 

3.   Subject to the provisions of paragraphs 2(b) and 4 of Article 9, a Member shall 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 commitment levels specified therein and shall not provide such subsidies in respect of any agricultural product not specified in that Section of its Schedule.

B. Interpretation and Application of Article 3

1. Article 3.1

26.   In EC ?Export Subsidies on Sugar, the Appellate Body referred to Article 3.1 in the context of finding that the normal rules of treaty interpretation apply in interpreting export subsidy commitments specified in a Member’s Schedule under the Agreement on Agriculture:

“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.?/p>

 

The applicable rules for interpreting the provisions of the GATT 1994 are the ‘customary rules of interpretation of public international law?⁽³⁴⁾ The Appellate Body has held that these rules are codified in the Vienna Convention on the Law of Treaties⁽³⁵⁾ (the ?i>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.⁽³⁶⁾ Accordingly, these rules apply in interpreting Footnote 1. We note that no participant or third participant in this appeal contests the applicability of these rules in interpreting Footnote 1.?sup id="fntext-37">(37)

27.   In EC ?Export Subsidies on Sugar, the Appellate Body stated that:

“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. This is also clear from the provisions of Article 9.2(a) of the Agreement, which requires adherence by a Member in each year of the implementation period to the budgetary outlay and quantity ‘reduction commitments? as specified in the Member’s Schedule.?sup id="fntext-38">(38)

28.   In EC ?Export Subsidies on Sugar, the Appellate Body also referred to Article 3.1 in the context of clarifying the hierarchy between the Agreement on Agriculture and the export subsidy commitments in a Member’s schedule:

“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. We, therefore, do not agree with the European Communities that ‘there is no hierarchy between the export subsidy commitments in a Member’s schedule and the Agreement on Agriculture.?sup id="fntext-39">(39)

2. Article 3.2

29.   In Korea ?Various Measures on Beef, examining whether Korea’s domestic support to its cattle industry was consistent with Articles 3, 6 and 7 of the Agreement on Agriculture, the Panel stated that:

“It is ?clear that Article 3 provides that support in favour of domestic producers (and here explicit reference is made to ?i>subject to Article 6? cannot exceed the level of support provided for in a Member’s schedule. So, when assessing the WTO compatibility of domestic support, two parameters are indicated: first the provisions of Article 6 which refer to the object of those same ‘commitments?on domestic support; and second, Section I of Part IV of a Member’s schedule.?sup id="fntext-40">(40)

3. Article 3.3

30.   With respect to Members?export subsidy commitments and related waivers, see also paragraph 82 below.

31.   In US ?FSC, the Appellate Body explained the obligations set forth in Article 3.3 by distinguishing two distinct types of “commitments?

“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? This is the commitment for scheduled agricultural products.

?/p>

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. Our interpretation of this term is confirmed by the title of Article 9, which is ?i>Export Subsidy Commitments? Consistently with our reading of that term, Article 9.1 relates both to (1) the commitments made for scheduled agricultural products, under the first clause of Article 3.3, and to (2) the general prohibition, in the second clause of Article 3.3, against providing export subsidies listed in Article 9.1 to unscheduled agricultural products.?sup id="fntext-41">(41)

32.   The Appellate Body in US ?FSC further stated that with regard to unscheduled products, Members are prohibited from providing any export subsidies, while in respect of scheduled agricultural products the “nature of the commitment made under the first clause of Article 3.3 is different?

“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 ?i>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. Thus, with respect to the prohibition against providing subsidies listed in Article 9.1 on unscheduled agricultural products, we believe that the FSC measure involves the application of export subsidies, not listed in Article 9.1, in a manner that, at the very least, ?i>threatens to lead to circumvention?of that ‘export subsidy commitment?in Article 3.3.

 

With respect to scheduled agricultural products, the nature of the commitment made under the first clause of Article 3.3 is different. Members are not subject to a general prohibition against providing export subsidies as listed in Article 9.1; rather, there is a limited authorization for Members to provide such subsidies up to the level of the reduction commitments specified in their Schedule.

?/p>

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.

?/p>

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.?sup id="fntext-42">(42)

33.   In EC ?Export Subsidies on Sugar, the Appellate Body found that Article 3.3 required Members to schedule their export subsidy commitments in terms of both budgetary outlay and quantity commitments levels:

?a href="#article3A3">Article 3.3 does not ?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?⁽⁴³⁾

 

Part III

 

back to top

V. Article 4  

A. Text of Article 4

Article 4: Market Access

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

 

2.   Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties(1), except as otherwise provided for in Article 5 and Annex 5.

 

(footnote original) 1 These measures include quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state-trading enterprises, voluntary export restraints, and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country-specific derogations from the provisions of GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture-specific provisions of GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.

B. Interpretation and Application of Article 4

1. General

(a) Purpose of Article 4

34.   In Chile ?Price Band System, the Appellate Body explained the background of the negotiations which produced the text of Article 4, “which is the main provision of Part III of the Agreement on Agriculture? and indicated that Article 4 “is appropriately viewed as the legal vehicle for requiring the conversion into ordinary customs duties of certain market access barriers affecting imports of agricultural products?

“[W]e 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?⁽⁴⁴⁾ 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.

 

Thus, Article 4 of the Agreement on Agriculture is appropriately viewed as the legal vehicle for requiring the conversion into ordinary customs duties of certain market access barriers affecting imports of agricultural products …”⁽⁴⁵⁾

(b) Notification requirements

35.   With respect to the notification requirements concerning tariff quotas and other quotas, see paragraph 173 below.⁽⁴⁶⁾

2. Article 4.1

36.   In EC ?Bananas III, the Appellate Body upheld the Panel’s finding that Article 4.1 cannot be interpreted so as to allow an inconsistency with GATT Article XIII of the European Communities import scheme for bananas.

3. Article 4.2

(a) “any measures which have been required to be converted into ordinary customs duties?/p>

(i) Interpretation

Ordinary meaning in its context and in light of its object and purpose

37.   In Chile ?Price Band System, the Appellate Body interpreted the ordinary meaning of the phrase “measures which have been required to be converted into ordinary customs duties? in its context and in light of its object and purpose. The Appellate Body first focused on the present perfect tense in that phrase (“have been required? and considered that ?a href="#article4A2">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 that had not been 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? The Appellate Body therefore concluded that this phrase could not be interpreted as limiting the obligation “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?

?a href="#article4A2">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.⁽⁴⁷⁾ 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 by 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.⁽⁴⁸⁾ But, as Chile and Argentina have agreed, this is clearly not so. (footnote omitted) 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.

 

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 ?i>any? and the phrase ?i>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.?sup id="fntext-49">(49)

Footnote 1

38.   The Appellate Body in Chile ?Price Band System referred to the wording of footnote 1 to the Agreement on Agriculture as confirmation of its interpretation of the phrase “measures which have been required to be converted into ordinary customs duties?(see paragraph 37 above):

“The wording of footnote 1 to the Agreement on Agriculture confirms our interpretation. The footnote imparts meaning to Article 4.2 by enumerating examples of ‘measures of the kind which have been required to be converted? and which Members must not maintain, revert to, or resort to, from the date of the entry into force of the WTO Agreement. Specifically, and as both participants agree (footnote omitted), 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. Thus, in our view, the illustrative nature of this list lends support to our interpretation that the measures covered by Article 4.2 are not limited only to those that were actually converted, or were requested to be converted, into ordinary customs duties during the Uruguay Round.

 

Footnote 1 also refers to a residual category of ‘similar border measures other than ordinary customs duties? which indicates that the drafters of the Agreement did not seek to identify all ‘measures which have been required to be converted?during the Uruguay Round negotiations. The existence of this residual category confirms our interpretation that Article 4.2 covers more than merely the measures that had been specifically identified or challenged by other negotiating partners in the course of the Uruguay Round.?sup id="fntext-50">(50)

Article 5 as context for Article 4.2 interpretation

39.   The Appellate Body in Chile ?Price Band System further indicated that the context of Article 4.2 confirms its interpretation (see paragraph 37 above). In this regard, the Appellate Body referred to Article 5.1 as an illustration that the phrase “have been required to be converted?in Article 4.2 is broader in scope than the phrase “have been converted?in Article 5.1:

“[T]he context of Article 4.2 confirms our interpretation. Article 5.1 of the Agreement on Agriculture, the only provision in addition to Article 4 that is included in Part III of that Agreement, specifies that a Member may, under certain conditions, impose a special safeguard on imports of an agricultural product ‘in respect of which measures referred to in [Article 4.2] have been converted into an ordinary customs duty? (emphasis added) In our view, the phrase ‘have been required to be converted?in Article 4.2 has a broader connotation than the phrase ‘have been converted?in Article 5.1.⁽⁵¹⁾ Therefore, it is perfectly apt that Article 5.1 speaks of such special safeguards only with respect to those agricultural products for which measures covered by Article 4.2 ‘have been converted??that is, have in fact already been converted ?into ordinary customs duties. Article 5.1 illustrates that, where the drafters of the Agreement on Agriculture wanted to limit the application of a rule to measures that have actually been converted, they used specific language expressing that limitation.

?/p>

?[T]he 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.⁽⁵²⁾?sup id="fntext-53">(53)

Subsequent practice

40.   In Chile ?Price Band System, Chile had argued that, in interpreting this Article 4.2 phrase, it was “highly relevant?that no country that had a price band system in place before the conclusion of the Uruguay Round had actually converted it into ordinary customs duties. The Appellate Body looked into the possibility that this practice could be considered “subsequent practice?pursuant to Article 31(3)(b) of the Vienna Convention and therefore a practice relevant to the interpretation of Article 4.2. The Appellate Body referred to its definition of “subsequent practice?in its Report in Japan ?Alcoholic Beverages⁽⁵⁴⁾ and noted that neither the Panel record nor the submissions of the parties suggested that there was a discernible pattern of acts or pronouncements implying an agreement among WTO Members on the interpretation of Article 4.2. The Appellate Body thus concluded that this practice of some Members alleged by Chile did not amount to a “subsequent practice?within the meaning of Article 31(3)(b) of the Vienna Convention.⁽⁵⁵⁾

(ii) “converted?/i>

41.   In Chile ?Price Band System, the Appellate Body looked at the meaning of “converted?in the phrase “any measures which have been required to be converted into ordinary customs duties?and concluded, on the basis of the dictionary meanings of “convert?and “converted? that those measures “had to be transformed into something they were not ?namely, ordinary customs duties? In this case, Chile had argued that its price band system was not a measure of the kind which had been required to be converted, but rather a system for determining the level of the resulting ordinary customs duties. The Appellate Body considered that the “mere fact that ?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 href="#article4A2">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?⁽⁵⁶⁾ The word ‘converted? connotes ‘changed in their nature? ‘turned into something different?⁽⁵⁷⁾ 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.?sup id="fntext-58">(58)

(iii) “ordinary customs duties?/i>

42.   In Chile ?Price Band System, the Appellate Body reversed the Panel’s definition of “ordinary customs duty? The Panel had found that “[a]ll “ordinary?customs duties may ?be said to take the form of ad valorem or specific duties (or combinations thereof)?⁽⁵⁹⁾ The Panel further found that the term “ordinary customs duty?has a “normative connotation?⁽⁶⁰⁾ The Appellate Body disagreed:

“We do not agree with the Panel’s reasoning that, necessarily, ‘[a]s a normative matter, ?those scheduled duties always relate to either the value of the imported goods, in the case of ad valorem duties, or the volume of the imported goods, in the case of specific duties.?sup id="fntext-61">(61) (emphasis in original, underlining added) Indeed, the Panel came to this conclusion by interpreting the French and Spanish versions of the term ‘ordinary customs duty?to mean something different from the ordinary meaning of the English version of that term. It is difficult to see how, in doing so, the Panel took into account the rule of interpretation codified in Article 33(4) of the Vienna Convention whereby ‘when a comparison of the authentic texts discloses a difference of meaning ? the meaning which best reconciles the texts ? shall be adopted.?(emphasis added).

 

We also find it difficult to understand how the Panel could find ‘normative? support for its reasoning by examining the Schedules of WTO Members. We have observed in a previous case that ‘[t]he ordinary meaning of the term “concessions?suggests that a Member may yield rights and grant benefits, but it cannot diminish its obligations?⁽⁶²⁾ A Member’s Schedule imposes obligations on the Member who has made the concessions. The Schedule of one Member, and even the scheduling practice of a number of Members, is not relevant in interpreting the meaning of a treaty provision, unless that practice amounts to ‘subsequent practice in the application of the treaty?within the meaning of Article 31(3)(b) of the Vienna Convention.⁽⁶³⁾ In this case the Panel Report contains no support for the conclusion that the scheduling activity of WTO Members amounts to ‘subsequent practice?

 

[N]ot each and every duty that is calculated on the basis of the value and/or volume of imports is necessarily an ‘ordinary customs duty? For example, in the case at hand, the ad valorem duty is calculated on the value of the imports. The calculation of the specific duty resulting from Chile’s price band system is, on the other hand, based, not only on the difference between the lower threshold of the price band and the applicable reference price, but also on the volume per unit of the imports.?sup id="fntext-64">(64)

43.   The Appellate Body in Chile ?Price Band System also disagreed and thus reversed the Panel’s finding 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?⁽⁶⁵⁾

“Surely Members will ordinarily take into account the interests of domestic consumers and domestic producers in setting their applied tariff rates at a certain level. In doing so, they will doubtless take into account factors such as world market prices and domestic price developments. These are exogenous factors, as the Panel used that term. According to the Panel, duties that are calculated on the basis of such exogenous factors are not ordinary customs duties. This would imply that such duties be prohibited under Article II:1(b) of the GATT unless recorded in the ‘other duties or charges? column of a Member’s Schedule. We see no legal basis for such a conclusion.⁽⁶⁶⁾?sup id="fntext-67">(67)

44.   The Appellate Body in Chile ?Price Band System further noted that “in examining Article 4.2 of the Agreement on Agriculture, the second sentence of Article II:1(b) of the GATT 1994, does not specify what form ‘other duties or charges? must take to qualify as such within the meaning of that sentence?

“We further note, in examining Article 4.2 of the Agreement on Agriculture, that the second sentence of Article II:1(b) of the GATT 1994, does not specify what form ‘other duties or charges?must take to qualify as such within the meaning of that sentence. The Panel’s own approach of reviewing Members?Schedules reveals that many, if not most, ‘other duties or charges?are expressed in ad valorem and/or specific terms, which does not, of course, make them ‘ordinary customs duties?under the first sentence of Article II:1(b).?sup id="fntext-68">(68)

45.   The Appellate Body in Chile ?Price Band System pointed to Article II:2 of the GATT 1994 and Annex 5 to the Agreement on Agriculture as contextual support for interpreting the term “ordinary customs duties?

“As context for this phrase in Article 4.2 of the Agreement on Agriculture, we observe that Article II:2 of the GATT 1994 sets out examples of measures that do not qualify as either ‘ordinary customs duties?or ‘other duties or charges? These measures include charges equivalent to internal taxes, anti-dumping and countervailing duties, and fees or other charges commensurate with the cost of services rendered. They too may be based on the value and/or volume of imports, and yet Article II:2 distinguishes them from ‘ordinary customs duties? by providing that ‘[n]othing in [Article II] shall prevent any Member from imposing?them ‘at any time on the importation of any product?

 

Contextual support for interpreting the term ‘ordinary customs duties?also appears in Annex 5 to the Agreement on Agriculture. Annex 5, read together with the Attachment to Annex 5 (?i>Guidelines for the Calculation of Tariff Equivalents for the Specific Purpose Specified in Paragraphs 6 and 10 of this Annex?, contemplates the calculation of ‘tariff equivalents?in a way that would result in ordinary customs duties ‘expressed as ad valorem or specific rates? We do not find an obligation in either of those provisions that would require Members to refrain from basing their duties on what the Panel calls ‘exogenous factors? Rather, all that is required is that ‘ordinary customs duties?be expressed in the form of ?i>ad valorem or specific rates??sup id="fntext-69">(69)

Measure resulting in ordinary customs duties

46.   In Chile ?Price Band System, Argentina had argued before the Panel that Chile’s price band system was a measure “of the kind which has been required to be converted into ordinary customs duties?and which, by the terms of Article 4.2 of the Agreement on Agriculture, Members are required not to maintain. Chile had refuted such an allegation and claimed that the duties resulting from its price band system were “ordinary customs duties?and that its price band system was merely a system for determining the level of those duties and, therefore, consistent with Article 4.2. The Appellate Body agreed with the Panel as regards the inconsistency of Chile’s price band system with Article 4.2 (although not as regards the Panel’s reasoning) and found that “the fact that the duties that result from the application of Chile’s price band system take the same form as ‘ordinary customs duties?does not imply that the underlying measure is consistent with Article 4.2 of the Agreement on Agriculture.?sup id="fntext-70">(70)

(iv) Timing of the obligation

47.   The Appellate Body in Chile ?Price Band System concluded that “the obligation in Article 4.2 not to ‘maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties?applies from the date of the entry into force of the WTO Agreement ?regardless of whether or not a Member converted any such measures into ordinary customs duties before the conclusion of the Uruguay Round?⁽⁷¹⁾

(b) Relation with Article XI of GATT and its Ad Note

48.   The Panel in Korea ?Various Measures on Beef held with respect to a certain practice of the Korean state trading agency for beef imports:

“[W]hen dealing with measures relating to agricultural products which should have been converted into tariffs or tariff-quotas, a violation of Article XI of GATT and its Ad Note relating to state-trading operations would necessarily constitute a violation of Article 4.2 of the Agreement on Agriculture and its footnote which refers to non-tariff measures maintained through state-trading enterprises.?sup id="fntext-72">(72)

(c) Special treatment

49.   With respect to the special treatment in connection with paragraph 2 of Article 4, see Article 5, Section VI below, and Annex 5, Section XXVII below.

4. Footnote 1 to Article 4.2

(a) “quantitative import restrictions?/p>

50.   In Turkey ?Rice the Panel found that Turkey had failed to grant Certificates of Control to import rice outside its tariff rate quota which was characterized as a quantitative import restriction. In its analysis the Panel found a lack of transparency and predictability:

“The Panel recalls that in Chile ?Price Band System, when referring to ‘variable import levies?within the meaning of footnote 1 to Article 4.2, the Appellate Body noted some features that are present in such measures:

 

‘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 ?[A]n 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. [Footnote omitted] This lack of transparency and predictability will also contribute to distorting the prices of imports by impeding the transmission of international prices to the domestic market.?sup id="fntext-73">(73)

 

In the present dispute, the challenged measure does not affect the level of duties, but rather the quantities of product that can enter the Turkish market. We find, however, that the features of ‘lack of transparency and lack of predictability?that result from Turkey’s decision to deny or fail to grant Certificates of Control to import rice outside of the tariff rate quota are similar to those observed by the Appellate Body Report in Chile ?Price Band System. Even without any systematic intention to restrict the importation of rice at a certain level, the lack of transparency and of predictability of Turkey’s issuance of Certificates of Control to import rice is similarly liable to restrict the volume of imports.

 

In conclusion, we consider that there is sufficient evidence regarding the manner in which, from September 2003 and for different periods of time, Turkey has denied or failed to grant Certificates of Control to import rice outside of the tariff rate quota, to characterize this measure as a quantitative import restriction. Through this practice, the Turkish authorities have restricted the importation of rice for periods of time. This conduct can, therefore, be considered as a measure of the kind which have been required to be converted into ordinary customs duties under Article 4.2 of the Agreement on Agriculture.?sup id="fntext-74">(74)

(b) “variable import levies?/p>

51.   In Chile ?Price Band System, the Appellate Body, reversing the Panel’s interpretation of this term⁽⁷⁵⁾, noted that the “WTO Members have not chosen to define [this] ‘term of art?in the Agreement on Agriculture or anywhere else in the WTO Agreement?⁽⁷⁶⁾ The Appellate Body concluded that a variable import duty requires the presence of both a formula causing automatic and continuous variability of duties and additional features that undermine the object and purpose of Article 4 because they include a lack of transparency and a lack of predictability in the level of duties that will result from such measures:

“In examining the ordinary meaning of the term ?i>variable import levies?as it appears in footnote 1, we note that a ‘levy? is a duty, tax, charge, or other exaction usually imposed or raised by legal execution or process.⁽⁷⁷⁾ An ‘import?levy is, of course, a duty assessed upon importation. A levy is ‘variable?when it is ‘liable to vary?⁽⁷⁸⁾ This feature alone, however, is not conclusive as to what constitutes a ‘variable import levy?within the meaning of footnote 1. An ‘ordinary customs duty?could also fit this description. A Member may, fully in accordance with Article II of the GATT 1994, exact a duty upon importation and periodically change the rate at which it applies that duty (provided the changed rates remain below the tariff rates bound in the Member’s Schedule).⁽⁷⁹⁾ This change in the applied rate of duty could be made, for example, through an act of a Member’s legislature or executive at any time. Moreover, it is clear that the term ‘variable import levies?as used in footnote 1 must have a meaning different from ‘ordinary customs duties? because ‘variable import levies?must be converted into ‘ordinary customs duties? Thus, the mere fact that an import duty can be varied cannot, alone, bring that duty within the category of ‘variable import levies? for purposes of footnote 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 ?i>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.

 

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. (footnote omitted) ‘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. ?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. (i) This lack of transparency and predictability will also contribute to distorting the prices of imports by impeding the transmission of international prices to the domestic market.?sup id="fntext-80">(80)

52.   The Appellate Body in Chile ?Price Band System (Article 21.5 ?Argentina), while observing that import levies could be characterized by certain additional features which include a “lack of transparency and a lack of predictability? noted that these features should not be understood as a necessary condition for a measure to be a “variable import levy?

“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.?sup id="fntext-81">(81)

53.   Regarding whether a measure ceases to be similar to a “variable import levy?because it is subject to a tariff cap, see paragraphs 61?a href="#62">62 below.

(c) “minimum import prices?/p>

54.   In Chile ?Price Band System, the Appellate Body, after indicating that 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?and that “no definition has been provided by the drafters of the Agreement on Agriculture? quoted the Panel’s description of “minimum import prices?as follows:

“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.⁽⁸²⁾?/p>

 

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.?sup id="fntext-83">(83) 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.?sup id="fntext-84">(84) (emphasis added)

 

?the participants said they do not object to the Panel’s definition of a ‘minimum import price’…?sup id="fntext-85">(85)

(d) “discretionary import licensing?/p>

55. The Panel in Turkey ?Rice examined the question whether Certificates of Control issued by Turkey were “import licences?and whether the issuance of these certificates constituted “discretionary import licensing? Recalling that the term “import licence?is not defined in the Agreement on Agriculture or elsewhere in the WTO Agreement, and recalling the definition of “import licensing?in the Agreement on Import Licensing Procedures, the Panel noted:

“[N]ot all documents giving the permission to import may be necessarily considered to be ‘import licences? As noted by the parties, the importation process is often a complex procedure during which a number of steps must be completed in order to obtain the permission to import certain products. Throughout this process, governments may require that written documents be obtained and then produced to certify the completion of certain steps and thus the compliance with certain legal requirements, in order to allow the importation of goods and their final entry into the importing market. Each of these steps and documents may serve particular objectives. Strictly speaking, these special documents, when used for purposes such as sanitary and phytosanitary control, customs clearance, payment of taxes or duties, are not to be considered as ‘import licences?

 

?not all practices of ‘import licensing?would be ‘discretionary import licensing? ‘Discretionary?is defined as ‘pertaining to discretion [or] left to discretion? ‘Discretion?can be characterized in turn as the ‘[f]reedom to decide or act as one thinks fit, absolutely or within limits; having one’s own judgement as the sole arbiter?

?/p>

?‘discretionary import licensing??appears as one of the measures in the indicative list of ‘measures of the kind which have been required to be converted into ordinary customs duties? The object and purpose of Article 4 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?sup id="fntext-86">(86), would be undermined if Members could decide, at their discretion, whether or not to grant permission for the importation of a good, or if they could decide, at their discretion, whether or not to grant a document that is indispensable for such importation.

 

This interpretation is consistent with the definition agreed by WTO Members in the context of the Import Licensing Agreement. Article 1.1 of the Import Licensing Agreement and its footnote, when defining import licensing, refer to licensing and ‘other similar administrative procedures? We note in this regard that the footnote to the Annual Questionnaire on import licensing procedures, adopted by the WTO Committee on Import Licensing, indicates that ‘similar procedures?

 

‘[A]re understood to include technical visas, surveillance systems, minimum price arrangements, and other administrative reviews effected as a prior condition for entry of imports.?sup id="fntext-87">(87)?sup id="fntext-88">(88)

56.   Applying this analysis to the measures at issue, the Panel in Turkey ?Rice noted that regarding ‘whether a measure may be characterized as an ‘import licence?or a conduct as an ‘import licensing?practice, the proclaimed objectives of a particular document or requirement are not the main issue to consider in this dispute?and it concluded that “regardless of the purported objectives of the Certificates of Control, the decision to stop granting such documents for periods of time has served as an instrument for administering trade?⁽⁸⁹⁾ The Panel concluded generally:

“[W]ithout necessarily having to articulate a general definition of what constitutes an ‘import licence?or a practice of ‘import licensing? we find that the discretionary use by authorities in an importing country of the concession, or refusal to grant, a particular document which is necessary for the importation of a good, as an instrument to administer trade, in this case can be safely characterized as a practice of ‘discretionary import licensing?under footnote 1 to Article 4.2 of the Agreement on Agriculture.?sup id="fntext-90">(90)

(e) “similar border measures?/p>

(i) Concept of similarity

57.   In Chile ?Price Band System, the Appellate Body agreed with 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 Appellate Body, however, disagreed with the Panel’s emphasis on the degree to which measures share characteristics of a “fundamental?nature.⁽⁹¹⁾ The Appellate Body found that the appropriate approach to determine similarity was to ask “whether two or more things have likeness or resemblance sufficient to be similar to each other? The Appellate Body further considered that, for a measure to be “similar?to a border measure, it must 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?

“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?⁽⁹²⁾ However, in our view, the Panel went unnecessarily far in focusing on the degree to which two measures share characteristics of a ‘fundamental? nature. We see no basis for determining similarity by relying on characteristics of a ‘fundamental?nature. The Panel seems to substitute for the task of defining the term ‘similar?that of defining the term ‘fundamental? This merely complicates matters, because it raises the question of how to distinguish ‘fundamental? characteristics from those of a less than ‘fundamental? nature. 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.

 

?To be ‘similar? Chile’s price band system ?in its specific factual configuration ?must have, to recall the dictionary definitions we mentioned, 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.?sup id="fntext-93">(93)

58.   The Appellate Body in Chile ?Price Band System (Article 21.5 ?Argentina) remarked that when approaching an empirical basis to determine similarity it “should 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? In doing so, the Appellate Body saw no error in the Panel’s analysis which took careful account of the design and structure:

“[I]n 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.⁽⁹⁴⁾

59.   The Appellate Body in Chile ?Price Band System stressed that “any examination of similarity presupposes a comparative analysis? and therefore, “to determine whether a measure is ‘similar?within the meaning of footnote 1, it is necessary to identify with which categories that [measure] must be compared?⁽⁹⁵⁾

60.   The Appellate Body in Chile ?Price Band System (Article 21.5 ?Argentina) further clarified that an examination of “similarity? cannot be made in the abstract:

“We recall that 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.?sup id="fntext-96">(96)

(ii) Relevance of tariff caps in the similarity analysis

61.   In Chile ?Price Band System, Chile had argued that the Panel had failed to take proper account of the fact that the total amount of duties that may be levied as a result of Chile’s price band system was “capped?at the level of the tariff rate of 31.5 per cent ad valorem bound in Chile’s Schedule. The Appellate Body thus considered whether Chile’s price band system ceases to be similar to a “variable import levy?because it is subject to a cap. The Appellate Body concluded:

“[W]e 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.⁽⁹⁷⁾ 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.?sup id="fntext-98">(98)

62.   The Appellate Body in Chile ?Price Band System found support for this view in the context of Article 4.2, including the Guidelines attached to Annex 5 of the Agreement on Agriculture, and Articles II and XI of the GATT 1994.

“The context of Article 4.2 lends support to this interpretation. That context includes the Guidelines for the Calculation of Tariff Equivalents for the Specific Purpose Specified in Paragraph 6 and 10 of this Annex (‘Guidelines?, which are an Attachment to Annex 5 on Special Treatment with respect to Paragraph 2 of Article 4. Both the Attachment and the Annex form part of the Agreement on Agriculture. Paragraph 6 of the Guidelines⁽⁹⁹⁾ envisages that tariff equivalents resulting from conversion of measures within the meaning of Article 4.2 may exceed previous bound rates. This implies that, even if the product to which that measure applied was in fact subject to a tariff binding before the Uruguay Round, conversion of that measure may nevertheless have been required. Therefore, a measure cannot be excluded per se from the scope of Article 4.2 simply because the products to which that measure applies are subject to a tariff binding.

 

Relevant context can also be found in Articles II and XI of the GATT 1994. If Members were free to apply a measure with a ‘cap?? which, in the absence of that ‘cap? would be a prohibited ‘variable import levy??Article 4.2 would, in our view, add little to the longstanding requirements of Articles II:1(b) and XI:1 of the GATT 1947. In fact, Chile concedes that the scope of measures prohibited by Article 4.2 extends beyond the tariffs in excess of bound rates that are prohibited by Article II and the ‘restrictions other than taxes, duties and charges?that are prohibited by Article XI:1. In any event, it is difficult to see why Uruguay Round negotiators would ‘compensate? Members for converting prohibited measures by permitting them to raise tariffs on certain products, while permitting those Members to retain those measures and, at the same time, impose those higher tariffs on those same products. It is not clear why, if this were so, a Member would ever have converted a measure. All that a Member would have had to do to comply with Article 4.2 would have been to adopt a tariff binding ?even at a higher level ?on the products covered by the original measure. Had this been the intention of the Uruguay Round negotiators, there would have been no need to list price-based measures in footnote 1 among the categories of measures prohibited by Article 4.2. The drafters of the Agreement on Agriculture simply could have adopted a requirement that all tariffs on agricultural products be bound.?sup id="fntext-100">(100)

(iii) Common features of border measures

63.   In Chile ?Price Band System, the Appellate Body noted that all border measures listed in the footnote to Article 4.2 have the object and effect of distorting trade:

“[W]e note that all of the border measures listed 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. Moreover, all of these measures have in common also that they disconnect domestic prices from international price developments, and thus impede the transmission of world market prices to the domestic market.?sup id="fntext-101">(101)

(f) “other than ordinary customs duties?/p>

64.   In Chile ?Price Band System (Article 21.5 ?Argentina), the Appellate Body rejected Chile’s contention that the Panel erred in omitting “to undertake a separate and independent analysis of whether the measure at issue is ‘other than ordinary customs duties’”. “Having found that the measure was similar to a variable import levy and to a minimum import price, the Panel could properly conclude from these findings that ‘as such, it is not an ordinary customs duty’”⁽¹⁰²⁾:

“… [W]e 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.?sup id="fntext-103">(103)

(g) Exceptions in Footnote 1

65.   The Panel in India ?Quantitative Restrictions considered a discretionary import licensing regime governing imports of both industrial and agricultural products. India argued that these measures fell within the exception provided in Footnote 1 for “measures maintained under balance-of-payments provisions? The Panel found that the measures violated Article 4.2:

“In paragraph 5.139 above, we found that the measures at issue violate Article XI:1 of the GATT 1994, which is equally applicable to industrialized and agricultural products. In paragraph 5.223 above, we also found that the measures at issue were not justified under Article XVIII:B and violated Article XVIII:11. India did not contest that Article 4.2 was applicable to the agricultural products subject to the measures at issue. We agree with India’s claims that the question of the consistency of India’s import restrictions with Article 4.2 depends on their consistency with Article XVIII:B. We therefore conclude that the Indian restrictions are not ‘measures maintained under balance-of-payments provisions?within the meaning of footnote 1 to Article 4.2 of the Agreement on Agriculture.

 

Since India does not invoke any of the other exceptions contained in the footnote to Article 4.2, we find that the measures at issue violate Article 4.2 of the Agreement on Agriculture.?sup id="fntext-104">(104)

(h) Relation with Article 4.2

66.   The Appellate Body in Chile ?Price Band System referred to the wording of footnote 1 to the Agreement on Agriculture as confirmation of its interpretation⁽¹⁰⁵⁾ of the phrase “measures which have been required to be converted into ordinary customs duties?of Article 4.2. See paragraph 38 above.

5. Relationship with other WTO Agreements

(a) GATT 1994

67.   The Appellate Body in Chile ?Price Band System, in examining the concept of ordinary customs duties under Article 4.2 of the Agreement on Agriculture, referred to Article II:1(b) of the GATT 1994. See paragraphs 41?a href="#45">45 above. The Appellate Body also indicated that if it were to find that Chile’s price band system was inconsistent with Article 4.2 of the Agreement of Agriculture, it would not need to make a separate finding on whether Chile’s price band system also results in a violation of Article II:1(b) of the GATT 1994 to resolve this dispute.⁽¹⁰⁶⁾

 

back to top

VI. Article 5  

A. Text of Article 5

Article 5: Special Safeguard Provisions

1.   Notwithstanding the provisions of paragraph 1(b) of Article II of GATT 1994, any Member may take recourse to the provisions of paragraphs 4 and 5 below in connection with the importation of an agricultural product, in respect of which measures referred to in paragraph 2 of Article 4 of this Agreement have been converted into an ordinary customs duty and which is designated in its Schedule with the symbol “SSG? as being the subject of a concession in respect of which the provisions of this Article may be invoked, if:

 

(a)   the volume of imports of that product entering the customs territory of the Member granting the concession during any year exceeds a trigger level which relates to the existing market access opportunity as set out in paragraph 4; or, but not concurrently:

 

(b)   the price at which imports of that product may enter the customs territory of the Member granting the concession, as determined on the basis of the c.i.f. import price of the shipment concerned expressed in terms of its domestic currency, falls below a trigger price equal to the average 1986 to 1988 reference price(2) for the product concerned.

 

(footnote original) 2 The reference price used to invoke the provisions of this subparagraph shall, in general, be the average c.i.f. unit value of the product concerned, or otherwise shall be an appropriate price in terms of the quality of the product and its stage of processing. It shall, following its initial use, be publicly specified and available to the extent necessary to allow other Members to assess the additional duty that may be levied.

 

2.   Imports under current and minimum access commitments established as part of a concession referred to in paragraph 1 above shall be counted for the purpose of determining the volume of imports required for invoking the provisions of subparagraph 1(a) and paragraph 4, but imports under such commitments shall not be affected by any additional duty imposed under either subparagraph 1(a) and paragraph 4 or subparagraph 1(b) and paragraph 5 below.

 

3.   Any supplies of the product in question which were en route on the basis of a contract settled before the additional duty is imposed under subparagraph 1(a) and paragraph 4 shall be exempted from any such additional duty, provided that they may be counted in the volume of imports of the product in question during the following year for the purposes of triggering the provisions of subparagraph 1(a) in that year.

 

4.   Any additional duty imposed under subparagraph 1(a) shall only be maintained until the end of the year in which it has been imposed, and may only be levied at a level which shall not exceed one third of the level of the ordinary customs duty in effect in the year in which the action is taken. The trigger level shall be set according to the following schedule based on market access opportunities defined as imports as a percentage of the corresponding domestic consumption(3) during the three preceding years for which data are available:

 

(footnote original) 3 Where domestic consumption is not taken into account, the base trigger level under subparagraph 4(a) shall apply.

 

(a)   where such market access opportunities for a product are less than or equal to 10 per cent, the base trigger level shall equal 125 per cent;

 

(b)   where such market access opportunities for a product are greater than 10 per cent but less than or equal to 30 per cent, the base trigger level shall equal 110 per cent;

 

(c)   where such market access opportunities for a product are greater than 30 per cent, the base trigger level shall equal 105 per cent.

 

    In all cases the additional duty may be imposed in any year where the absolute volume of imports of the product concerned entering the customs territory of the Member granting the concession exceeds the sum of (x) the base trigger level set out above multiplied by the average quantity of imports during the three preceding years for which data are available and (y) the absolute volume change in domestic consumption of the product concerned in the most recent year for which data are available compared to the preceding year, provided that the trigger level shall not be less than 105 per cent of the average quantity of imports in (x) above.

 

5.   The additional duty imposed under subparagraph 1(b) shall be set according to the following schedule:

 

(a)   if the difference between the c.i.f. import price of the shipment expressed in terms of the domestic currency (hereinafter referred to as the “import price? and the trigger price as defined under that subparagraph is less than or equal to 10 per cent of the trigger price, no additional duty shall be imposed;

 

(b)   if the difference between the import price and the trigger price (hereinafter referred to as the “difference? is greater than 10 per cent but less than or equal to 40 per cent of the trigger price, the additional duty shall equal 30 per cent of the amount by which the difference exceeds 10 per cent;

 

(c)   if the difference is greater than 40 per cent but less than or equal to 60 per cent of the trigger price, the additional duty shall equal 50 per cent of the amount by which the difference exceeds 40 per cent, plus the additional duty allowed under (b);

 

(d)   if the difference is greater than 60 per cent but less than or equal to 75 per cent, the additional duty shall equal 70 per cent of the amount by which the difference exceeds 60 per cent of the trigger price, plus the additional duties allowed under (b) and (c);

 

(e)   if the difference is greater than 75 per cent of the trigger price, the additional duty shall equal 90 per cent of the amount by which the difference exceeds 75 per cent, plus the additional duties allowed under (b), (c) and (d).

 

6.   For perishable and seasonal products, the conditions set out above shall be applied in such a manner as to take account of the specific characteristics of such products. In particular, shorter time periods under subparagraph 1(a) and paragraph 4 may be used in reference to the corresponding periods in the base period and different reference prices for different periods may be used under subparagraph 1(b).

 

7.   The operation of the special safeguard shall be carried out in a transparent manner. Any Member taking action under subparagraph 1(a) above shall give notice in writing, including relevant data, to the Committee on Agriculture as far in advance as may be practicable and in any event within 10 days of the implementation of such action. In cases where changes in consumption volumes must be allocated to individual tariff lines subject to action under paragraph 4, relevant data shall include the information and methods used to allocate these changes. A Member taking action under paragraph 4 shall afford any interested Members the opportunity to consult with it in respect of the conditions of application of such action. Any Member taking action under subparagraph 1(b) above shall give notice in writing, including relevant data, to the Committee on Agriculture within 10 days of the implementation of the first such action or, for perishable and seasonal products, the first action in any period. Members undertake, as far as practicable, not to take recourse to the provisions of subparagraph 1(b) where the volume of imports of the products concerned are declining. In either case a Member taking such action shall afford any interested Members the opportunity to consult with it in respect of the conditions of application of such action.

 

8.   Where measures are taken in conformity with paragraphs 1 through 7 above, Members undertake not to have recourse, in respect of such measures, to the provisions of paragraphs 1(a) and 3 of Article XIX of GATT 1994 or paragraph 2 of Article 8 of the Agreement on Safeguards.

 

9.   The provisions of this Article shall remain in force for the duration of the reform process as determined under Article 20.

B. Interpretation and Application of Article 5

1. Article 5.1(b)

68.   In EC ?Poultry, Brazil argued that the European Communities had failed to comply with Article 5 of the Agreement on Agriculture in implementing special safeguard measures for imports of poultry meat outside tariff quotas. The Panel found that the phrase in Article 5.1(b) “on the basis of the c.i.f. import price?referred to the c.i.f. price plus import duties. Reversing this finding, the Appellate Body first explored the practical significance of this issue, and then went on to distinguish between entry into the customs territory on the one hand, and entry into the domestic market on the other:

“This dispute has no practical significance if both the c.i.f. import price and the c.i.f. import price plus customs duties fall above or below the trigger price. If both prices are above the trigger price, then additional duties cannot be imposed. And, if both prices fall below the trigger price, then additional duties may be imposed regardless of which definition of the relevant import price is adopted. However, the practical significance of this dispute becomes apparent whenever the trigger price falls between the other two prices, that is, when the trigger price is greater than the c.i.f. import price but smaller than the c.i.f. import price plus customs duties. ?nbsp; [I]f the relevant price is defined as the c.i.f. import price plus customs duties, additional duties may not be imposed since the relevant price is well above the trigger price. If, on the other hand, it is defined as the c.i.f. import price only (that is, without customs duties), additional duties may be imposed because the relevant price is below the trigger price. Thus, to adopt one definition, rather than another, will determine whether or not an importing Member may impose additional safeguard duties.

?/p>

The relevant import price in Article 5.1(b) is described as ‘the price at which imports of that product may enter the customs territory of the Member granting the concession, as determined on the basis of the c.i.f. import price of the shipment concerned? It is noteworthy that the drafters of the Agreement on Agriculture chose to use as the relevant import price the entry price into the customs territory, rather than the entry price into the domestic market. This suggests that they had in mind the point of time just before the entry of the product concerned into the customs territory, and certainly before entry into the domestic market, of the importing Member. The ordinary meaning of these terms in Article 5.1(b) supports the view that the ‘price at which that product may enter the customs territory?of the importing Member should be construed to mean just that ?the price at which the product may enter the customs territory, not the price at which the product may enter the domestic market of the importing Member. And that price is a price that does not include customs duties and internal charges. It is upon entry of a product into the customs territory, but before the product enters the domestic market, that the obligation to pay customs duties and internal charges accrues.?sup id="fntext-107">(107)

69.   The Appellate Body in EC ?Poultry then noted that the Agreement on Agriculture does not define the term “c.i.f. import price? but considered the customary usage of this term in international trade:

?a href="#article5A1b">Article 5.1(b) also states that the relevant import price is to be ‘as determined on the basis of the c.i.f. import price of the shipment concerned? (emphasis added) The Panel interprets this phrase to mean ‘that the market entry price is something that has to be constructed using the c.i.f. price as one of the parameters.?⁽¹⁰⁸⁾ We disagree. In the light of our construction of the preceding phrase ‘the price at which imports of the product may enter the customs territory of the Member granting the concession? we conclude that the phrase ‘as determined on the basis of the c.i.f. import price of the shipment concerned?in Article 5.1(b) refers simply to the c.i.f. price without customs duties and taxes. There is no definition of the term ‘c.i.f. import price?in the Agreement on Agriculture or in any of the other covered agreements. However, in customary usage in international trade, the c.i.f. import price does not include any taxes, customs duties, or other charges that may be imposed on a product by a Member upon entry into its customs territory.⁽¹⁰⁹⁾ We think it significant also that ordinary customs duties are not mentioned as a component of the relevant import price in the text of Article 5.1(b). Article 5.1(b) does not state that the relevant import price is ‘the c.i.f. price plus ordinary customs duties? Accordingly, to read the inclusion of customs duties into the definition of the c.i.f. import price in Article 5.1(b) would require us to read words into the text of that provision that simply are not there.?sup id="fntext-110">(110)

70.   The Appellate Body in EC ?Poultry found support for its finding referenced in paragraph 69 above in the context of Article 5.1(b):

“This reading of the text of Article 5.1(b) is supported by our reading of the context of that provision in accordance with Article 31 of the Vienna Convention, which specifies that the ordinary meaning of the terms of a treaty should be interpreted in their context.

 

We look first to the rest of Article 5.1. In considering when additional special safeguard duties under Article 5.1(b) may be imposed, the relevant import price must be compared with a trigger price. According to Article 5.1 (b), this trigger price is ‘equal to the average 1986 to 1988 reference price for the product concerned? Footnote 2 to Article 5.1(b) states:

 

The reference price used to invoke the provisions of this subparagraph shall, in general, be the average c.i.f. unit value of the product concerned, or otherwise shall be an appropriate price in terms of the quality of the product and its stage of processing. It shall, following its initial use, be publicly specified and available to the extent necessary to allow other Members to assess the additional duty that may be levied.

 

Thus, the reference price with which the relevant price is compared under Article 5.1 does not include ordinary customs duties. It is simply the average c.i.f. import price of the product concerned during the reference period, 1986?988. Given this definition of the reference price, it could not have been the intention of the drafters to compare a c.i.f. price exclusive of customs duties for the reference period with a c.i.f. price inclusive of such duties today.

 

Paragraph 5 of Article 5 is also part of the context of Article 5.1(b). This provision establishes a link between the amount of the additional duty to be imposed and the difference between the c.i.f. import price of the shipment and the trigger price. According to the schedule contained in paragraph 5, when the difference between the c.i.f. import price of the shipment and the trigger price is not greater than 10 per cent, no additional duty shall be imposed. When the difference is greater than 10 per cent, additional duties may be imposed. The amount of the additional safeguard duties increases as the difference in the two prices increases. We see no reference in paragraph 5 to ‘c.i.f. import price plus ordinary customs duties? The price used to determine when the special safeguard may be triggered and the price used to calculate the amount of the additional duties must be one and the same.?⁽¹¹¹⁾

71.   The Appellate Body in EC ?Poultry, after making the findings referenced in paragraphs 68?a href="#70">70 above, considered what it termed two “anomalies?which would arise under the interpretation given to Article 5.1(b) by the Panel:

“Certain anomalies would arise from the interpretation adopted by the majority of the Panel. One of these anomalies was cited in the opinion of the dissenting member of the Panel.⁽¹¹²⁾ If tariffication of non-tariff barriers on a certain product took the form of specific duties that were greater than the trigger price, then an importing Member may never be able to invoke Article 5.1(b). The truth of this observation is evident from the fact that the c.i.f. import price plus customs duties may never fall below the trigger price. This consequence is not limited to the case of specific duties that exceed the trigger price. It could also occur in cases where tariffication takes the form of ad valorem duties. We know that tariffication has resulted in tariffs which are, in a large number of cases, very high. The probability is strong, therefore, that the ad valorem duties could exceed the percentage decrease in the c.i.f. import price by a substantial margin. In such cases, the decrease in the c.i.f. price would have to be very deep before the relevant import price would fall below the trigger price. Thus, the provisions of Article 5.1(b) would not be operational in many cases. It is doubtful that this was intended by the drafters of the ‘Special Safeguard Provisions?

 

Another anomaly that would arise from defining the relevant import price as the c.i.f. import price plus ordinary customs duties would be that the right of Members to invoke the provisions of Article 5.1(b) would depend on the level of tariffs resulting from tariffication. Faced with a certain decline in the c.i.f. price ?say, 20 per cent ?some Members would find themselves in a situation where they could not invoke the price safeguard; others would have the right to do so. The first category would comprise those Members with a relatively high level of tariffied duties; the second would be those with a relatively moderate level. Thus, the rights of Members would ultimately depend on the level of their tariffied duties. It is doubtful, too, that this was intended by the drafters of the ‘Special Safeguard Provisions??sup id="fntext-113">(113)

72.   As a result of the reasoning referenced in paragraphs 68?a href="#71">71 above, the Appellate Body in EC ?Poultry concluded:

“[W]e 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.?sup id="fntext-114">(114)

2. Article 5.5

73.   Regarding Article 5.5, in EC ?Poultry, the Appellate Body examined whether it was permissible for the importing Member to offer the importer a choice between the use of the c.i.f price of the shipment as provided in that provision, and another method of calculation which departs from this principle. Under the relevant regulation, the European Communities calculated a periodic representative price, based, inter alia, in part on prices in third-country markets and prices at various stages of marketing within the European Communities. The Commission, in its determination of the trigger price for the purposes of the special safeguard provision, would use this “representative price? unless the importer specifically requested the use of the c.i.f. price, conditional upon the presentation of certain documents and the lodging of a security by the importer. The Appellate Body held as follows:

“[N]either 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.?sup id="fntext-115">(115)

3. Article 5.7

(a) Notification requirements

74.   With respect to notification requirements concerning the special safeguard provisions, see paragraphs 173?a href="agriculture_02_e.htm#177">177 below.

4. Relation of Article 5 with other articles

75.   The Appellate Body in Chile ?Price Band System (Article 21.5 ?Argentina) identifies Article 5 as an exception to the obligations that Article 4.2 imposes to all WTO Members:

“In the original proceedings, the Appellate Body acknowledged the importance of agricultural products to many developing country Members of the WTO, and the role of special and differential treatment for developing country Members under the Agreement on Agriculture. At the same time, the Appellate Body recognized that the requirements of the Agreement on Agriculture apply to developing country Members except where otherwise provided. 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. Annex 5 exempts developing country Members from these disciplines in specific circumstances. Article 5 specifies that a Member may, under certain conditions, impose a special safeguard on imports of an agricultural product ‘in respect of which measures referred to in [Article 4.2] have been converted into an ordinary customs duty? 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. Because Chile reserved no such right in respect of wheat and wheat flour, Chile cannot avail itself of the mechanism set out in Article 5 for imports of these products.

 

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.⁽¹¹⁶⁾ The establishment of a special safeguard mechanism for developing country Members forms part of the Doha Work Programme on agriculture.⁽¹¹⁷⁾ 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.?sup id="fntext-118">(118)

 

Part IV

 

back to top

VII. Article 6  

A. Text of Article 6

Article 6: Domestic Support Commitments

1.   The domestic support reduction commitments of each Member contained in Part IV of its Schedule shall apply to all of its domestic support measures in favour of agricultural producers with the exception of domestic measures which are not subject to reduction in terms of the criteria set out in this Article and in Annex 2 to this Agreement. The commitments are expressed in terms of Total Aggregate Measurement of Support and “Annual and Final Bound Commitment Levels?

 

2.   In accordance with the Mid-Term Review Agreement that government measures of assistance, whether direct or indirect, to encourage agricultural and rural development are an integral part of the development programmes of developing countries, investment subsidies which are generally available to agriculture in developing country Members and agricultural input subsidies generally available to low-income or resource-poor producers in developing country Members shall be exempt from domestic support reduction commitments that would otherwise be applicable to such measures, as shall domestic support to producers in developing country Members to encourage diversification from growing illicit narcotic crops. Domestic support meeting the criteria of this paragraph shall not be required to be included in a Member’s calculation of its Current Total AMS.

 

3.   A Member shall be considered to be in compliance with its domestic support reduction commitments in any year in which its domestic support in favour of agricultural producers expressed in terms of Current Total AMS does not exceed the corresponding annual or final bound commitment level specified in Part IV of the Member’s Schedule.

 

4.   (a)   A Member shall not be required to include in the calculation of its Current Total AMS and shall not be required to reduce:

 

(i)   product-specific domestic support which would otherwise be required to be included in a Member’s calculation of its Current AMS where such support does not exceed 5 per cent of that Member’s total value of production of a basic agricultural product during the relevant year; and

 

(ii)   non-product-specific domestic support which would otherwise be required to be included in a Member’s calculation of its Current AMS where such support does not exceed 5 per cent of the value of that Member’s total agricultural production.

 

(b)   For developing country Members, the de minimis percentage under this paragraph shall be 10 per cent.

 

5.   (a)   Direct payments under production-limiting programmes shall not be subject to the commitment to reduce domestic support if:

(i)   such payments are based on fixed area and yields; or

 

(ii)   such payments are made on 85 per cent or less of the base level of production; or

 

(iii)   livestock payments are made on a fixed number of head.

 

(b)   The exemption from the reduction commitment for direct payments meeting the above criteria shall be reflected by the exclusion of the value of those direct payments in a Member’s calculation of its Current Total AMS.

B. Interpretation and Application of Article 6

1. Notification requirements

76.   With respect to the notification requirements concerning domestic support, see paragraphs 173?a href="agriculture_02_e.htm#177">177 below.

2. Article 6.2

77.   The “Mid-Term Review Agreement?referred to in paragraph 2 is the package of results adopted by the Uruguay Round Trade Negotiations Committee at its mid-term review held in Montreal on 5? December 1988 and in Geneva on 5? April 1989, also referenced in the second paragraph of the preamble to the Agreement on Agriculture.⁽¹¹⁹⁾

78.   See also Article 13(b) of the Agreement.

3. Article 6.3

79.   In the dispute on US ?Upland Cotton, the Panel and Appellate Body examined the issue of whether Article 3.1(b) of the SCM Agreement is inapplicable to payments that are consistent with a Member’s domestic support reduction commitments under Article 6.3 of the Agreement on Agriculture. The Appellate Body agreed with the Panel that ?a href="#article6A3">Article 6.3 does not provide that compliance with such ‘domestic support reduction commitments?shall necessarily be considered to be in compliance with other applicable WTO obligations. Nor does it contain an explicit textual indication that otherwise prohibited measures are necessarily justified by virtue of compliance with the domestic support reduction commitments.?sup id="fntext-120">(120)

?a href="#article6A3">Article 6.3 does not explicitly refer to import substitution subsidies. 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. Article 3.1(b) of the SCM Agreement prohibits subsidies that are contingent ?that is, ‘conditional? ?on the use of domestic over imported goods.

 

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).?sup id="fntext-121">(121)

 

back to top

VIII. Article 7  

A. Text of Article 7

Article 7: General Disciplines on Domestic Support

1.   Each Member shall ensure that any domestic support measures in favour of agricultural producers which are not subject to reduction commitments because they qualify under the criteria set out in Annex 2 to this Agreement are maintained in conformity therewith.

 

2.   (a)   Any domestic support measure in favour of agricultural producers, including any modification to such measure, and any measure that is subsequently introduced that cannot be shown to satisfy the criteria in Annex 2 to this Agreement or to be exempt from reduction by reason of any other provision of this Agreement shall be included in the Member’s calculation of its Current Total AMS.

 

(b)   Where no Total AMS commitment exists in Part IV of a Member’s Schedule, the Member shall not provide support to agricultural producers in excess of the relevant de minimis level set out in paragraph 4 of Article 6.

B. Interpretation and Application of Article 7

1. Paragraph 2

80.   In Korea ?Various Measures on Beef, the Panel found that Korea’s Current AMS for beef exceeded the de minimis level set out in Article 6.4 and was therefore inconsistent with Article 7.2(a); the Appellate Body reversed this determination as the Panel had used a methodology inconsistent with Article 1(a)(ii) and Annex 3; see paragraphs 6?a href="#7">7 above.

2. Relationship with Annex 2

81.   See the material on Annex 2 below.

 

Part V

 

back to top

IX. Article 8 

A. Text of Article 8

Article 8: Export Competition Commitments

    Each Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in that Member’s Schedule.

B. Interpretation and Application of Article 8

1. Waivers from export subsidy commitments

82.   On 22 October 1997, the General Council decided to grant Hungary a limited waiver from its export subsidy commitments until 31 December 2001, in accordance with Article IX of the WTO Agreement.⁽¹²²⁾

 

back to top

X. Article 9  

A. Text of Article 9

Article 9: Export Subsidy Commitments

1.   The following export subsidies are subject to reduction commitments under this Agreement:

 

(a)   the provision by governments or their agencies of direct subsidies, including payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to a cooperative or other association of such producers, or to a marketing board, contingent on export performance;

 

(b)   the sale or disposal for export by governments or their agencies of non-commercial stocks of agricultural products at a price lower than the comparable price charged for the like product to buyers in the domestic market;

 

(c)   payments on the export of an agricultural product that are financed by virtue of governmental action, whether or not a charge on the public account is involved, including payments that are financed from the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the exported product is derived;

 

(d)   the provision of subsidies to reduce the costs of marketing exports of agricultural products (other than widely available export promotion and advisory services) including handling, upgrading and other processing costs, and the costs of international transport and freight;

 

(e)   internal transport and freight charges on export shipments, provided or mandated by governments, on terms more favourable than for domestic shipments;

 

(f)   subsidies on agricultural products contingent on their incorporation in exported products.

 

2.   (a)   Except as provided in subparagraph (b), the export subsidy commitment levels for each year of the implementation period, as specified in a Member’s Schedule, represent with respect to the export subsidies listed in paragraph 1 of this Article:

 

(i)   in the case of budgetary outlay reduction commitments, the maximum level of expenditure for such subsidies that may be allocated or incurred in that year in respect of the agricultural product, or group of products, concerned; and

 

(ii)   in the case of export quantity reduction commitments, the maximum quantity of an agricultural product, or group of products, in respect of which such export subsidies may be granted in that year.

 

(b)   In any of the second through fifth years of the implementation period, a Member may provide export subsidies listed in paragraph 1 above in a given year in excess of the corresponding annual commitment levels in respect of the products or groups of products specified in Part IV of the Member’s Schedule, provided that:

 

(i)   the cumulative amounts of budgetary outlays for such subsidies, from the beginning of the implementation period through the year in question, does not exceed the cumulative amounts that would have resulted from full compliance with the relevant annual outlay commitment levels specified in the Member’s Schedule by more than 3 percent of the base period level of such budgetary outlays;

 

(ii)   the cumulative quantities exported with the benefit of such export subsidies, from the beginning of the implementation period through the year in question, does not exceed the cumulative quantities that would have resulted from full compliance with the relevant annual quantity commitment levels specified in the Member’s Schedule by more than 1.75 per cent of the base period quantities;

 

(iii)   the total cumulative amounts of budgetary outlays for such export subsidies and the quantities benefiting from such export subsidies over the entire implementation period are no greater than the totals that would have resulted from full compliance with the relevant annual commitment levels specified in the Member’s Schedule; and

 

(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?990 base period levels, respectively. For developing country Members these percentages shall be 76 and 86 per cent, respectively.

 

3.   Commitments relating to limitations on the extension of the scope of export subsidization are as specified in Schedules.

 

4.   During the implementation period, developing country Members shall not be required to undertake commitments in respect of the export subsidies listed in subparagraphs (d) and (e) of paragraph 1 above, provided that these are not applied in a manner that would circumvent reduction commitments.

B. Interpretation and Application of Article 9

1. General

(a) Notification requirements

83.   With respect to notification requirements concerning export subsidies, see paragraphs 173?a href="agriculture_02_e.htm#177">177 below.

2. Article 9.1(a)

(a) “direct subsidies, including payments-in-kind?/p>

84.   The Panel in Canada ?Dairy held that “‘payments-in-kind? are a form of direct subsidy?and that “a determination in the instant matter that ?i>payments-in-kind?exist would also be a determination of the existence of a direct subsidy.?sup id="fntext-123">(123) The Appellate Body disagreed and held, inter alia, that “[w]here 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?

“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.

 

[T]he Panel erred in finding that ‘a determination in the instant matter that ‘payments-in-kind?exist would also be a determination of the existence of a direct subsidy.?The Panel should have considered whether the particular ‘payment-in-kind?that it found existed was a ‘direct subsidy? Instead, because the Panel assumed that a ‘payment-in-kind?is necessarily a ‘direct subsidy? it did not address specifically either the meaning of the term ‘direct subsidies?or the question whether the provision of milk to processors for export under Special Classes 5(d) and 5(e) constitutes ‘direct subsidies??sup id="fntext-124">(124)

(b) “governments or their agencies?/p>

85.   In Canada ?Dairy, the Appellate Body addressed the phrase “governments or their agencies?and upheld the Panel’s finding that the Canadian milk marketing boards at issue were “agencies? of the government:

“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.?sup id="fntext-125">(125)

(c) “contingent on export performance?/p>

86.   In US ?Upland Cotton, the Appellate Body analysed “Step 2?payments to exporters of US upland cotton, which were payable based on proof of export of eligible cotton by the exporter, and agreed with the Panel that these payments were “contingent on export performance?⁽¹²⁶⁾ Consequently the Appellate Body found that these payments were also export-contingent for purposes of Article 3.1(a) of the SCM Agreement.⁽¹²⁷⁾

3. Article 9.1(c)

(a) “payments?/p>

(i) A payment includes a payment-in-kind

87.   In Canada ?Dairy, the Appellate Body interpreted the term “payments?to include a transfer of resources other than money, including a “payment in kind?

“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?⁽¹²⁸⁾ (emphasis added) Similarly, the Shorter Oxford English Dictionary describes a ‘payment?as a ‘sum of money (or other thing) paid?⁽¹²⁹⁾ (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?

 

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 foregone.?sup id="fntext-130">(130)

88.   The Appellate Body in Canada ?Dairy considered that the context of Article 9.1(c) also supported a reading of the word “payments? that covered “payments-in-kind?

“The context of Article 9.1(c) also supports a reading of the word ‘payments?that embraces ‘payments-in-kind? That context includes the other sub-paragraphs of Article 9.1. As the Panel explained, none of the export subsidies listed in Article 9.1 is restricted to grants made solely in money form and several expressly involve subsidies granted in a form other than money.⁽¹³¹⁾ Under Article 9.1(a), ‘payments-in-kind?are specifically included as a form of ‘direct subsidies? Similarly, under Articles 9.1(b), the export subsidy identified may involve the disposal of agricultural goods at less than domestic price. Under Article 9.1(e), the provision of transport services for export shipments at prices lower than the price charged for domestic shipments is also an export subsidy. Thus, each of these three sub-paragraphs of Article 9.1 specifically contemplates that the export subsidy may be granted in a form other than a money payment.

 

The context, in our view, also includes Article 1(c) of the Agreement on Agriculture. In terms of that provision, ‘revenue foregone? is to be taken into account in determining whether ‘budgetary outlay? commitments, made with respect to export subsidies as listed in Article 9.1, have been exceeded. In our view, the foregoing of revenue usually does not involve a monetary payment. Thus, if a restrictive reading of the words ‘payments?were adopted, such that ‘payments?under Article 9.1(c) had to be monetary, no account could be taken, under Article 9.1(c), of ‘revenue foregone? This would, we believe, prevent a proper assessment of the commitments made by WTO Members under Article 9.2, as envisaged by Article 1(c) of the Agreement on Agriculture. We, therefore, prefer a reading of Article 9.1(c) that allows full account to be taken of ‘revenue foregone? The contrary view would, in our opinion, elevate form over substance and permit Members to circumvent the subsidy disciplines set forth in Article 9 of the Agreement on Agriculture.?sup id="fntext-132">(132)

89.   The Appellate Body in Canada ?Dairy acknowledged that Article 9.1(c) did not refer explicitly to “payments-in-kind? unlike other provisions of the Agreement on Agriculture, but held that the purpose of its express inclusion was “to counter any suggestion that the ordinary meaning of the terms ?i>direct subsidies?and ?i>direct payments?does not include ‘payments-in-kind’”:

“It is true, as Canada argues, that Article 9.1(c) does not expressly include ‘payments-in-kind?within its scope, whereas Article 9.1(a) and paragraph 5 of Annex 2 to the Agreement on Agriculture do. However, we do not regard the express inclusion of ‘payments-in-kind?in these two provisions as necessarily implying the exclusion of ‘payments-in-kind?under Article 9.1(c). In Article 9.1(a) and in paragraph 5 of Annex 2, the term ‘payments-in-kind?is used in conjunction with the words ?i>direct subsidies?and ?i>direct payments? respectively. We believe that reference is made to ‘payments-in-kind? in these two provisions to counter any suggestion that the ordinary meaning of the terms ?i>direct subsidies?and ?i>direct payments? does not include ‘payments-in-kind? By contrast, since the ordinary meaning of the word ‘payments?in Article 9.1(c) includes ‘payments-in-kind? there was no need for ‘payments-in-kind?to be expressly provided for. Moreover, if ‘payments-in-kind?are included in the qualified concept of ‘direct payments?under Annex 2, paragraph 5, it would be incongruous to exclude them from the broader concept of ‘payments?in Article 9.1(c).?sup id="fntext-133">(133)

90.   The Appellate Body in Canada ?Dairy consequently agreed with the Panel that the ordinary meaning of the word “payments?in Article 9.1(c) encompassed “payments?in forms other than money, including revenue foregone:

“In our view, the provision of milk at discounted prices to processors for export under Special Classes 5(d) and 5(e) constitutes ‘payments? in a form other than money, within the meaning of Article 9.1(c). If goods or services are supplied to an enterprise, or a group of enterprises, 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. Instead of receiving a monetary payment equal to the revenue foregone, the recipient is paid in the form of goods or services. But, as far as the recipient is concerned, the economic value of the transfer is precisely the same.

 

We, therefore, uphold the Panel’s finding, in paragraph 7.101 of the Panel Report, 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.?sup id="fntext-134">(134) ⁽¹³⁵⁾

(ii) Cross-subsidization as a payment

91.   In EC ?Export Subsidies on Sugar, the Appellate Body examined the EC sugar regime, in which all “C sugar?could not be disposed of in the EC internal market and could only be exported without further processing. The Appellate Body agreed with the Panel that because C sugar “must be exported? then “advantages, payments or subsidies to C sugar, that must be exported, are subsidies ‘on the export?of that product.?sup id="fntext-136">(136) The Appellate Body found that because C sugar “must be exported? “[i]t follows that payments in the form of ‘cross-subsidization?are, by definition, ‘payments?‘on the export’”⁽¹³⁷⁾.

(iii) Benchmark to be applied when assessing payments

92.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) explained the importance of a benchmark when assessing if the measure at issue involves “payments?under Article 9.1(c):

“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.

 

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.⁽¹³⁸⁾

 

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).?sup id="fntext-139">(139)

93.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) rejected the Panel’s suggestion that the domestic market provided the “right benchmark?for the dispute.

“The domestic price in this case is an administered price fixed by the Canadian government as part of the regulatory framework established by it for managing the supply of milk destined for consumption in the domestic market. As with administered prices in general, this price expresses a government policy choice based, not only on economic considerations, but also on other social objectives. The Canadian regulatory framework for managing domestic milk supply, including the establishment of the administered price, is not in dispute in this case. 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 foregone 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.?sup id="fntext-140">(140)

94.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) also rejected an alternative “benchmark?which relied on world market prices.

“The alternative ‘benchmark?which the Panel relied upon to determine whether CEM prices involve ‘payments?was the terms and conditions on which alternative supplies are available to processors on world markets, through IREP.⁽¹⁴¹⁾ In reviewing this benchmark, we recall that, in these proceedings, the standard used to determine whether there are ‘payments?under Article 9.1(c) must be based on the proper value of the milk to the producer, in order to determine whether the producer foregoes a portion of this value. 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.⁽¹⁴²⁾ World market prices do, therefore, provide one possible measure of the value of the milk to the producer.

 

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. There would then be no ‘payments?under Article 9.1(c) of the Agreement on Agriculture and WTO Members could easily defeat the export subsidy commitments that they have undertaken in Article 3 of the Agreement on Agriculture.⁽¹⁴³⁾

 

We do not, therefore, accept that world market prices are an appropriate basis for determining whether sales of CEM by producers involve ‘payments?under Article 9.1 (c) of the Agreement on Agriculture.?sup id="fntext-144">(144)

95.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) indicated that a number of possible measures for assessing the value of milk existed:

“We turn now to determine the appropriate standard for assessing whether sales of CEM by producers involve ‘payments?under Article 9.1(c) of the Agreement on Agriculture. We reiterate that the standard must be objective and based on the value of the milk to the producer.

 

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??sup id="fntext-145">(145)

96.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US II) considered that the average total cost of production benchmark should be an industry-wide average:

“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.?sup id="fntext-146">(146)

97.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US II) agreed with the Panel that certain imputed costs and selling costs should be included in the cost of production benchmark:

“We, therefore, find that the COP standard for determining whether ‘payments?exist, under Article 9.1(c) of the Agreement on Agriculture, includes all monetary and non-monetary economic costs of production, such as the costs of family labour and management, and of owner’s equity.

?/p>

Accordingly, we find that any transport, marketing, and administrative costs are to be included in the COP standard applied under Article 9.1(c), as are any costs of acquiring and retaining quota.?sup id="fntext-147">(147)

(b) “financed by virtue of governmental action?/p>

(i) Meaning of governmental action

98.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) considered the meaning of the term “governmental action?under Article 9.1(c):

“We recall that, in the original proceedings, the role of the government in managing the supply of milk for export was manifest. We stated that:

 

‘[G]overnmental 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?⁽¹⁴⁸⁾ (emphasis added)

 

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.?sup id="fntext-149">(149) 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.?sup id="fntext-150">(150)

(ii) Meaning of “financed?/i>

99.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) considered the meaning of this term under Article 9.1(c):

“[I]t 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.

 

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.⁽¹⁵¹⁾ 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.?sup id="fntext-152">(152)

(iii) Link between governmental action and the financing of payments

100.   When examining the link required between governmental action and the financing of payments under Article 9.1(c), the Panel in Canada ?Dairy (Article 21.5 ?New Zealand and US) considered that governmental action should be “indispensable?to the financing of payments, and “establish[es] the conditions which ensure that the payment ?takes place.?sup id="fntext-153">(153) Further, the Panel indicated that for the “by virtue of?test of Article 9.1(c) to be met “it must be established that a payment would not be financed ?but for governmental action.?sup id="fntext-154">(154) This “but for?standard would be met if the following two requirements were established:

“[T]hat governmental action, de jure or de facto: (i) prevents Canadian milk producers from selling more milk on the regulated domestic market, at a higher price, than to the extent of the quota allocated to them; and (ii) obliges Canadian milk processors to export all milk contracted as lower priced commercial export milk, and, accordingly, penalizes the diversion by processors of milk contracted as commercial export milk to the domestic market. As explained below,⁽¹⁵⁵⁾ only if both those requirements were to be met, governmental action could be said to be indispensable for the transfer of resources to take place: the lower priced commercial export milk would not have been available to Canadian processors for export but for these governmental actions, taken together.?sup id="fntext-156">(156)

101.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) confirmed that mere governmental action would not be sufficient for a finding that an export subsidy existed under Article 9.1(c) and expanded on the meaning of the words “by virtue of?

“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.?sup id="fntext-157">(157) (emphasis added)

102.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) indicated that establishing such a link would be more difficult in cases involving payments-in-kind.

“[T]he 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.?sup id="fntext-158">(158)

103.   Further, the Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US) indicated that it disagreed with the Panel’s findings that governmental action had “oblige[d]?or “drive[n]? producers to sell commercial export milk (“CEM?.⁽¹⁵⁹⁾ However, the Appellate Body did not make any further findings on the meaning of “financed by governmental action?at that stage of the proceedings.

104.   In Canada ?Dairy (Article 21.5 ?New Zealand and US II) the Appellate Body considered the meaning of “financed by government action?in light of the ordinary meaning of the word “financing? but, on the other hand, the fact that Article 9.1(c) expressly states that “payments?need not involve “a charge on the public account? It summed up as follows:

“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??sup id="fntext-160">(160)

105.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US II) considered the fact of the dispute and agreed with the Panel that a significant percentage of producers were likely to finance sales of commercial export milk (“CEM? at below the costs of production as a result of participation in the domestic market and, further, that payments made through the supply of CEM at below the costs of production were financed by virtue of “governmental action? within the meaning of Article 9.1(c) of the Agreement on Agriculture:

“It falls now to consider the role of the Canadian government in financing payments made on the sale of CEM. 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. [footnote omitted] 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. [footnote omitted]

 

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 covers their fixed costs in the domestic market and, as a result, has the resources profitably to sell export milk at prices that are below the costs of production.?sup id="fntext-161">(161)

106.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US II) dismissed an objection 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?⁽¹⁶²⁾ 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.?sup id="fntext-163">(163)

107.   The Appellate Body in Canada ?Dairy (Article 21.5 ?New Zealand and US II) considered that the “payments?at issue were not financed “by virtue of?another form of governmental action in the dispute, which was an exemption for processors from paying the higher domestic price for milk when they purchased commercial export milk:

“We do not believe that this action influences the ‘financing? of payments by the producer. Certainly, this action explains why the processor of CEM is not required to pay the higher domestic price for CEM. However, the mere fact that the processor is not obliged to buy CEM at the domestic price does not demonstrate a link between this exemption and the financing of payments by the producer on the sale of CEM. The exemption is, in short, not linked to the mechanism by which the producer funds the payments.?sup id="fntext-164">(164)

4. Article 9.1(d)

(a) “costs of marketing?/p>

108.   In US ?FSC, the measure at issue provided an income tax credit (directly reducing income tax liability for certain US corporations), provided, inter alia, that these corporations incurred a certain portion of their marketing expenses abroad. The Panel found that the United States?measure constituted a subsidy to “reduce the costs of marketing exports? within the meaning of paragraph 1(d).⁽¹⁶⁵⁾ The Appellate Body disagreed and held, inter alia, that “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?⁽¹⁶⁶⁾ The Appellate Body ultimately concluded that “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?

“We turn, first, to the word ‘marketing?in Article 9.1(d), which is at the heart of the phrase ‘to reduce the costs of marketing exports?in Article 9.1(d). Taken alone, that word can have, as the Panel indicated, a range of meanings. The Panel noted the Webster’s Dictionary meaning, according to which ‘marketing?is the ‘aggregate of functions involved in transferring title and in moving goods from producer to consumer including among others buying, selling, storing, transporting, standardizing, financing, risk bearing and supplying market information? ?The New Shorter Oxford Dictionary provides a similar meaning: ‘The action, business, or process of promoting and selling a product …’. However, we must look beyond dictionary meanings, because, as we have said before, ‘dictionary meanings leave many interpretive questions open.?/p>

 

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.

?/p>

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.?sup id="fntext-167">(167)

5. Article 9.2

109.   The Appellate Body in EC ?Export Subsidies on Sugar found that “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 [budgetary outlays and quantity commitment levels] must be specified in a Member’s Schedule in respect of any export subsidy listed in Article 9.1.?sup id="fntext-168">(168) The Appellate Body further found “contextual support for the above interpretation in Article 9.2(b)(iv)?

“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.?sup id="fntext-169">(169)

 

back to top

XI . Article 10  

A. Text of Article 10

Article 10: Prevention of Circumvention of Export Subsidy Commitments

1.   Export subsidies not listed in paragraph 1 of Article 9 shall not be applied 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.

 

2.   Members undertake to work toward the development of internationally agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes and, after agreement on such disciplines, to provide export credits, export credit guarantees or insurance programmes only in conformity therewith.

 

3.   Any Member which claims that any quantity exported in excess of a reduction commitment level is not subsidized must establish that no export subsidy, whether listed in Article 9 or not, has been granted in respect of the quantity of exports in question.

 

4.   Members donors of international food aid shall ensure:

 

(a)   that the provision of international food aid is not tied directly or indirectly to commercial exports of agricultural products to recipient countries;

 

(b)   that international food aid transactions, including bilateral food aid which is monetized, shall be carried out in accordance with the FAO “Principles of Surplus Disposal and Consultative Obligations? including, where appropriate, the system of Usual Marketing Requirements (UMRs); and

 

(c)   that such aid shall be provided to the extent possible in fully grant form or on terms no less concessional than those provided for in Article IV of the Food Aid Convention 1986.

B. Interpretation and Application of Article 10

1. Article 10.1

(a) Export subsidy commitments

110.   In US ?FSC, the Appellate Body interpreted the term “export subsidy commitments?to have “a wider reach [than reduction commitments] that covers commitments and obligations relating to both scheduled and unscheduled agricultural products?

“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.

?/p>

We also find support for this interpretation of the term ‘export subsidy commitments?in Article 10 itself, which draws a distinction, in sub-paragraphs 1 and 3, between ‘export subsidy commitments?and ?i>reduction commitment levels? In our view, the terms ‘export subsidy commitments?and ‘reduction commitments?have different meanings. ?i>Reduction commitments?is a narrower term than ‘export subsidy commitments?and refers only to commitments made, under the first clause of Article 3.3, with respect to scheduled agricultural products. It is only with respect to scheduled products that Members have undertaken, under Article 9.2(b)(iv) of the Agreement on Agriculture, to reduce the level of export subsidies, as listed in Article 9.1, during the implementation period of the Agreement on Agriculture. The term ‘export subsidy commitments?has a wider reach that covers commitments and obligations relating to both scheduled and unscheduled agricultural products.?sup id="fntext-170">(170)

(b) “export subsidies not listed in paragraph 1 of Article 9?/p>

111.   The Appellate Body in US ?FSC and the Panel in US ?Upland Cotton both applied the interpretation of export contingency under the SCM Agreement to the interpretation of export contingency under the Agreement on Agriculture; see paragraphs 14?a href="#18">18 above, under Article 1(e).

(c) “applied in a manner which results in, or which threatens to lead to circumvention?/p>

(i) Threat of circumvention

112.   In US ?FSC, the Appellate Body examined the measures at issue in relation to Article 10.1:

“We turn next to whether the subsidies under the FSC measure are ‘applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments? (emphasis added) 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. We note, moreover, 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??sup id="fntext-171">(171)

113.   In US ?Upland Cotton, the Appellate Body rejected an argument that the concept of “threat?in Article 10.1 of the Agreement of Agriculture obliges Members to take affirmative, precautionary steps to prevent circumvention:

“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.?sup id="fntext-172">(172)

(ii) Relevance of a measure’s structure and characteristics in respect of “threat of circumvention?/i>

114.   In US ?FSC, the Appellate Body pointed out the relevance of the structure and characteristics of the tax measure at issue, in relation to Article 10.1:

“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.?sup id="fntext-173">(173)

115.   In US ?Upland Cotton, the Appellate Body explained that its findings in US ?FSC were not intended to imply that a “threat?of circumvention requires an unconditional legal entitlement to receive an export subsidy:

“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.?sup id="fntext-174">(174)

(iii) Difference in nature of “circumvention?in respect of scheduled and unscheduled products

116.   In US ?FSC, the Appellate Body pointed out that the nature of “circumvention?of export subsidy commitments may differ depending on whether the measure at issue applies to scheduled or unscheduled products:

“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.

 

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. However, as we have seen, the FSC measure allows for the provision of an unlimited amount of FSC subsidies, and scheduled agricultural products may, therefore, benefit from those subsidies when the reduction commitment levels specified in the United States? Schedule for those agricultural products have been reached. 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.?sup id="fntext-175">(175)

117.   The Panel in US ?FSC (Article 21.5 ?EC) found that the legislation at issue contained subsidies contingent on export performance under Article 1(e) of the Agreement on Agriculture. The Panel found that the United States had acted inconsistently with Article 10.1 by “applying the export subsidies, with respect to both scheduled and unscheduled agricultural products, in a manner that, at the very least, threaten[ed] to circumvent its export subsidy commitments under Article 3.3 of the Agreement on Agriculture?

“Turning to the issue of whether the export subsidies are ‘applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments?within the meaning of Article 10.1 of the Agreement on Agriculture, we derive guidance from the approach of the Appellate Body in the original dispute and consider the structure and other characteristics of the measure.⁽¹⁷⁶⁾ We recall that the term ‘export subsidy commitments? defining the obligations that are to be protected under Article 10.1 of the Agreement on Agriculture, ‘… covers commitments and obligations relating to both scheduled and unscheduled agricultural products?⁽¹⁷⁷⁾

 

We note that the Act creates a legal entitlement for recipients to receive export subsidies, not listed in Article 9.1⁽¹⁷⁸⁾, with respect to both scheduled and unscheduled agricultural products. Upon fulfilment by the taxpayer of the conditions stipulated in the Act, the United States government must provide the tax exclusion. As there is no limitation on the amount of extra-territorial income, and thus on the amount of qualifying foreign trade income, that may be claimed in respect of eligible transactions, the amount of export subsidies is unqualified.⁽¹⁷⁹⁾

 

Thus, with respect to unscheduled agricultural products, we believe that the Act involves the application of export subsidies, not listed in Article 9.1, in a manner that, at the very least, ‘threatens to lead to circumvention?of that ‘export subsidy commitment?in Article 3.3.

 

With respect to scheduled agricultural products, we observe that the measure allows for the provision of an unlimited amount of subsidies, and scheduled agricultural products may, therefore, benefit from those subsidies even after the reduction commitment levels specified in the United States?Schedule for those agricultural products have been reached. Thus, we find that the Act is applied in a manner that, at the very least, threatens to lead to circumvention of the export subsidy commitments made by the United States, under the first clause of Article 3.3, with respect to scheduled agricultural products.⁽¹⁸⁰⁾

 

We note that, in these proceedings, the United States does not contest that, if the measure gives rise to subsidies contingent upon export performance under the Agreement on Agriculture, then these subsidies would violate its obligations under Articles 10.1 and 8 of the Agreement on Agriculture.

 

We therefore conclude that the United States has acted inconsistently with its obligations under Article 10.1 of the Agreement on Agriculture by applying the export subsidies, with respect to both scheduled and unscheduled agricultural products, in a manner that, at the very least, threatens to circumvent its export subsidy commitments under Article 3.3 of the Agreement on Agriculture. Furthermore, by acting inconsistently with Article 10.1, the United States has acted inconsistently with its obligation under Article 8 of the Agreement on Agriculture ‘not to provide export subsidies otherwise than in conformity with this Agreement …’.?sup id="fntext-181">(181)

2. Article 10.2

(a) Work in the WTO on development of disciplines on export credits pursuant to Article 10.2

118.   At its meeting of 18 October 2000, the General Council agreed to instruct the Committee on Agriculture to include an item on the implementation of Article 10.2 in the agenda for the Committee’s regular meetings.⁽¹⁸²⁾

“In paragraph 4 of the NFIDC Decision (see below), Ministers agreed ‘to ensure that any agreement relating to agricultural export credits makes appropriate provision for differential treatment in favour of least-developed and net food-importing developing countries.?The Singapore Ministerial Declaration provided that paragraph 4 would ‘be taken fully into account in the agreement to be negotiated on agricultural export credits.?sup id="fntext-183">(183) The General Council further endorsed this objective in relation to work on export credits under Article 10.2, at its meeting on 18 October 2000.?sup id="fntext-184">(184)

119.   At the Doha Ministerial Meeting, Members approved the following recommendations, which had been submitted to the Committee on Agriculture for its consideration:

“a)   That the focus of the work in the regular Committee meetings would be on the implementation of Article 10.2 and the disciplines foreseen therein, whereas the Special Session negotiations would focus on the proposals tabled or to be tabled on export credit practices;

 

b)   that, without prejudice to further work to be undertaken in the regular meetings of the Committee as provided for in subparagraph (I) above, in the event that a Sector Understanding on agricultural export credits is concluded at the OECD, the Committee would, as envisaged in the report of the Committee on Agriculture to the Singapore WTO Ministerial (G/L/131, paragraph 11), consider how any such understanding could be multilateralized within the framework of the Agreement on Agriculture and how the provisions of paragraph 4 of the Marrakesh NFIDC Decision have been taken into account; and

 

c)   that the Committee on Agriculture should submit a report to the General Council on this subject following its regular September 2002 meeting.⁽¹⁸⁵⁾?/p>

120.   The Committee on Agriculture has pursued its work on the implementation of Article 10.2 and of the related provisions of the Marrakesh NFIDC Decision on the basis of the foregoing recommendation. The Committee’s work is reflected in its reports to the General Council contained in G/AG/16 (2003) and G/AG/16/Add.1 (2006).

121.   On 1 August 2004, the General Council adopted a Framework for Establishing Modalities in Agriculture.⁽¹⁸⁶⁾

122.   In December 2005, the Hong Kong Declaration reaffirmed Members? commitment to the development of internationally-agreed disciplines for export credits.⁽¹⁸⁷⁾

123.   Revised Draft Modalities for Agriculture were circulated in December 2008.⁽¹⁸⁸⁾

(b) Application of Article 10.1 to export credit guarantees, export credits or insurance programmes

124.   In US ?Upland Cotton the Appellate Body upheld the Panel’s finding that Article 10.2 of the Agreement on Agriculture does not exempt or “carve out?export credit guarantees from the export subsidy disciplines in Article 10.1 of that agreement.⁽¹⁸⁹⁾

“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]ot with-standing 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.

 

Moreover, as the Panel explained, Article 10.2 ‘contrasts starkly with the text of other provisions in the covered agreements, which clearly carve out or exempt certain products or measures from certain obligations that would otherwise apply pending the development of further multilateral disciplines? The Panel referred to Article 6.1(a) and the footnote 24 to Article 8.2(a) of the SCM Agreement and Article XIII of the General Agreement on Trade in Services, which expressly indicate that existing disciplines do not apply pending the negotiation of future disciplines. However, Article 10.2 does not expressly exclude the application of the existing disciplines in the Agreement on Agriculture until such time as the specific disciplines on export credits, export credit guarantees and insurance programmes are internationally agreed upon.

 

The Panel rejected the United States?submission that Brazil’s approach would render Article 10.2 irrelevant. In the Panel’s view, ‘the purpose of any eventual disciplines could be further to facilitate the determination of when export credit guarantee programmes in respect of agricultural products constitute export subsidies per se by developing and refining existing disciplines? Put another way, ‘the work envisaged in Article 10.2 would presumably elaborate further and more specific disciplines that could facilitate identification of the extent to which such export credit guarantee programmes constitute export subsidies, or to what extent export credit guarantee programmes are not permitted? The use of the term ‘development? in Article 10.2 is consistent with this view. The definitions of the term ‘development?include: ‘[t]he action or process of developing; evolution, growth, maturation; ?a gradual unfolding, a fuller working-out?and ‘[a] developed form or product ?an addition, an elaboration? This suggests that the disciplines to be internationally agreed will be an elaboration of the export subsidy disciplines that are currently applicable.

 

This interpretation is consistent with the reference in Article 10.2 to internationally agreed disciplines ‘to govern the provision of? export credits, export credit guarantees or insurance programmes; alternatively, Article 10.2 could have referred to internationally agreed disciplines ‘to govern?export credits, export credit guarantees or insurance programmes. The latter formulation (‘to govern? would have been broader in scope, whereas the formulation used in Article 10.2 (‘to govern the provision? is narrower. If the drafters had intended that currently no disciplines at all would apply to export credit guarantees, export credits and insurance programmes, it would have made more sense for them to have chosen the broader formulation ‘to govern? The drafter’s choice of the narrower formulation ‘to govern the provision of?suggests that export credit guarantees, export credits and insurance programmes are not ‘undisciplined? in all respects, and that the disciplines to be developed have to do only with their provision. In other words, export credit guarantees, export credits and insurance programmes are governed by Article 10.1 of the Agreement on Agriculture, but WTO Members will develop specific disciplines on the provision of these instruments.?sup id="fntext-190">(190)

125.   In US ?Upland Cotton, the Appellate Body found further support for this reading of Article 10.2 in its context in light of the object and purpose of the Agreement on Agriculture:

“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? The United States and Brazil agreed that export credit guarantees are not listed in Article 9.1. 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.?sup id="fntext-191">(191)

3. Article 10.3

(a) Partial reversal of burden of proof

126.   In Canada ?Dairy (Article 21.5 ?New Zealand and US II), the Appellate Body explained that Article 10.3 provides a special rule for proof of export subsidies that applies in certain disputes under Articles 3, 8, 9 and 10. Article 10.3 partially reverses the usual rules on burden of proof as follows:

“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.

 

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.

 

Consistent with the usual rules on burden of proof, it is for the complaining Member to prove the first part of the claim, namely that the responding Member has exported an agricultural product in quantities that exceed the responding Member’s quantity commitment level.

 

If the complaining Member succeeds in proving the quantitative part of the claim, and the responding Member contests the export subsidization aspect of the claim, then, under Article 10.3, the responding Member ?i>must establish that no export subsidy ?has been granted?in respect of the excess quantity exported.?(emphasis added)?

?/p>

“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.?sup id="fntext-192">(192)

(b) Limitation in scope to scheduled products

127.   In US ?FSC, the Panel found that Article 10.3 does not apply in respect of unscheduled products.⁽¹⁹³⁾

128.   In US ?Upland Cotton, the Appellate Body also reasoned that Article 10.3 only applies to scheduled products, not unscheduled products:

“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.?sup id="fntext-194">(194)

4. Article 10.4: International food aid

(a) Relationship between Articles 10.4 and 10.1

129.   In US ?Upland Cotton, the Appellate Body remarked that “each paragraph in Article 10 pursues [the] aim?of “Prevention of Circumvention of Export Subsidy Commitments?and that ?a href="#article10A4">Article 10.4 provides disciplines to prevent WTO Members from circumventing their export subsidy commitments through food aid transactions?⁽¹⁹⁵⁾ The Appellate Body commented further:

“… 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. ?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, ?a href="#article10A4">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 Article 10.1 and 10.4.?sup id="fntext-196">(196)

(b) International food aid

130.   Regarding international food aid, see Article 16 and paragraphs 3(i) and (ii) of the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food-Importing Developing Countries (the “NFIDC Decision?. See also the material under Article 16 and starting at paragraph 215 below.

131.   The Food Aid Convention 1986 was replaced by the Food Aid Convention 1999, a separate legal instrument under the International Grains Agreement, administered by the Food Aid Committee utilizing the services of the Secretariat of the International Grains Council. The Food Aid Convention was adopted under the auspices of the United Nations on 24 March 1999, and entered into force provisionally on 1 July 1999 for an initial duration of three years; the Food Aid Committee has extended the Convention several times pending the outcome of the Doha negotiations on agriculture. In December 2010, the Food Aid Committee agreed to begin the formal process of renegotiating the Convention.⁽¹⁹⁷⁾