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WTO disputes

European Communities – Export Subsidies on Sugar - WT/DS 265

Responses by Australia to questions from the panel

First substantive meeting of the panel 30 March – 1 April 2004

21 April 2004

QUESTION 1

Please elaborate your views on the applicability of the SCM Agreement to this case. On the basis of the principle of judicial economy, if remedies are available under the Agreement on Agriculture, what would be the basis for invoking remedies under the SCM Agreement?

(a) Is the application of Article 4.7 of the SCM Agreement the main reason for the complainants to invoke the SCM Agreement?

(b) How do you reconcile the specific remedies provided for in the SCM Agreement with those provided for in Article 19 of the Agreement on Agriculture (including the DSU which is referred to)?

(c) If a measure violates both the SCM Agreement and the Agreement on Agriculture, which specific recommendation - Article 19.1 of the DSU or Article 4.7 of the SCM Agreement - is a panel entitled to make in light of Article 21.1 of the Agreement on Agriculture?

Australia considers that it is open to the Panel to find the same measure inconsistent with both the provisions of the SCM Agreement and of the Agriculture Agreement. In support of this position, Australia refers to US-FSC jurisprudence, in which the Appellate Body found the FSC measure inconsistent with both Agreements and the revised ETI measure also to be inconsistent with both Agreements.

The relevant provisions of the SCM and the Agriculture Agreement need to be read in context and need to give meaning to the intent of the negotiators to integrate – at least partially - export subsidies into the SCM Agreement. A distinction can be made with the relevant provisions of the Tokyo Round Subsidies Code, which provided for two distinct sets of disciplines between export subsidies on non-primary and primary products (Articles 9 and 10 of the Subsidies Code).

The chapeau to Article 3 of the SCM, read together with Article 21.1 of the Agriculture Agreement, provides a special exception for those export subsidies provided in conformity with the Agriculture Agreement, that is: (a) Article 9.1 listed export subsidies subjected to reduction commitments; (b) Article 9.1 listed export subsidies on scheduled products that are not in excess of the budgetary outlay and quantity commitments specified in the Schedule; and (c) fulfilment of the individual undertaking of each Member in accordance with Article 8 of that Agreement.

In regard to the specific questions:

(a) Australia has made a claim under the SCM Agreement because it believes that the EC is acting inconsistently with the provisions of that Agreement. If the EC is found to be acting inconsistently, the remedy would follow.

The provisions of Article 3 of the SCM are not limited to remedies.

The provisions of Article 3 of the SCM constitute an absolute prohibition. Article 3.1 of the SCM prohibits subsidies contingent on export performance. Article 3.2 prohibits the granting or maintaining of such measures. Implementation can only be effected by elimination of the export subsidies in question.

(b) There is no inherent inconsistency between the specific remedies under Article 4.7 of the SCM and Article 19 of the DSU, read in conjunction with Article 21.3 of the DSU. Article 4.7 of SCM provides for a more explicit remedy than provided by the relevant DSU provisions, but is not in conflict with those provisions.

Australia recalls that, in the original US-FSC case, the DSB recommended that the United States bring the FSC measure into conformity with its obligations under the covered agreements and that the FSC subsidies found to be prohibited export subsidies within the meaning of the SCM Agreement be withdrawn without delay.

(c) Article 19.1 of the DSU does not serve to prevent a panel from making a recommendation in line with the provisions of Article 4.7 of the SCM. The Agriculture Agreement does not provide for any specific remedy, hence Article 21.1 of the Agriculture Agreement would not prevent a specific recommendation in line with Article 4.7 of the SCM.

QUESTION 2

To what extent is the nullification and impairment (within the meaning of Article 3.8 of the DSU), allegedly suffered by the complainants different or complementary, with regard to the claims under both the Agreement on Agriculture and the SCM Agreement?

As a result of the EC's infringement of its obligations under the Agriculture Agreement and the Subsidies Agreement, there is a prima facie case, in regard to claims under both agreements, that nullification and impairment has been suffered by the complainants. Australia notes that pursuant to Article 3.8 of the DSU, the EC, as the defending party must rebut the presumption of nullification and impairment.

In paragraph 145 of the EC's first submission it accepts that Article 3.8 explicitly requires the defending party to rebut the presumption in the complainants' favour that there is a case of nullification and impairment. In EC - Bananas III, the Appellate Body referred to the discussion of "nullification and impairment" in the US – Superfund case and cited the following statement:

….a demonstration that a measure…has no or insignificant effects would not be a sufficient demonstration that the benefits accruing under that provision have not been nullified or impaired even if such a rebuttal were in principle permitted.[1]

QUESTION 3

Considering that Article 3.2 of the DSU states that the dispute settlement system of the WTO serves to clarify the existing provisions of those agreements (the covered agreements) "in accordance with customary rules of 'interpretation' of public international law", how if at all would the parties justify the "application" of general principles of international law such as estoppel or good faith to this dispute?

The relationship between the WTO Agreements and aspects of customary international law has been considered by both panels and the Appellate body. Much of this attention has been focused on Article 3.2 of the DSU. The Appellate Body has clarified that customary rules of interpretation of public international law are expressed in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT).

In relation to the principle of good faith, the Appellate Body has observed that Article 31(1) of the VCLT directs that a treaty be interpreted in good faith and that "performance of treaties is also governed by good faith".[2] In its statement, the Appellate Body acknowledged the clear link between Articles 31(1) and 26 of the VCLT. The latter article provides that "[e]very treaty in force is binding upon the parties to it and must be performed by them in good faith". Interpretation of a treaty in good faith is inextricably linked to the performance of that treaty in good faith.

Although the principle of estoppel is linked to the general principle of good faith, as noted by the International Court of Justice in the Gulf of Maine Case[3], this linkage does not mean that a WTO Member may rely on the principle of estoppel to defeat a claim brought by another Member. The principle of estoppel is not imported into the WTO Agreements by the reference in DSU Article 3.2 to the customary rules of interpretation of public international law. Estoppel is not a customary rule of interpretation.

If the EC were permitted to have recourse to estoppel, it would operate to diminish the rights of the complainants, contrary to the provisions of Articles 3. 2 and 19.2 of the DSU. It is one thing to have a right subject to relevant provisions of a covered agreement, but another thing entirely to have that right subject to the operation of a principle which is not recognised in the provisions of a covered Agreement.

Australia recalls States negotiating a treaty may exclude or modify the application of principles of customary international law as between themselves through the operation of the treaty.[4]

The principle of estoppel has been raised in earlier WTO disputes, although its application has not been considered by the Appellate Body.

In Argentina – Poultry AD Duties, a case brought by Brazil concerning anti-dumping measures imposed by Argentina on Brazilian poultry imports, Argentina asserted that Brazil's conduct in bringing the dispute successively before different fora, first MERCOSUR and then the WTO, was contrary to the principle of good faith and warranted invocation of the principle of estoppel. Argentina did not allege that Brazil had violated any substantive provision of a covered agreement in bringing the case. Argentina argued that:

[T]he essential elements of estoppel are "(i) a statement of fact which is clear and unambiguous; (ii) this statement must be voluntary, unconditional, and authorized; (iii) there must be reliance in good faith upon the statement … to the advantage of the party making the statement".[5]

As Argentina failed to satisfy the elements it had identified, the Panel

[did] not consider it necessary to determine whether or not [it] would have had the authority to apply the principle of estoppel if the relevant conditions had been satisfied. Nor [did it] consider it necessary to determine whether the three conditions proposed by Argentina are sufficient for the application of that proposal.[6]

In Guatemala – Cement II, Guatemala argued that Mexico's failure to object immediately to a delay in notification by Guatemala required under Article 5.5 of the Anti-Dumping Agreement gave rise to an estoppel. Guatemala did not identify a provision of a covered agreement as supporting its reliance on the principle of estoppel. The Panel considered that:

[e]stoppel is premised on the view that where one party has been induced to act in reliance on the assurances of another party, in such a way that it would be prejudiced were the other party later to change its position, such a change in position is "estopped", that is precluded.[7]

The Panel did not find it necessary to determine whether a WTO Member could rely on the principle of estoppel, as it held that "Mexico was under no obligation to object immediately to the violations" it alleged before the Panel.[8] The Panel went on to hold that as Mexico had:

raised its claims at an appropriate moment under the WTO dispute settlement procedures, Guatemala could not have reasonably relied upon Mexico's alleged lack of protest to conclude that Mexico would not bring a WTO complaint

Australia notes that neither in Argentina – Poultry AD Duties nor in Guatemala – Cement II did the Member raising the principle of estoppel identify any provision of a covered agreement which gave specific expression to that principle.

Australia also notes that, in Guatemala – Cement II the Panel held that the fact that a Member does not complain about a measure at a given point in time cannot by itself deprive that Member of its right to initiate a dispute at some later point in time. The lack of complaint does not create an estoppel.

QUESTION 4

Please elaborate on whether each of the complainants' two claims challenged by the EC, (including in paras 69, 162, 196, 204.2 and 205.4 of the EC's first written submission), comply with the requirements of Article 6.2 of the DSU relating to the "identification of specific measures at issue and need to provide a brief summary of the legal basis of the complaints sufficient to present the problems clearly".

The EC appears to be challenging the scope of the Panel's terms of reference in relation to claims under Article 10.1 of the Agriculture Agreement and in relation to so-called "subsidiary claims" of Thailand and Brazil in relation to the Footnote, which in reality relate to export subsidies on 'ACP/India equivalent' sugar.

Australia will address both of those issues, but considers that the EC assertions should first be put into context. Australia draws attention to the fact that the EC has refrained from raising these issues until the time of its first written submission, some six months after the Panel was established and more than two months after the Panel was composed. The EC did not raise any concerns about the terms of reference at the time of panel establishment. Nor did it attempt to seek a preliminary ruling at an early stage of the Panel processes, which it has done in other recent disputes in which it is a respondent.

Australia recalls in this regard the following statement by the Appellate Body in its US-FSC report about the operation of Article 3.10 of the DSU in relation to responding Members:

The same principle of good faith requires that responding Members seasonably and promptly bring claimed procedural deficiencies to the attention of the complaining Member, and to the DSB or the Panel, so that corrections, if needed, can be made to resolve disputes.[9]

EC assertions

In paragraph 69 of its first written submission, the EC's purported concern is that none of the complainants specified the measure at issue in relation to claims under Article 10.1 of the Agriculture Agreement, seemingly because none of the complainants cited Item (d) of the Illustrative List of export subsidies in the SCM Agreement. In paragraph 204.2, the EC concludes that the complainants' claim under Article 10.1 of the Agriculture Agreement is outside the terms of reference of the Panel.

In paragraph 162, the EC refers to a "subsidiary claim" of Brazil and Thailand - with respect to the exact terms of the Footnote – as being outside the Panel's terms of reference. This assertion is re-iterated, but not elaborated upon, in paragraph 196 – "Neither of these claims [EC is not respecting the terms of the footnote] were made in the Requests for Establishment by Brazil and Thailand."

In paragraph 205.4, the EC seeks a finding that, to the extent that it is within the Panel's terms of reference, the claim that Footnote 1 does not permit the EC's practice of exporting with refunds a quantity equivalent to the ACP/India imports is unfounded.

The EC is confusing claims with arguments, as is evident from paragraphs 162, 196 and 205.4. In reality, the EC's arguments in relation to the Panel's terms of reference are restricted entirely to the assertions in paragraphs 69 and 204.2, in relation to Article 10.1 of the Agriculture Agreement.

Article 10.1

Contrary to the EC's assertions in paragraph 71 of the EC's first written submission, Australia did not identify the "export of sugar" as a "measure". The measures are clearly identified in the fourth and fifth paragraphs of Australia's Panel request (WT/DS265/21) as the subsidies provided by the EC in excess of reduction commitment levels on sugar and sugar containing products. The source of the subsidisation and the nature of the problem are elaborated in the ensuing paragraphs, as are the relevant legal provisions of the WTO Agreements.

In regard to the EC assertions, in paragraph 71 of its first written submission, that the complainants should have identified the specific elements of the EC's sugar regime, Australia refers to paragraphs 52-54 of its Oral Statement of 30 March 2004.

In regard to the specific legal provisions, Australia correctly identified Article 10.1 of the Agriculture Agreement as a claim in the alternative in relation to export subsidies applied to 'C' sugar exports. The nature of subsidisation is clearly identified in paragraphs 4-7 of Australia's Panel request. Article 10.1 refers to "export subsidies not listed in paragraph 1 of Article 9". Its scope extends to export subsidies as defined in the WTO Agreements, other than those listed in Article 9.1. The Article 10.1 obligation is not contingent on a claim of inconsistency with the provisions of the SCM or any other WTO Agreement.

Further, the EC's assertion, if accepted, would have the effect of re-reversing the burden of proof of Article 10.3, which applies to Article 10.1. Article 10 is concerned with circumvention of export commitments and the EC clearly has the burden of proof to demonstrate that it is not applying any export subsidies other than Article 9.1 listed export subsidies in a manner which would circumvent its export subsidy reduction commitments. It is not incumbent on Australia to identify all or any export subsidy definitions.

'ACP/India equivalent' sugar

The EC is confusing the Footnote with the measure at issue. Australia notes from the EC's First Written Submission that the EC deliberately avoids addressing the specific measure at issue, but instead refers exclusively to the Footnote in relation to 'ACP/India equivalent' sugar[10]

In the fourth and fifth paragraphs of its Panel request, Australia identifies the measures at issue as the subsidies on sugar in excess of the EC's reduction commitments and elaborates on the nature of the measures in paragraphs 6-7 of that request. The relevant WTO provisions are cited in the second last paragraph of that request. Nowhere does Australia cite the Footnote as a measure at issue, rather, the EC is informed by the Panel request that the exports in excess of reduction commitments arise from the subsidised export of 'C' sugar and 'ACP/India equivalent sugar'.

Indeed, the EC is using the Footnote as a rebuttal argument to the complainants' claims of inconsistency. It is perfectly in order for any complainant to anticipate such an argument in its first written submission or to respond to such arguments in its rebuttal submission. Such issues are unconnected to Article 6.2 of the DSU and to the requests for establishment of the Panel.

QUESTION 5

What is the nature of the Modalities Paper and what is the legal value of the note of the Chairman of the Negotiating Group on Market Access with regard to that Modalities Paper? The EC has referred to the Modalities paper as "context" with respect to the interpretation of their Schedule. Can this paper be part of the context within the meaning of the Vienna Convention (Article 31.2(b))? On what basis can one refer to the context if the terms of the WTO treaty are clear? Should the Modalities paper rather be considered an element of the preparatory work of the Agreement on Agriculture within the meaning of Article 32 of the Vienna Convention for the purpose of interpreting a Member's schedule?

The Modalities Paper forms part of the preparatory work of the Agriculture Agreement and the associated Schedules. It was prepared to assist in the establishment of specific binding commitments on market access, domestic support and export subsidisation.

The Modalities Paper of December 1993 constituted the penultimate stage of the treaty-making process in regard to the Agriculture Agreement. It allowed for negotiations in respect of some, but not all Sections of Schedules – reflecting the principle that a Schedule may yield rights but not diminish obligations. The Modalities paper does not provided for negotiation on export subsidy reduction commitment levels. The export subsidy provisions of the Agriculture Agreement replicate the relevant provisions of the Modalities Paper, including in regard to the minimum obligations applying under that Agreement.

The note of the Chairman of the Negotiating Group states, in part, that:

The revised text is being re-issued on the understanding of participants in the Uruguay Round that these negotiating modalities shall not be used as a basis for dispute settlement proceedings under the MTO Agreement.

This part of the Chairman's note goes to the legal use to which the Modalities Paper may be put. The note states that the negotiating modalities are not to be used "as a basis for dispute settlement proceedings". The word "basis" is defined in the Oxford Dictionary, inter alia, as "[t]he main constituent, fundamental ingredient" or as "[t]hat on which anything is reared, constructed, or established".[11] Its use then in the Chairman's note appears intended to convey the "understanding of the participants" that the Paper was not intended to provide the foundation for, or main element in, dispute settlement proceedings. It would not give rise to rights and obligations which could be the subject of dispute settlement proceedings. Interpreted in this way, the statement has been made out of an abundance of caution because the Paper is not a covered agreement or linked to a covered agreement. That said, it is not unknown for statements to be made during negotiations out of an abundance of caution to meet the concerns of negotiating States.

This interpretation of the statement in the Modalities Paper does not rule out its use for interpretative purposes.

In this regard, the Paper could either provide "context", as defined in Article 31.2 of the Vienna Convention on the Law of Treaties (VCLT), for interpreting the Agriculture Agreement, or form part of the "preparatory work", as recognised in Article 32 of the VCLT, to be used as a supplementary means of interpreting the Agriculture Agreement.

Australia does not consider that the Paper provides "context" as defined in Article 31.2 of the VCLT.

In relation to Article 31.2(a), the Modalities Paper does not constitute an agreement relating to the Agriculture Agreement made in connexion with the conclusion of the Agreement. Instead, it constitutes a document that was used to facilitate the preparation of specific binding commitments included in the Schedules associated with the Agriculture Agreement.

In relation to Article 31.2(b), the Modalities Paper does not constitute an instrument relating to the Agriculture Agreement made in connexion with the conclusion of the Agreement. It does not represent an instrument made by one or more parties and, critically, it was a document prepared during the latter stages of negotiation of the Agreement, not at the time of its conclusion.

Sinclair emphasises that an agreement or instrument falling within the scope of Article 31.2 must "be drawn up on the occasion of the conclusion of the treaty".[12]

While not providing "context" as defined in Article 31.2 of the VCLT, the Modalities Paper does form part of the preparatory work, as recognised in Article 32 of the VCLT, of the Agriculture Agreement, having been developed as part of the negotiating process. Accordingly, it can be used as a supplementary means of assisting interpretation of Member's Schedule:

in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31:

(a) leaves the meaning ambiguous or obscure; or

(b) leads to a result which is manifestly absurd or unreasonable.

As to the question of the basis on which one can refer to the context if the terms of the WTO treaty are clear, Australia notes that Article 31.1 of the VCLT makes reference to "context" one of the primary interpretative tasks. Reference to "context" by a treaty interpreter is not conditioned by whether the text being interpreted is clear or not.

QUESTION 8

With regard to the principle of good faith under Article 3.10 of the DSU, does the EC believe that the reference to good faith in the DSU is a reference to procedural or substantive norms?

Article 3.10 provides, in part, that "if a dispute arises, all Members will engage in these procedures in good faith in an effort to resolve the dispute". It applies in the event that a dispute arises. In US – FSC, the Appellate Body held that the requirement to engage in dispute procedures in good faith required complaining Members to "accord to the responding Members the full measure of protection and opportunity to defend, contemplated by the letter and spirit of the procedural rules".[13] It is clear then that the requirement to act in good faith established by Article 3.10 relates to procedural not substantive norms.

QUESTION 11

The EC has referred to the Modalities as context. Is the EC referring to: (i) Section L of 20 December 1991 Draft Final Act Modalities on the basis of which most draft schedules/offers were tabled in the course of 1992 and 1993 (MTN.TNC/W/FA), or (ii) the consolidated version of the Modalities which was issued on 20 December 1993 for the purposes, inter alia, of the subsequent Verification Process (MTN.GNG/MA/W/24), or (iii) both versions?

Australia notes that there is no provision under either version of the Modalities paper that provided for bilateral negotiations on export subsidy reduction commitments to take place, as an alternative to the commitments specified in the texts.

QUESTION 12

Were there any comments or suggestions regarding the Footnote in the draft EC Schedule made by other participants in the UR negotiations in the course of the pre-Marrakech Verification Process, or any written communication by the Chairman of this process to any such participant on this subject?

Australia has documented its comments and suggestions in its response to Question 16 and in paragraphs 60-66 of its Oral Statement.

As to other participants, Australia notes that the Blair House Accord of December 1992[14] does not contain any reference to the Footnote or provide for any exception from reduction commitments for 'ACP/India equivalent' sugar, or indeed any other subsidised exports of EC sugar. On that basis, Australia assumes that there was noagreement between the EC and USA on exclusion of EC subsidised exports of sugar from scheduled reduction commitments.

Australia also notes that the Modalities text of 20 December 1993[15] does not contain any exceptions provisions to the export subsidy reduction commitments, either product specific or in regard to any category of sugar. On that basis also, Australia assumes that the EC had not concluded any understanding with any participant on the exclusion of any part of EC subsidised sugar exports from reduction commitment obligations.

QUESTION 13

Please specify the possible consequences for ACP countries of an eventual acceptance by the Panel of the complainants' claims against the EC.

This dispute does not relate to the ACP countries' preferential access to the EC's market. The EC can, and should, comply with its legal obligations to the ACP countries to import sugar and also comply with its legal obligations under the WTO Agriculture and Subsidies Agreements. As noted in Australia's answer to question 14, there is no legal link in the Cotonou Agreement between preferential imports from ACP countries and the EC subsidization of 'ACP/India equivalent' sugar.

Australia again invites the EC to make a guarantee to the ACP countries that no matter what the outcome of the present dispute, their preferential access will not be affected.

QUESTION 14

With respect to the Cotonou Agreement between the EC and the ACP countries, are there any direct links made in the Sugar Protocol between preferential imports from ACP countries and the EC subsidization of exports of ACP/India "equivalent" sugar?

No, there is no direct link in the Cotonou Agreement (Sugar Protocol) between the preferential imports from ACP countries and the EC subsidisation of exports of 'ACP/India equivalent' sugar. In relation to sugar, the obligation on the EC under these agreements is to import a certain amount of sugar from ACP countries under guaranteed price arrangements. Article 1(1) of Annex V of the Cotonou Agreement, Protocol 3 on ACP Sugar provides:

The Community undertakes for an indefinite period to purchase and import, at guaranteed prices, specific quantities of cane sugar, raw or white, which originate in the ACP States and which these States undertake to deliver to it.

Article 3 specifies the quantity of cane sugar that is to be delivered by each ACP country within each 12 month period.[16] The quantity of sugar to be provided is not contingent on export by the EC of ACP sugar or its equivalent.

The price for ACP sugar is not fixed but is negotiated annually within a price range. Again, the pricing arrangement is not linked in any way to exports of 'ACP/India equivalent' sugar, nor, indeed, to the provision of export subsidies by the EC. Article 5(3) provides:

The Community undertakes to purchase, at the guaranteed price, quantities of raw sugar, within agreed quantities, which cannot be marketed in the Community at a price equivalent to or in excess of the guaranteed price.

The guaranteed price is to be determined in accordance with Article 5(4) which states:

The guaranteed price, expressed in units of account, shall refer to unpacked sugar, cif European ports of the Community, and shall be fixed in respect of standard quality sugar. It shall be negotiated annually, within the price range obtaining in the Community, taking into account all relevant economic factors, and shall be decided at the latest by 1 May immediately preceding the delivery period to which it will apply.

Australia notes that the price delivered to the ACP through an arrangement comparable to the intervention floor price system for EC quota sugar, will depend on decisions taken by the EC in respect of its own domestic prices. There is thus no linkage between the ACP guarantee price and the EC export subsidy on 'ACP/India equivalent' sugar.

It is Australia's understanding that the export subsidies granted to 'ACP/India equivalent' sugar are in excess of the total estimated value of the price guarantee to ACP quota holders under the protocol, as well as the guaranteed quantities.

QUESTION 16

The EC argues that the complainants explicitly agreed to the compartmentalized treatment of ACP/India "equivalent" sugar. Since the complainants contest this allegation, what was the understanding of the complainants regarding the Footnote in EC's schedule of reduction commitments at the time of the Uruguay Round? What was the expectation of the complainants at that time with respect to how the subsidies for ACP/India "equivalent" sugar exports should be treated?

Australia did not and still does not consider that 'ACP/India equivalent' sugar is compartmentalised from other EC sugar experts. There is no basis for the EC's allegation.

During the course of the Uruguay Round negotiations, Australia's position on export subsidies on 'ACP/India equivalent' sugar exports was consistent with that expressed in the 1979 GATT panel report – EC- Refunds on exports of sugar[17]and the 1981 GATT Article XVI:1 Working Party report on EC- Refunds on exports of sugar[18].

Australia's concerns were registered at G8 technical discussions on draft agriculture schedules, held in Geneva from 23-26 March 1992. [19] Australia submits a record of those discussions as Exhibit ALA-3.

As noted by the EC in its First Written Submission[20], during the course of informal bilateral discussions, Australia raised concerns with the EC's proposed exclusion of 'ACP/India equivalent' sugar from the EC's export subsidy reduction commitments. The issue was also raised in discussions between the then Australian Trade Minister and the then Agriculture Commissioner on 10 December 1993 as, reflected in a letter of that date from the Australian Trade Minister to the Agriculture Commissioner. Australia submits this letter as Exhibit ALA-5.

Australia's concerns were further registered in a note from the Australian Mission in Brussels to Commission officials Moehler and Mildon of 31 January 1994, which Australia submits as Exhibit ALA–8. In that note, Australia stated:

  • We would note that the EC offer of 14 December 1993 does not include an export subsidy reduction commitment for sugar exports subsidised by direct export restitutions (corresponding to its imports from ACP countries and India) which is inconsistent with the Final Act and open to challenge.

The note was forwarded in advance of a meeting in Brussels on 4 February 1994 between Australian officials Sparkes and O'Brien with the aforementioned Commission officials. In reporting on that meeting, the Australian officials noted: "Moehler did not show any sign of discomfort, implying that acceptance of country schedules would legitimise any deficiencies (which we rejected)."

QUESTION 17

Australia mentioned that at the time of the finalization of the EC Schedule there was a letter from the Australian Minister [of Trade] to the European Trade Commissioner with respect to the EC Footnote. Can Australia provide a copy of this letter? Was there a follow up to this letter?

Australia provides a copy of the letter as Exhibit ALA-5. As noted in the response to Question 16 above, there was a follow up to that letter in January and February 1994, including in the note of 31 January 1994 provided to Commission officials, which is submitted as Exhibit ALA-8.

QUESTION 18

What is the legal value under customary international law of the Footnote 1 in the EC's Schedule? Is it an integral part of the Member's Schedule of commitments and of the Agreement on Agriculture?

The Appellate Body has stated that schedules are integral parts of GATT 1994 and are parts of the terms of the treaty. Article 3.1 of the Agriculture Agreement states that the domestic and export subsidy commitments in Part IV of each Member's Schedule constitute commitments limiting subsidization and are hereby an integral part of GATT 1994. Accordingly, schedules must be interpreted in accordance with the customary rules of interpretation of public international law as set out in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT).[21]

In the present case then, the EC's Schedule CXL forms an integral part of GATT 1994, including that section of the Schedule detailing the EC's export subsidy reduction commitments (Part IV, Section II). As a result, the footnote concerning ACP and Indian origin sugar appended to Section II would also form part of GATT 1994.

Accordingly, the footnote falls to be interpreted in accordance with Articles 31 and 32 of the VCLT. Article 31.1 requires that the footnote be interpreted in accordance with the ordinary meaning to be given to its terms in their context and in light of the treaty's object and purpose.

The context of the footnote is not only that part of the Schedule to which it is appended but also the relevant provisions of the Agriculture Agreement, in particular, Article 3, which is referred to in the heading of Part IV, Section II of the EC's Schedule.

The importance of referring to context is underpinned by the interpretive principle of effectiveness which has been recognised by the Appellate Body.[22] This principle requires a treaty interpreter to ascertain and give effect to all the terms of a treaty.

On the ordinary meaning to be given to its terms, the footnote excludes ACP/India sugar from the EC's export subsidy commitment. This meaning must be considered in the context of the Schedule and Article 3 of the Agriculture Agreement because the treaty interpreter must seek to give effect to all terms of a treaty.

In particular, Article 3.3 contemplates that a Member may exclude an agricultural product entirely from Part IV, Section II of its Schedule, but does not contemplate that when an agricultural product is included in the Schedule that the commitments in relation to that product can be diminished. There is no language in either Article 3.1 or 3.3 allowing this. As noted by the Appellate Body in India-Patents (US) the principles of treaty interpretation:

neither require nor condone the imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended[23]

As such, the footnote is in conflict with Article 3 of the Agriculture Agreement.

The EC seeks to avoid this result by arguing that the footnote articulates subsidy commitments by setting a fixed ceiling in relation to 'ACP/India equivalent' sugar. This interpretation is not supported by the text of the footnote or the relevant provisions of the Agriculture Agreement.

This conflict between the footnote and Article 3 raises the limits of the principle of effective interpretation. If, having applied Article 31 and 32 of the Vienna Convention, the treaty interpreter cannot resolve the conflict between the footnote and Article 3, then a choice must be made as to which will prevail.

In Australia's view, a provision of fundamental importance contained in the Agriculture Agreement negotiated by the Members should prevail over a footnote unilaterally inserted in a Member's Schedule in the event of conflict.

QUESTION 19

Has the EC complied with the terms of the ACP/India "equivalent" sugar Footnote?

No. Even if the footnote was considered a legitimate derogation from the EC's obligations under the Agreement on Agriculture, which in our view it is not, the EC is not complying with its terms. The words of the footnote must be interpreted according to their 'ordinary meaning' in accordance with the Vienna Convention on the Law of Treaties. On this basis, the footnote would require the sugar exports excluded from export reduction commitments to actually be sugar of ACP and Indian origin, as stated in the Footnote. Payment of export subsidies on an equivalent amount of sugar sourced from the EC does not come within the terms of the Footnote, which states:

Does not include exports of sugar of ACP and Indian origin on which the Community is not making any reduction commitments. The average of export in the period 1986 to 1990 amounted to 1,6 mio t.

The EC has now admitted that the sugar it exports is not sugar of ACP or Indian origin (para 197 of the EC's First Written Submission) but sugar of EC origin. Yet there is nothing in the wording of the footnote to indicate that the sugar exported would not be 'of ACP and Indian origin'.

The EC argues in paragraph 198 of its First Written Submission that the second sentence in the footnote somehow indicates or implies that the exports were not ACP and Indian sugar but equivalent sugar. But this is not what it says on its face. The fact that the EC actually changed the wording from the letters it cites which refer to "sugar corresponding to its imports of sugar from ACP countries and India." to the actual wording in the footnote could imply the opposite to the interpretation put forward by the EC – i.e. that the change was intentional to limit the application of the footnote. This is particularly so given that the word 'corresponding to' could arguably imply actual ACP/India sugar or EC equivalent sugar.

This reading of the footnote by Australia is supported by the European Court of Justice Case C 103/96, Directeur General des Douanes et Droits Directs v Eridania Beghin-Say SA.[24] In that case a company imported raw cane sugar from Cuba, placing it under inward processing arrangements. The same company then exported white sugar made from raw beet sugar under the 'equivalent system'. As sugar cane and raw beet sugar do not fall under the same common customs tariff subheading, the Court ruled that the EC product used was not to be considered 'equivalent'. Thus the EC itself does not allow for a substitution of 'equivalent' sugar in its own system.

It is also clear that the EC is exporting 1.6 million tonnes of EC sugar with export refunds irrespective of the amount of sugar imported from ACP countries and India under the preferential access arrangements. This is in clear violation of the footnote itself. As set out above, only 'Preferential sugar' – as defined in Article 35 of Regulation 1260/2001[25]- imported from these countries is eligible for export subsidies. Annually, according to both the EC's Schedules and the Sugar Protocol to the Cotonou Agreement and the Agreement with India this amounts to a maximum of 1,304,700 tonnes of white sugar. Neither SPS, EBA nor any other sugar imports are eligible for export subsidies, as stated in Article 35 of EC Council Regulation 1260/2001.

QUESTION 20

Let's assume that the general prohibition in Article 8 of the Agreement on Agriculture establishes two requirements under which export subsidies may exceptionally be provided by a WTO Member. One requirement would be that the provision of an export subsidy must be in conformity with the rules of the Agreement on Agriculture. The other would be that the provision of any export subsidy must be in conformity with a commitment as specified in a Member's Schedule. Do the parties consider that it is possible to have an inconsistency between these two requirements? If so, how should any inconsistency be resolved?

Australia considers that no conflict should arise between the two undertakings of Article 8. The requirements are expressed as individual undertakings by each WTO Member not to provide export subsidies otherwise than: (1) in conformity with the Agreement and; (2) with the commitments specified in a Schedule. The negotiating participants cannot be presumed to have inserted a provision in the Agriculture Agreement which would permit a WTO Member to act in relation to its schedule in a way which is inconsistent with its obligations under the Agreement. The principle of effective interpretation should be applied to the extent possible to resolve any apparent conflict.

The wording of Article 8 makes it clear that a Member cannot use its schedule to act inconsistently with the obligations of the Agriculture Agreement. It must comply with all of those obligations as well as the commitments specified in its schedule. The schedule may include commitments going beyond those required by the Agriculture Agreement, but the scheduled commitments cannot be less than the commitments specified by the Agreement.

A WTO Member would not be in conformity with the provisions of Article 8 if it was acting in conformity with its scheduled commitments of, for example, Article 3.3, but was providing export subsidies inconsistently with the provisions of the second part of Article 3.3 as well as the provisions of Articles 9.1, 10.1 and 11.

The first "requirement", that an export subsidy must be in conformity with the Agreement, captures all export subsidy obligations under the Agreement - i.e.:

  • the Article 3.3 obligation not to provide Article 9.1 listed export subsidies in excess of scheduled commitments;
  • the Article 3.3 obligation not to provide Article 9.1 listed export subsidies on unscheduled products;
  • the Article 9.1 obligation to make reduction commitments in respect of export subsidies listed in Article 9.1;
  • the other obligations of Article 9;
  • the obligation of Article 10.1; and;
  • the obligation of Article 11.

The second requirement is narrower in scope and is limited to observance of commitments specified in a Member's Schedule, in that an Article 9.1 listed export subsidy cannot be provided on a scheduled product except within the limits specified in a Member's Schedule. The obligation covers the first part of the Article 3.3 obligation and any scheduled commitment under Article 9.3, together with the commitments on schedules undertaken during the implementation period, as provided by Article 9.2.

QUESTION 21

Article 9.3 of the Agreement on Agriculture refers to commitments related to "limitation on the extension of the scope of export subsidization". Is this a different type of commitment from the reduction commitment referred to in Article 9.1 of the Agreement on Agriculture?

Yes. Article 9.3 provides scope for Members to make commitments additional to the reduction commitments required by Article 9.1. Any such additional commitments would relate to limitations on the extension of the scope of subsidisation, as regards individual or regional markets.[26] Unlike the reduction commitments of Article 9.1, Members were not required, as part of the Agriculture Agreement, to make such Article 9.3 commitments. However, Article 9.3 authorises them to do so and to record those commitments in their schedules. The Article 9.3 commitment is only acquired through scheduling, whereas the Article 9.1 commitment constitutes an obligation independent of a scheduled obligation. The EC did not schedule any commitments under Article 9.3.

Article 9.1 lists export subsidies which are subject to reduction commitments, that is, export subsidies which must be reduced and for which reduction commitment levels must be specified in Schedules. Read in its proper context, including the provisions of Article 9.2, the commitments of Article 9.1 involve budgetary outlay and quantity reduction commitments.

QUESTION 22

Can the reference to "commitments limiting subsidisation" in Article 3.1 of the Agreement on Agriculture be taken to indicate that the Agreement on Agriculture contemplates that scheduled commitments may include not only reduction commitments but also commitments simply "limiting" subsidisation. In the light of Article 9.3 of the Agreement on Agriculture (scheduled limitation on subsidization), Article 9.4 of the Agreement on Agriculture (special and differential treatment), Article 10.4 of the Agreement on Agriculture (international food aid transactions) and Article 15.1 of the Agreement on Agriculture (scheduled special and differential treatments contents) can it be said that the export subsidies [listed in Article 9.1 of the Agreement on Agriculture] are in all cases subject to reduction commitments under the Agreement?

Article 3.1 is an over-arching provision which refers to both export subsidy commitments limiting subsidisation and domestic support commitments limiting subsidisation. It must be read in the context of Article 3.2 and 3.3, which make reference to domestic support and export subsidies respectively, setting out what the more specific obligations are in respect to each.

In relation to export subsidies, Article 3.3 makes clear that the commitment is a reduction commitment. Article 3.3 requires that Article 9.1 listed export subsidies can only be provided in accordance with a Member's Schedule, that is, a Member must not provide export subsidies on scheduled agricultural products beyond its budgetary and quantity commitment levels set out in its Schedule and shall not provide export subsidies on products not specified in its Schedule. Article 3.3 also makes clear that Article 9.4 is an exception to the specific requirements set out in Article 9.1 for developing countries and relates only to export subsidies coming within the definitions set out in Article 9.1(d) and (e). Article 15 represents an exception on similar grounds.

Article 9.1 makes clear that in the absence of a specific exemption contained in the Agriculture Agreement all export subsidies coming with the definitions 9.1(a) – 9.1(f) are subject to reduction commitments.

As noted in Australia's response to Question 21, Article 9.3 provides for commitments additional to reduction commitments. The Article 9.3 commitment is acquired through scheduling, whereas the Article 9.1 reduction commitment is an obligation independent of scheduling.

The provisions of Article 10.4 do not serve to exempt a WTO Member from any WTO obligation, including the obligation of Article 9.1(b).

QUESTION 23

In US – FSC, the Appellate Body stated: "... In our view, the terms 'export subsidy commitments' and 'reduction commitments' have different meanings. 'Reduction commitments' is a narrower term than 'export subsidy commitments'...(para. 147 of the AB Report). With respect to export subsidies, what types of commitments other than reduction commitments can be incorporated in a Member's schedule? Do all reduction commitments have to be incorporated in a Member's Schedule? What are the types of commitment invoked in this dispute?

Australia recalls in that section of the US – FSC Report, the Appellate Body was considering the meaning of the term "export subsidy commitments" under Article 10.1 of the Agriculture Agreement. The Appellate Body stated in paragraph 147:

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 "reduction commitment levels".[27] In our view, the terms "export subsidy commitments" and "reduction commitments" have different meanings. "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.[28] The term "export subsidy commitments" has a wider reach that covers commitments and obligations relating to both scheduled and unscheduled agricultural products.

The Appellate Body found that "export subsidy commitments" had a wider reach than the term "reduction commitments" used in Article 10.3. It found that "reduction commitments" refers only to commitments made with respect to scheduled agricultural products. Whereas "export subsidy commitments" covers obligations and commitments relating to both scheduled and unscheduled agricultural products.

In relation to unscheduled agricultural products, the Appellate Body notes in paragraph 146 of its Report, that, 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. Thus Members have an obligation not to provide any Article 9.1 listed export subsidies on unscheduled products. If a Member wished to take advantage of the capacity in Article 9.1 to continue to provide export subsidies on specified products, such products had to be included in that Member's Schedule and they had to be subject to reduction commitments.

The commitments invoked in this dispute concern the EC's failure to comply with its reduction commitment levels on sugar. It was up to each Member to determine what products it exported were in receipt of export subsidies and to what levels. Reduction commitment levels were based on this determination. The EC appears to have taken a calculated risk in regard to application of the subsidies covered by Article 9.1 to 'C' sugar, and excluded such exports from its calculations, a risk from which it has profited for nearly a decade. It cannot now seek to blame others for the decision it took and for the consequences of that decision.

QUESTION 24

In Korea – Various Measures on Beef (paras. 94 – 106 of the AB Report) the Appellate Body reversed the Panel for not having taken into account in Korea's schedule of a second column on base quantity contained in square brackets as well as a footnote giving priority to this second column, notwithstanding the fact that such a column was contrary to AMS standard annual reduction calculation. In the same dispute, Korea also had another footnote (6(e)) stating that the "remaining restrictions" would be brought into conformity as of 1 January 2001. With a view to ensuring effective interpretation of Korea's schedule the Panel went into an examination of previous bilateral agreements between the parties to find out which were the so-called remaining restrictions. (Panel report, paras. 517-611) How do the parties reconcile the situations in Korea – Various Measures on Beef dispute with the present situation?

(1) Note regarding Korea's commitment levels of domestic support

The first note to which the Panel refers was used by the Appellate Body to assist it to correctly interpret Korea's Schedule LX containing the figures for its total current Aggregate Measure of Support (AMS). These figures related to domestic support commitments, not export subsidy commitments. The Schedule was not clear on its face as Korea had provided two separate numbers with respect to the Current Total AMS for each year.

The fact that the Appellate Body referred to the footnote in Korea Beef does not establish a broad legal principle on how footnotes are to be used in the interpretation of a schedule. The wording of schedules and footnotes varies from case to case, as does the factual context, and different legal provisions will be in play. This point needs to be borne in mind in examining the findings in Korea-Beef and the footnote issue in this case.

In Korea-Beef the footnote was used merely to clarify the applicable scheduling commitments. In the present case, the EC is attempting, through a footnote – as unilaterally interpreted by the EC - to completely revise its obligations under the Agriculture Agreement. This goes beyond the mere interpretation of a Schedule and equates to an attempt to diminish an obligation. As was made clear in US-Sugar Headnote and by the Appellate Body in a number of cases including EC-Bananas; Chile-Price Bands; and EC-Poultry, parties can yield rights but cannot diminish obligations in their schedules. Accordingly, the EC's footnote to its schedule does not allow the EC to escape its obligations under Articles 3.3, 8 and 9 of the Agriculture Agreement.

(2) Note on "remaining restrictions"

The second note to which the Panel refers concerned the results of the 1989 consultation with the GATT/Balance-of-Payments Committee and the Uruguay Round multilateral trade negotiation and stated that Korea "would eliminate or bring into conformity with GATT provisions all remaining restrictions" on a range of specified products, including imported beef, from 1 January 2001.

Relying on Article 32 of the Vienna Convention on the Law of Treaties, the Panel consulted a range of documents to assist in interpreting the words "remaining restrictions", including bilateral Records of Understanding between Korea and the US and Australia. The Records dealt, inter alia, with quota levels and conditions governing the sale of imported beef in the Korean market.

It should be noted that in relation to this footnote, the Panel did not fully review the jurisprudence on WTO schedules. As the Panel's finding was not appealed, there is no Appellate Body clarification on the Panel's approach.

QUESTION 30

There is no separate production of quota sugar and C sugar, and C sugar must be exported. The complainants argue that the legal framework of the sugar regime "encourages overproduction of sugar" above the quota level and generates the profits used to fund the export of such sugar (C sugar).

(a) What would be the mechanism that encourages the production and export
of C sugar?
(b) What percentage of all sugar producers actually produce and export
C sugar
(c) Why do some sugar producers refrain from producing and exporting
C sugar? Are there certain economic conditions or circumstances under
which some sugar producers do NOT have the incentive to produce over the
quota level?
(d) Can it be said that, if certain conditions are met, a sugar producer
will almost certainly produce and export C sugar?
(e)Following from the above, has the sugar regime anticipated that certain
sugar producers will most probably produce and export sugar above their
quota level? Furthermore, has the sugar regime anticipated that
the higher revenue sales for quota sugar would effectively finance some
or all of the costs of C sugar?
(f)What would the sugar producers do with their C sugar if there were
no requirement to export C sugar? Would they still export C sugar or would
they rather sell it to the domestic market?
(g) Is there any way to ensure that the revenue from sales of quota
sugar would NOT finance the exports of C sugar at below the average total
cost of production?

Before providing answers to Question 30 (a, c, d and e) it may be useful to briefly set out the economic factors and linkages which determine the production level of 'C' sugar.

There are essentially three reasons why a producer will decide to produce 'C' sugar in all or most seasons. Those are: (1) to ensure receipt of full quota sugar revenue from season to season, (2) to minimise the risk of losing long term quota rights and (3) to make a financial contribution to covering fixed production costs when the 'C' sugar price exceeds variable cost[29].

The strength of a producer's incentive to grow and process beet into 'C' sugar for the above reasons will in turn depend on four factors. These are the prices of quota sugar, the price of 'C' sugar, production cost and yield variability. The relationship between 'C' sugar production and each of these factors is set out briefly below.

  • Unpredictable seasonal variations in sugar yield mean that a producer can make sure of filling quota in each season only by setting planned production (production at average yield) well above the level of quota.
  • The difference between prices for quota sugar and average total production cost is the profit which, to a degree, is dependent on each producer's cost structure.
    • It provides the dual incentives to keep production high enough to:
      • receive payment for full allocation of quota sugar in each season (short term quota insurance); and
      • ensure that there is no chance of being identified as a poor performer in filling quota, should the national government ever have a redistribution of quota (long term quota insurance); and it
    • finances the purchase of production capacity and coverage of other fixed cost, making it profitable to produce 'C' sugar.

Clearly the higher the price for quota sugar the greater are all three incentives to produce 'C' sugar. The quota insurance and variable cost aspects of 'C' sugar production are discussed in more detail in Exhibit ALA-1, pp.17-21 and pp.21-23, respectively.

The link between the production of 'C' sugar and production costs is an inverse relationship. The higher is the level of average total production cost, the less is the incentive to produce 'C' sugar. The level of variable cost may be separately important.

  • A producer whose variable cost is less than the 'C' sugar price receives some net contribution to coverage of fixed cost for each unit of 'C' sugar production – provided that sufficient capacity is already in place.
  • A producer whose variable cost is more than the 'C' sugar price makes direct cash loss for each unit of 'C' sugar produced.
    • However, such a producer may still find it worthwhile to produce 'C' sugar for quota insurance purposes.
    • The producer will raise planned production to the level beyond which the gains from further security of filling quota in low yield years are exceeded by the losses from producing extra 'C' sugar.

The effect of the 'C' sugar price on 'C' sugar production is straightforward. A higher price for 'C' sugar gives a lower cost of quota insurance. Also, the higher is the price of 'C' sugar, the more producers are there whose variable cost is less than the 'C' sugar price and the greater is the margin for those producers whose costs are below that price. Therefore, the higher is the 'C' sugar price, the greater will be 'C' sugar production.

For simplicity of exposition, references are made to 'the producer' as a single entity in the above discussion, and much of that which follows. In fact, separate decisions are made by beet growers and processors, generally at arm's length. Beet pricing systems (discussed in Australia's response to Question 31(b) below) and other aspects of grower/processor contracts are designed to coordinate production decisions. Processors are the holders of quota. However, grower/processor contracts are generally specified in terms of beet delivery rights that mirror those quotas. So both processors and growers have similar interests in and incentives with regard to quota. For example, it is worth noting that even when a processor pays a high price to encourage planned production of some over quota beet for quota insurance purposes, growers may still have an incentive to plant more, for their own insurance purposes. This is particularly likely given that an individual farmer may face greater yield variability than that faced at the processor level.[30]

This is confirmed by statements made by representatives of the UK sugar beet industry:

The challenge for growers is to grow enough beet to meet the individual production quota. Norfolk farmer Francis Ulrych grows 55 acres of beet at Griston, near Watton. "It's our most profitable crop and especially in the past three years. I have to grow enough beet to meet my quota, if I don't it will be lost or clawed back".

"I don't want to produce excess beet because it's not worthwhile," said Mr Ulrych who is the regional chairman of the NFU sugar board. In the latest campaign, he had to grow enough beet to produce 1300 tonnes of sugar.

The weather transformed yields last summer. As a result, he produced a surplus of almost 24pc above his quota, the so-called 'C' beet. He is drilling his latest crop and will plant about 55 acres of beet for processing at the Bury St Edmunds factory. "We're three weeks later than last year and we don't know what the weather will do," he said.

Mr Blacker [a Yorkshire farmer who represents 7000 beet growers in England and Wales] said: "There's no profit in growing 'C' beet. Every farmer wants to grow 101pc of quota but the weather always has the last word."

He received about £30 per tonne for 'quota' beet but the payment for this surplus depends on world market prices, and was under £7.50 a tonne.

The unpredictability of the weather encourages the production of some surplus sugar, said Mr Blacker. Under EU trade and subsidy rules, this 'C' or surplus sugar must be exported outside Europe. In 2003, a total of 478,000 tonnes was exported from Britain – including 250,000 tonnes from beet and the balance from Tate & Lyle imported cane.[31]

(a) What would be the mechanism that encourages the production and export of C sugar?

Production of 'C' sugar is encouraged by two things; the system of quotas and the high returns from subsidised A and B quota sugar. Exports of 'C' sugar are commanded by the regulatory restrictions on carryover of over quota production and the requirement that 'C' sugar be exported (the impact of these regulations is discussed further in Australia's response to Question 30(c)).

(b) What percentage of all sugar producers actually produce and export C sugar?

Reliable data on which EC producers produce 'C' sugar are difficult to obtain. As is shown in Exhibit ALA-1 EC member countries in which most 'C' sugar is produced are those which have producers whose cost is low by EC standards. Reasons for that are outlined in Australia's response to Question 30(c). The impression gained from the list of industry websites, journals and studies consulted in preparing Exhibit ALA-1 is that C beet production is a general and expected activity for beet growers in those lower cost countries. The beet pricing schemes that apply in those countries virtually ensure that all beet growers will grow at least some C beet (see Australia's response to Question 31(b) below). In general, beet production cost (in terms of sugar yield) tends to be dominated by climatic factors. There is also a strong association between lower cost beet production and lower cost processing. To a considerable extent, therefore, grouping producers by member state tends to aggregate like groups of higher, medium or lower cost producers.

There are only around 30 sugar processors who hold quota, in the EU. Those processors range in size from Sudzucker to some quite small producers in France. So knowing the percentage of processors who produce 'C' sugar is not necessarily helpful. On the other hand, production decisions at a grower level may be strongly influenced by C beet pricing policies. These are discussed in Australia's response to Question 31(b) below.

(c) Why do some sugar producers refrain from producing and exporting C sugar? Are there certain economic conditions or circumstances under which some sugar producers do NOT have the incentive to produce over the quota level?

Which producers produce C sugar?

Drawing on the above discussion, it can be seen that the level of a producer's cost is a key factor in that producer's decision whether to produce 'C' sugar, and if so at what level.

  • A producer with average total cost which is relatively low for the EC:
    • will have very high net returns from quota sugar;
    • will, therefore, have a strong incentive to protect quota returns; and
    • will have large quota profits from which to finance fixed cost.
  • A producer whose variable cost is below the 'C' sugar price and who has the capacity to produce 'C' sugar will be able to make a contribution towards covering fixed cost with each additional unit of 'C' sugar produced. Producers who have relatively low average variable cost tend also to have relatively low fixed cost. So the same producers tend to have the full set of incentives to produce 'C' sugar.
  • Some producers whose variable cost exceeds the 'C' sugar price nevertheless have an incentive to produce 'C' sugar for quota insurance purposes. However, the higher a producer's cost, the more expensive is quota insurance and the less valuable is the quota being insured.
  • National allocations of quota and a prohibition of quota trade between EC member states reduces the insurance incentive in higher cost member countries. As noted in Australia's response to Question 30(b), each EC member country tends to contain a like group of higher, medium or lower cost producers by EC standards.

Economic conditions under which there is no incentive to produce C sugar

Clearly the level of cost faced by individual producers is an important determinant of 'C' sugar production. Prices for both quota sugar and 'C' sugar are also important.

  • At progressively lower prices for quota sugar:
    • fewer producers would retain an incentive to produce 'C' sugar: and
    • those who did produce would produce less.
  • Also, the lower the price for 'C' sugar on the world market, the smaller the incentive to produce 'C' sugar.

Reasons that over quota sugar production is exported

As stated in (a) above, the EC requirement to export 'C' sugar is the primary force. However, producers are allowed to carry over up to the equivalent of 20 per cent of A quota. Some producers do use the carry over allowance. The question is why some regular producers of 'C' sugar do not use the full 20 per cent allowance. The answer has to do with the strength of the incentives for lower cost EU producers to produce 'C' sugar, as outlined above, and the stipulation that carryover be used for the following season's A quota, not simply be stored for use as quota sugar at the producer's discretion.

By way of example, consider two producers who face yield conditions such that setting planned production equal to quota will deliver 90 per cent and 110 per cent of quota in the worst and best seasons, respectively. Suppose producer X has variable cost below the 'C' sugar price, so sets planned production at 111 per cent of quota – thus just filling quota in the worst years and producing 'C' sugar equal to 22 per cent of quota in the best years[32][33].

Producer X can afford to carry over the full 20 per cent of quota from a good year only by making changes to future production plans and bearing significant cost.

  • Next season's crop can be used to fill only 80 per cent of quota, since 20 per cent is already filled by carryover. So leaving planned production at 111 per cent of quota would risk having as much as 142 per cent of quota on hand and being forced to export an amount equal to at least 22 per cent of quota as 'C' sugar.
  • An alternative would be to cut planned production, say by the full 22 per cent.
    • Ultimately it is the quota holder, the processor, who must make a choice about planned production. It is the beet grower, though, who implements that choice through plantings.
    • The timing of such decisions and implementation would be tight, with only a few weeks between the end of the current season's campaign and the next season's planting. Arranging large changes in plantings at short notice would require good coordination and would most likely impose significant costs on growers.
  • It is possible that, over the long term, such a producer would consider investing in lower capacity, setting planned production at lower levels and storing surplus sugar from high yield seasons to fill quota in low yield seasons – given the freedom to do so. However, existing EC policy makes such a choice impossible. Production surplus to quota must either be carried over to fill the next season's A quota (within the 20 per cent limit) – rather than to the season of the producer's choice – or exported. For a lower cost producer this reduces to a choice between the disruptive pattern described above or regular exports of the surplus as 'C' sugar.

Producer Y has higher total cost and variable cost that is greater than the 'C' sugar price. Quota sugar production is less profitable and there is less incentive to insure quota than there is for producer X[34]. Additionally, with variable cost greater than the 'C' sugar price, the producer loses more for every additional unit of 'C' sugar produced, in direct net cash terms. Suppose producer Y sets planned production equal to quota (which seems likely to be the upper limit). In a high yield season, producer Y will have a potential carryover equal to 10 per cent of quota. A choice to store the 10 per cent, followed by a second high yield season would leave producer Y within the 20 per cent carryover limit. In other words, even a sequence of high yield years may not put any pressure on such a producer to export 'C' sugar or adjust production plans.

Not surprisingly, carryover of production surplus to quota is most used by those EC producers with intermediate costs (relative to other EC producers). Lower cost EC producers export proportionally more of their over quota production. The highest cost EC producers produce little 'C' sugar. The relationship between production cost and carryover is demonstrated in Exhibit ALA-1, pp.24-5.

(d) Can it be said that, if certain conditions are met, a sugar producer will almost certainly produce and export C sugar?

Given the above observations, and taking the current level of prices for quota sugar and the supporting regulations as given, it can be said that a producer whose variable cost is less than the 'C' sugar price is almost certain to set planned production at a level that ensures substantial production of 'C' sugar in most, if not all, seasons.

(e) Following from the above, has the sugar regime anticipated that certain sugar producers will most probably produce and export sugar above their quota level? Furthermore, has the sugar regime anticipated that the higher revenue sales for quota sugar would effectively finance some or all of the costs of C sugar?

The above explanation of the impact of EC subsidies on producer incentives and behaviour is neither new nor exceptional. In the economic literature, the effects on over quota production of quota insurance have been analysed for agricultural support schemes since at least 1981.[35] Aspects of the impacts of quota insurance and the beet pricing systems induced by the EC sugar regime had been analysed and published in a widely available report by the Australian Bureau of Agricultural Economics as early as 1985[36].

Furthermore, there has been substantial 'C' sugar production for decades. For most of that time most, if not all, would have been produced and exported at below the average total cost of production. For example, production cost data has been available on a commercial in confidence basis from LMC International for around 20 years. 'C' sugar production has long been recognised as a problem by the EC as well as others. In 1973, the Commission proposed the option of prohibition of 'C' sugar.[37] At the 1981 GATT working party a proposal made to solve the 'C' sugar problem was "Possibility of extension of the obligatory storage of sugar C (provided for in Article 26) in such a way that sugar C would be no longer be exported when the world price fell below a price to be determined".[38]

That revenue from A and B quota sugar financed part of the cost of producing 'C' sugar has also been long known and discussed in Europe. For example, Bureau of Agricultural Economics (1985) cites a paper presented to a 1980 London sugar conference by Harris outlining that effect.[39]

(f) What would the sugar producers do with their C sugar if there were no requirement to export C sugar? Would they still export C sugar or would they rather sell it to the domestic market?

The producers would sell their 'C' sugar on the domestic market given that the EC domestic price is around €670 tonne whereas the world price is currently around €145 per tonne.

(g) Is there any way to ensure that the revenue from sales of quota sugar would NOT finance the exports of C sugar at below the average total cost of production?

There may be a number of ways to ensure that the revenue from sales of quota sugar would not finance export of 'C' sugar. One approach would be to redefine sugar production by quota holders that is surplus to quota as quota sugar for the next season. In other words, producers who hold quota would be required to carry over all sugar that is currently classified as 'C' sugar. It is clear that all EC producers have average total costs of production that vastly exceed the world price for sugar. So this approach would not deprive EC sugar producers of economically viable business opportunities. Such an approach would be administratively simple. Restricting the carryover requirement to quota holders would allow for the possibility (however remote) that some producers may be able to more than cover their average total cost of production from export market receipts at some future time. Alternatively, the EC could simply specify quotas as production quotas, rather than quota rights to sell EC produced sugar on the EC domestic market. Strict production quotas could eliminate 'C' sugar production and exports without affecting domestic support.

QUESTION 31

Assuming that the beet growers are guaranteed a fixed minimum price for quota beet (=58% of the intervention price for quota sugar), but the sales of C beet from beet growers to sugar producers are permitted at a lower price than quota beet (as the price of C beet is not regulated). What is the result of this price guarantee for A and B beet on C beet?

(a) Does
this price guarantee for quota beet necessarily result in a lower price
for C beet?
(b) How
is the price of C beet determined? Is it determined solely by market forces,
or do some other factors affect the price?
(c) The
price of C beet seems to be approximately 60% of the international market
price of sugar by which C sugar is sold. Has this percentage changed
over time?

(a) Does this price guarantee for quota beet necessarily result in a lower price for C beet?

The price guarantee for quota beets does not guarantee a lower price for C beet. As is outlined in (b), some C beet is purchased at the same pooled price as A and B quota beet. In some other beet pricing schemes an amount of C beet may also be purchased at a price as high as the minimum price for B beet. Processors can afford, and are driven, to pay such high prices for some amount of C beet to ensure that they fill and protect valuable A and B quota. For the remainder of C beet, growers are paid prices related to the world market price of sugar. Any beet price derived from the market value of 'C' sugar is guaranteed to be well below the prices for A and B beet.

(b) How is the price of C beet determined? Is it determined solely by market forces, or do some other factors affect the price?

While processors are not required to pay the fixed minimum prices for A and B quota beet, the EC regime does in fact provide for a minimum price for C beet.[40]

Pricing systems for C beet vary between EC member countries and between processors within those countries. Essentially, there are three basic systems of C beet pricing, pooled pricing, two tiered pricing (C1/C2) and single C price systems. A more detailed description of some of the systems is contained in Exhibit ALA-1 (pp.10-12).

A commonly used system for pricing C beet is price averaging. The same price is paid for all beet used to produce A quota sugar, B quota sugar and some or all of 'C' sugar. The base for calculating that average price is a weighed average of the minimum prices for A and B beet and around 60 per cent of the export market returns from 'C' sugar.[41] A two tiered system is commonly used in France, Germany and Austria. C beet is defined in two separate tranches, C1 and C2. The price of C2 beet is normally based on 58 per cent of world market receipts for 'C' sugar. C1 beet is frequently priced at higher than that – in some cases as high as the B quota price. In some other cases all C beet is paid a price based on around 60 per cent of the world market returns for 'C' sugar.

None of these systems are driven primarily by market forces. Market forces play some role in determining C beet prices in the pricing systems described above. EC policy generally plays a more dominant role. The easiest way to see this is to look at the systems in sequence, from single C price, through C1/C2 to A, B and C averaging systems. The starting point of single C price systems is a grower share of around 60 per cent of the revenue from 'C' sugar sales. Clearly the C price is a direct function of world market prices in this case. However, the other aspect of market conditions, beet producer and processor costs, is not reflected in any way. For example, over the 10 years from 1992-93 to 2001-02 the value of revenue from 'C' sugar sales less the variable cost of processing averaged 82 and 68 per cent of the 'C' sugar price for France and Germany, respectively. Over the same period, C2 beet prices averaged 54 and 53 per cent for France and Germany, respectively[42]. Despite the quite different levels of processing cost in the two countries, the C2 beet pricing conventions were the same. Analysis of the year to year variations in actual C2 prices, 'C' sugar prices and processing cost, suggest that the convention of paying growers a fixed share of returns from 'C' sugar dominates the decision process.[43]

In a two tiered pricing system, if any beet is classed as C1 and paid a higher price than C2 it is always the first tranche of over quota beet delivered by a grower. Similarly, for pooled price systems that have some C beet excluded from the pooled price, it is always that component delivered after the 'quota' C that receives the pooled price has been delivered. This suggests that processors, in paying a higher price for C1 and 'quota' beet, are trying to encourage growers to plan high enough production to insure the processors will always be able to fill their quotas.

Depending on the season, the C1 beet price may account for most, if not all, the returns from selling 'C' sugar. Processors cover only part of their cost, if that. For C beet included in a grower's 'quota' and paid for at a pooled price, processors always pay much more than they receive for the sugar. On the other hand, all C2 beet or C beet in a single C price system is paid for at a price that fails to cover growers' total cost. As illustrated above, in such cases, processors in the lower cost member states may at least cover their variable cost. Nevertheless, in none of these cases do the returns from 'C' sugar from the world market come close to covering the average total cost of production.

(c) The price of C beet seems to be approximately 60% of the international market price of sugar by which C sugar is sold. Has this percentage changed over time?

A 60 per cent share of returns for 'C' sugar from the world market seems to be a rough approximation to the starting point in deciding the C2 or single C beet price, at best. Over the period 1983-84 to 2001-02, for which time series are available, C2 prices averaged 60 and 55 per cent of estimated mill door 'C' sugar returns for Germany and France, respectively. In Germany, the grower share of 'C' sugar revenue declined significantly, from an average of 67 per cent in the first 10 years to an average of 53 per cent in the final 9 years. There was no significant change in France.

QUESTION 33

Article 13 of the EC Council Regulation 1260/2001 on sugar requires a charge on C sugar if not exported. How is the charge calculated and to what extent has the EC made such charges in the past?

Australia refers to Article 8.2 of Regulation 1464/95[44], which links the charge to export refund levels.

In the context of penalties attaching to individual exporters, Australia refers to Exhibits ALA-9 and 10.

QUESTION 35

To what extent is the sugar beet growing and sugar processing undertaken by financially integrated firms in the EC?

Australia refers to page 6 of Exhibit COMP-6 and to pages 19-25 of Exhibit ALA-12.

QUESTION 36

What quantities of C sugar was carried forward and converted to quota sugar in each of the last five marketing years and what percentage of total C sugar did these conversions represent? What percentage, if any, of C sugar is donated to charitable institutions pursuant to Regulation 1260/2001?

Approximate values for 'C' sugar production; carryover and the proportion of 'C' sugar production carried over are given in table X.

Table X 'C' sugar production and carryover: EC-15

'C' sugar
production and carryover
1998-99 1999-00 2000-01 2001-02 2002-03

C sugar production 1000t white
sugar

3361

4970

4733

1705

4170

Carryover 1000t white sugar

1340

1603

957

385

919

Carryover as a percentage of production

40

32

20

23

22

Source: European Commission 2003 and earlier years, The Agricultural Situation in the European Union, Statistical and Economic Information. 'C' sugar production is taken as the sum of 'Production of 'C' sugar not carried over' and 'Quantity of sugar carried over into (following season)'. The estimate is not an exact measure of 'C' sugar production for all years. For some years the carryover figure may contain small quantities of B sugar.

QUESTION 38

Is it correct that most beet processing factories are located close to inland beet growing areas in the Community? What types of firms actually undertake the export of C sugar produced by the EC's beet processing factories?

The vast difference in value between sugar and beet relative to bulk and weight along with the perishability of beet ensures that beet processing facilities are always centred in beet production regions. Only around 16-18 per cent of the weight of beet is sugar. Allowing for processing costs and the value of by products, the value by weigh of beet is well under 10 per cent of the value of the contained sugar. It would never be economic to transport beet, rather than sugar, closer to market.

It is Australia's understanding that 'C' sugar is exported by sugar trading firms in most instances. There may be some instances in which processors arrange export sales directly.

QUESTION 39

There is an argument by the complainants that sugar producers have a strong incentive to produce above their quota level because they would not like their level of production to fall below the quota level by accident and thereby not being able to retain their quota level. To what extent is this a built-in mechanism in the EC sugar regime?

There are two incentives that a quota holder may have to avoid production falling below quota. The first is to ensure receipt of the high prices for quota sugar in each season. For all but the highest cost EC producers, this incentive is built in by the high prices for quota sugar. The second incentive is to avoid the possibility of losing some quota – by being identified as a poor performer – should there be a reallocation of quota. For all but the highest cost EC producers, this incentive is also built in by the high prices for quota sugar (making quotas very valuable). It is also built in by EC regulatory allowance for member state government to reallocate up to 10 per cent of national quota[45]. Even where the whole national quota is held by a single firm (as in the United Kingdom) there is no guarantee that the national government would not consider reallocation of quota to potential new processors if the incumbent did not perform.

While beet growers do not own quota they have incentives to fill quota that are separate, and to some extent additional, to processors' incentives. Regulated minimum prices for quota beet guarantee growers substantial shares of the high prices for quota sugar. Additionally, individual growers have an incentive to protect their beet delivery rights from reallocation by processors and individual growers may face greater yield uncertainty than the processors who hold quota.[46] This is confirmed by the reported statements of UK beet growers, cited in Australia's response to Question 30.

QUESTION 40

On the assumption that the EC Council of Ministers has the authority to establish production quotas, could the determination of such quotas be equal to consumption levels so as to render exports unnecessary?

Setting quota to equal domestic consumption would not solve the problem of 'C' sugar exports because it would neither remove nor modify the set of incentives for over quota production (see Australia's response to Question 30). Given the nature of those incentives it seems likely that that any reduction in quota would eventually lead to a reduction in production that was roughly in proportion to the cut in quota. Over the 5 seasons 1998-99 to 2002-03 EC the ratio of sugar production to total A and B quota averaged 1.17. EC sugar consumption in 2002-03 was 12.9 million tonnes. With total quota and EC consumption at 12.9 million tonnes and production continuing to average 117 per cent of quota, production would average15.09 million tonnes, with 'C' sugar exports of 2.19 million tonnes. Given this relationship between production and quota, total quota would need to be reduced to 11.02 million tonnes to eliminate 'C' sugar exports.

The above calculations are illustrative only. They could be valid if domestic production equalled total EC supply, in other words if there were no imports from ACP and other countries. In that context Australia notes that under the "Everything But Arms" initiative, duty and quota-free imports of sugar from least developed countries are envisaged by 2009.

Australia notes that the Commission has the authority to make temporary annual adjustments to quotas fixed by the Council of Ministers.[47]

QUESTION 41

Were the complainants aware, at the time of the conclusion of the UR negotiations, that exports of C sugar existed? Furthermore, were the complainants at that time already of the opinion that the exports of C sugar were subsidized? Australia has stated in its oral statement to the first substantive meeting of the Panel that a ministerial correspondence from Australia to the EC on 10 December 1993 recorded Australia's expectation that the EC Schedule of export subsidy reduction commitments should include commitments of all EC export subsidies on sugar and also that Australia explicitly raised concerns about the EC's expressed intent to exclude some sugar from its scheduled reduction commitments. What export subsidies specifically had Australia in mind?

Australia was aware at the time of conclusion of the Uruguay Round that exports of 'C' sugar existed. Australia had previously challenged the exports of 'C' sugar as export subsidies in the 1979 GATT dispute EC- Refunds on exports of sugar[48]. At that time, 'C' sugar exports clearly came within the definition of an export subsidy contained in paragraph 2 of the Ad Note to Article XVI:3 of GATT, as:

  • "A system for the stabilization of the domestic price or of the return to domestic producers of a primary product independently of the movements in export prices, which results at times in the sale of the product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market."

Further, Australia had also proposed options for reducing the trade distortions caused by 'C' sugar exports in the course of the GATT Working Party on EC-Refunds on exports of sugar (Article XVI:1 discussions).[49]

The EC itself had also identified a problem with 'C' sugar. In 1973 the Commission had proposed prohibiting the production of such sugar.[50] The reference in the letter of 10 December 1993 was generic, in that Australia registered its expectation that there should not be any exclusions from reduction commitments. The reference was not specific to 'C' sugar and was primarily intended to register concerns about the EC's announced intent to exclude some sugar from its reduction commitments. However, at the time of the Uruguay Round Australia did not have access to information that would have enabled it to make a definitive assessment that 'C' sugar exports were being subsidised in the sense of Article 9.1(c) of the Agriculture Agreement.[51]

In the course of the Uruguay Round the EC supplied only those statistics related to sugar exports subject to producer levies. While statistical data may have been published, such information was not readily accessible, given that internet access was not widely available to officials at that time and given also that there was only limited information posted on internet sites at the time.[52] Until late 2003 there was a marked absence of any published information undertaken by EC institutions on the economics of its sugar production and trade.

On the other hand, as noted in paragraph 26 of Australia's oral statement of 30 March 2004, the EC[53] had access to a very wide range of information sources that would have enabled it to make an informed assessment of the cross subsidization of 'C' sugar exports. It knew, as far back as 1981, that the EC sugar regime resulted in the pooling of producers receipts from sales in internal markets at supported prices.[54] It is apparent from the reports of the Court of Auditors[55], NEI [56]and Commission Decision of 20 December 2001[57], that the authors of those reports had access to information that was not made publicly available. It is also apparent that the EC had undertaken relevant research into the costs of sugar processing[58], but the EC refused to make such information available to Australia. It was known that some sugar industry groups and Member State agencies collected costs of production data and shared those with the EC, but again the EC refused to provide Australia with such information.

Following an accumulation of evidence from European sources (including reports published or commissioned by the EC[59]) and in light of the increase in 'C' sugar exports from 1995 to 2000[60] Australia was then able to undertake independent detailed research which would enable it to challenge EC assertions that 'C' sugar exports were not subsidised.

Australia, like the EC, was a third party to all of the proceedings in the Canada-Dairy dispute. Australia supported the arguments of the complainants and endorsed the findings of the Appellate Body in the second recourse to Article 21.5. In its statement to the Dispute Settlement Body on adoption of that report, Australia stated that "The full implementation of export subsidy rules for agricultural products was important to Australia." and "... encouraged all Members to ensure compliance with their export subsidy commitments."[61]

Australia notes that the export subsidy reduction commitments are multilateral in nature and did not proceed on a bilateral offer/request basis or product specific basis. It would not have been in the power of Australia or any other WTO Member to agree, tacitly or implicitly, to exclude any product from the application of Articles 3.3, 8, 9 or 10 of the Agriculture Agreement. On the basis of Article 10.3 of the Agriculture Agreement, the EC would have been fully aware that it would be directly answerable in the event of exports exceeding its scheduled reduction commitments. The decision on how to schedule support was one for each Member to take at the end of the day, based on its own interpretation of the application of the draft provisions to the regimes applying in each sector. Any risk in regard to so-called "under-calculations" of the base period outlays and quantities was the responsibility of the scheduling Member. Other participants were more concerned to counter efforts to circumvent reduction commitment obligations by inflating the base period levels.

QUESTION 42

What are the factual differences and similarities between the Canada milk regime addressed in the Canada-Dairy dispute and the EC sugar regime? Furthermore, explain to what extent the findings of the panel and Appellate Body in Canada –Dairy with regard to "payment", "on export", and "by virtue of governmental action" in Article 9.1 (c) in the Agreement on Agriculture would be relevant (and applicable) in the present dispute given such factual differences and similarities?

Australia refers to paras 42-48 of its oral statement of 30 March 2004. While there are some differences of detail[62] the regimes in the Canada-Dairy case and the present case are markedly similar. In regard to the product at issue in both cases the goods are manufactured from a primary product, in the case of Canada-Dairy milk and in the present case sugar beet (we note that under the EC's AMS classification butter, skim milk powder and sugar are all classified as basic products). In both cases there are production quotas with set minimum prices for production within those quotas. Surplus to quota production is permitted without limit but in both cases must be exported. While there is a provision in the sugar regime for some 'C' sugar to be carried over to the following marketing year and reclassified as 'A' sugar, this is limited[63].

Both systems are government run and both encourage surplus production. Both also facilitate cross-subsidisation of non-quota production from the profits of quota production. In both cases the 'governmental action' provides for the supply of the primary product at prices below the prices for which the same product may be sold for consumption on the domestic market. The products in both cases are sold at below the average total cost of production, with the losses financed by virtue of governmental action.

In both cases payments are made on export at below the total average costs of production and are financed by virtue of governmental action, i.e. the price support delivered through the respective regimes. In the case of Canada-Dairy, the payment was made by the milk producer to the processor. In the case of EC sugar, there are multiple payments: from the grower to the processor in the case of C2 beet; from the processor to the exporter, or, if exported directly by the processor, from the processor to the foreign buyer.

Given the above factual similarities, the consideration by the Panel and Appellate Body in Canada-Dairy is highly relevant to the present case. As Australia has stated in its First Submission and Oral Statement the Canada-Dairy case is the only consideration of the interpretation and application of Article 9.1(c). Australia considers that the benchmarks established in that case, in particular whether products are sold at below their average total cost of production, are applicable in this case (the discussion in question 45 is relevant on this point).

Indeed, the factual analysis of the EC sugar regime makes the case even more compelling than in Canada-Dairy. In that case, there were approximately 800 dairy farmers who only produced CEM milk, whereas there do not appear to be any sugar growers or processors who produce only 'C' beet or 'C' sugar. 'C' sugar also represents a much higher percentage of total production than CEM milk. As noted in Exhibit ALA-1 page 5, over the decade to the 2001/02 production year 'C' sugar exports fluctuated around 17% of the combined A and B quota for the EC. Another difference is that in the milk regime dairy farmers were able to trade or lease quota between farms[64], whereas quota trading in the sugar regime is very limited, occurring mainly in the context of corporate takeovers or amalgamations.

In its first written submission the EC attempted to distinguish the Canada-Dairy example from the present case. In particular, the EC argued that "Canada – Dairy stands for the proposition that the provision of an agricultural input below its average total cost of production constitutes a "payment" to the processor of that input" (para 53). This appears to be a distinction on the basis of the degree of processing of the product. There is no basis in either the Agriculture Agreement or the Subsidies Agreement for the distinction the EC is advocating. Both agreements apply to all covered products without distinction on the basis of degrees of processing. There is also no basis in Canada-Dairy for the EC's conclusion that the legal reasoning and conclusions were limited to the specific case of subsidised inputs for processing. The citations mentioned serve only to explain the factual situation existing in the Canada-Dairy case. They in no way directly state or imply the limitation the EC argues.

QUESTION 43

In applying Article 9.1(c) of the Agreement on Agriculture, has the "export contingency" to be found in the "payment" or in the "governmental action"? What factors should be taken into account in determining whether there has been "export contingency" in a specific case?

Article 9.1(c) makes clear that it is the "payment" which must be "on the export".

In determining whether the payment is on the export the factors to be considered relate to the linkage between the payment and the export of a covered agricultural product. In the present case Australia has shown that payments are made in relation to 'C' sugar, which is a covered agricultural product and which must be exported. The linkage is clear and direct.

The export of 'C' sugar is part of the EC price support system. 'C' sugar exports have persistently been a significant structural component of EC sugar production. In the decade to 2001-02, 'C' sugar exports have fluctuated around 17 per cent of the combined A and B quota for the EC.[65] It is therefore clear that the EC regime is predicated on the export of 'C' sugar as there is clearly a structural surplus of sugar production and imports in the EC. The regime is designed in such a way as to ensure these exports and therefore relieve the pressure on the domestic supply situation.

Australia has shown that production of 'C' beet and 'C' sugar are due in part to the need for producers to insure their quota receipts and in part to the profits derived from A and B sugar and the consequent profits made on the marginal production costs of 'C' sugar (see ALA-1). As set out in para 123 of Australia's first written submission, 'C' sugar is regarded by the EC as a factor in market balance, fulfilling the market stabilisation objectives of the EC sugar regime.

The payments made in relation to 'C' sugar – whether by grower or processor - which have already been shown by Australia to be financed 'by virtue of governmental action', are on the export because they are contingent and dependent on 'C' sugar being exported.

The EC contends that even if the subsidies to A and B sugar cross-subsidise or finance the production of 'C' sugar there is no export subsidy because any payment is not made "on the export" of 'C' sugar. It is worth recalling that the EC made a similar argument as a Third Party in Canada-Dairy, which was not adopted by the Panel or the Appellate Body and indeed was not advocated by Canada.

In the appeal in the First Article 21.5 decision, the EC argued that the finding should be held to be "moot and without legal effect" because the Panel erroneously "decoupled" the term "on the export" from the term "payment" and then equated it with the concept of export contingency, although the notion of "payment on the export" involves a more direct and strict link with the export operation.[66] This line of argument was repeated by the EC in Canada-Dairy Second Recourse to Article 21.5, where it argued before the panel that the preposition "on" contains a temporal element and suggests a closer nexus between the payment and actual exportation than export contingency.[67]

Specifically, the EC is arguing that because the producers of A and B quota sugar do not receive subsidies based directly on the export of 'C' sugar there is no payment on the export. This argument is not tenable and is inconsistent with the Appellate Body's reasoning in Canada-Dairy.

The EC is confusing the requirement in Article 9.1(c) that "payments" be made "on the export" with a perceived test – not found anywhere in the Agreement - that the price support delivered to quota sugar be made contingent on a certain quantity of 'C' sugar being exported. For example, in para 43 of the EC submission the EC states that:

Some of the measures cited by the Complainants, such as import tariffs or safeguard measures, are not even subsidies. Therefore the issue of whether they provide "export subsidies" does not arise.

In that context, Australia notes that cross-subsidisation from price support forms part of WTO export subsidy definitions; for example the Ad Note to Article XVI:3 of GATT 1994 and in Article 9.1(b) of the Agriculture Agreement. Article 9.1(c) also captures such cross-subsidisation, whether from producer levies or consumer transfers. Article 9.1(c) makes it clear that the financing is not limited to a charge on the public account.

The EC has confused the citing of measures in support of the "by virtue of governmental action" element of Article 9.1(c) with what constitutes an 'export subsidy'. Australia is not suggesting that import tariffs or safeguard measures are, by themselves, subsidies. It is not the elements which make up the 'governmental action' which must be made on the export, it is the payment. Australia, unlike the EC, is addressing the elements required to demonstrate the existence of an export subsidy under Article 9.1(c), viz a payment, made on the export, financed by virtue of governmental action. Australia has clearly shown that the payments made on 'C' sugar are made on the export of 'C' sugar. Indeed, as 'C' sugar must be exported any payment made on it must be made 'on the export'.

It can also be shown that where a "payment" is made from the grower to the processor, the payment is made only because processors are not required to pay the higher domestic price for 'C' beet provided that beet is processed into 'C' sugar and exported. This is the exact corollary of the Canada-Dairy case.

QUESTION 44

Assuming that the export of C sugar would not have been possible in the absence of the benefits to processors in the form of intervention price, eligible production, production quota, export subsidies for quota sugar, etc., meaning that such benefits at least resulted in "cross-subsidization" of exports of C sugar, does it necessarily mean that such benefits were also intended, known or anticipated to result in cross-subsidization? Is a mere unintended or consequential result spill over of the domestic subsidy sufficient for the transfer of resources involved to be deemed an export subsidy for the purposes of Article 9.1(c) of the Agreement on Agriculture ? What additional factors in this case could lead to a finding that such benefits actually constitute an "export subsidy"?

Australia considers that a Member's intent is not relevant to that Member's compliance with its obligations on export subsidies under the Agriculture Agreement. In applying the "average total cost of production" test the Appellate Body in Canada-Dairy stated that a Member's domestic subsidies may in some instances provide spill over benefits to exports and that such a situation should not automatically be characterised as an export subsidy, but that domestic support should not be used without limit.[68] An appropriate benchmark should respect the separation between the disciplines on domestic and export subsidies.[69] The Appellate Body, in its First Article 21.5 Report, in formulating this approach, also clearly stated this:

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

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

(92) In our view, by relying upon the total cost of production in this dispute, to determine whether there are "payments", the integrity of the two disciplines is best respected. The existence of "payments" is determined by reference to a standard that focuses upon the motivations of the independent economic operator who is making the alleged "payments" – here the producer – and not upon any government intervention in the marketplace. More importantly, using this basis for comparison, the potential for WTO Members to export their agricultural production is preserved, provided that any export-destined sales by a producer at below the total cost of production are not financed by virtue of governmental action. The export subsidy disciplines of the Agreement on Agriculture will also be maintained without erosion.[70]

As has been made clear in Australia's first submission and in Exhibit ALA-1, this case does not involve a 'mere spill over' of domestic support into export subsidies. What the Appellate Body has made clear in the above quote, and what is present in this case, is that the spill over of domestic support comes within the definitional context of an export subsidy, in relation to the financing, by virtue of governmental action, of payments on the export of sugar.

Thus the cross-subsidisation in this case must meet the elements set out in Article 9.1(c) of the Agriculture Agreement in order to be considered an export subsidy. What is required is that there be a "payment" made on the export of an agricultural product which is financed by virtue of governmental action. The cross subsidy from the price support provided through the EC sugar regime to A and B quota sugar finances a payment, as established in Australia's first submission. With regard to the governmental action, there is a clear and demonstrable link between the payments and the governmental action through the EC sugar regime. Australia has provided in its first submission a detailed examination of the extensive governmental action in this case which demonstrated that 'C' sugar is produced as an integral part of the way the current EC sugar regime is structured.

Australia also refers to its responses to Questions 49 and 54 in relation to the operation or result of a price support system.

QUESTION 45

Assuming that one has to determine whether a "payment" in Article 9.1(c) of the Agreement on Agriculture has been made on export of C sugar , is the "average total cost of production" the only appropriate benchmark? Could there be any other appropriate benchmarks?

The First Article 21.5 Appellate Body Report in Canada Dairy[71] analysed Article 9.1(c) and determined that the appropriate benchmark for ascertaining whether a payment[72] had been made was whether the price paid to the producer for the product was below the "average total cost of production". This reasoning equated "payments" with the transfer of economic resources and, on this basis, looking at whether prices paid are sufficient to recover average fixed and variable costs of production and thus if producers are able to avoid making losses over the long term.[73] The Appellate Body considered and rejected two alternative benchmarks, the domestic price and the world price. [74]

The complaint rests upon the argument that the EC sugar producers are able to export large amounts of 'C' sugar at world market prices because they are receiving such a high level of support for in quota sugar. A comparison between world market prices and 'C' sugar prices received by processors would only reveal that they are comparable.[75] It would provide no indication on the crucial question of whether European exporters have been given an advantage.

In making the above analysis the Appellate Body did not state that the 'average total cost of production' test was the only appropriate benchmark under 9.1(c). It is entirely possible that in differing factual scenarios different benchmarks could be appropriately applied to determine whether a payment exists under Article 9.1(c). In the present case Australia is not aware of a feasible alternative benchmark which would be applicable and notes also that the EC has not proposed any alternative benchmarks.

From an economic perspective, a valid benchmark would be whether the long run industry marginal cost (the full fixed and variable cost of permanently expanding production by one more unit) exceeds the export price. The data collection and analytical task involved in providing such a measurement could be prohibitive. However, knowing that the average total cost of production exceeds the export price is a sufficient benchmark to establish that exports are subsidised given also that this occurs by virtue of governmental action.[76] Producers acting rationally will produce at a point where their long run marginal cost exceeds their average total cost[77]. If their average total cost of production is greater than the export price, their long run marginal cost is clearly greater than the export price. Only through the export subsidy are they induced to produce for export[78].

QUESTION 46

2. The three complainants seem to argue differently on how a "payment" is taking place (See for instance the first submissions from Australia at paras. 112 and 113, Brazil at paras. 44-49, and Thailand at para. 77). Could the complainants comment on each others' argumentation with respect to whether there is a payment in the sense of Article 9.1 of the Agreement on Agriculture?

In Australia's first submission (paras 111-113) a 'payment' in the sense of Article 9.1(c) was identified in that 'C' sugar is being sold at below the average total cost of production by the sugar producer to the world market. Thailand and Brazil identified the same payment in their first submissions. (Brazil, para 49 and Thailand para 77).

Brazil identified two additional payments: the higher than market price paid by European consumers to the producers of sugar (para 45) and the export refunds paid by European taxpayers to A and B (para 46); and a payment-in-kind in the form of 'C' beet at prices below its total cost of production to sugar processors (paras 47-48).

Australia has applied the "payments' test in the sense of the sale of beet or sugar at below the average total cost of production of the product concerned. Having identified one payment Australia did not consider it necessary to identify others, however as discussed in response to question 47 below, there are other payments within the EC sugar regime which are made to 'C' sugar and which are financed by virtue of governmental action.

QUESTION 47

Furthermore, having regard to the contention that in this case the alleged payment or transfer of economic resources takes place between "private parties" (and independently of whether or not the transfer of economic resources might be characterised as being at a price below the average total cost of production), could the complainants comment in greater detail on the means by which, contractually or otherwise, the transfer of resources is actually effected, including, with regard to the facts of the present case, "by who" and "to whom" the transfer is made within the meaning of Article 9.1 (c) of the Agreement on Agriculture.

In the First Article 21.5 Canada Dairy Report the Appellate Body equated 'payments' with a transfer of economic resources. Stating that payment within Article 9.1(c) "encompasses a diverse range of practices involving a transfer of resources, either monetary or in-kind" which may take place "in many different factual and regulatory settings."[79] On this basis there are a number of 'payments' operating in the EC sugar regime.

Australia has identified a payment-in-kind in the form of sugar sold below the average total cost of production. Australia has defined "producer" as a collective term for all enterprises engaged in the production of sugar, from the growing of sugar beet or cane to the processing/refining of sugar from sugar beet or sugar cane or from raw cane sugar.[80] There are payments within the production chain, as well as payments outside of that chain.

In the case of the EC sugar regime, there are multiple payments, in the sense that the payment is being made at below the average total cost of production, or below its "proper value". The payments include:

  • in the case of C2 beet, a sale by the beet grower to the sugar processor[81]

and;

  • a sale by the sugar processor to the exporter

or;

  • where the sugar processor is the exporter, to the foreign buyer.

These payments in the case of both Canada Dairy and EC sugar involve sales at prices that do not reflect the "proper value".

QUESTION 48

Which of the following would/could constitute "payment on the export" in the present dispute:

(a)
The sales of C beet from growers to processors at a low price?
(b)
The higher than world market price paid by European consumers and tax
payers to the producers of sugar?
(c)
The low-priced sales of C sugar by the producers on the world market at
a price below average cost of production?
(d)
Or, could it be something more abstract or conceptual?

Australia considers that scenarios (a) and (c) would constitute payments in circumstances where the sale is made at below that average total cost of production of the seller of the product.

QUESTION 49

The complainants argue that the export of C sugar at prices below average total cost of production has been possible because the system including the high intervention price enables the processors/exporters to recover all the fixed costs so that the processors/exporters are able to export C sugar at such prices, as long as they are above marginal cost of production. The EC seems to contend that what is at issue in this case is NOT whether C sugar export are contingent on the intervention price and the production quota, but whether such benefits are contingent on exports of C sugar. The EC seems to argue that such benefits are typical domestic support and are not contingent on export. In the view of the complainants, how and why are such benefits "payment on the export" in this case?

The EC's interpretation of Article 9.1(c) is confused and fundamentally flawed. Australia recalls that, at the oral hearings, the EC did not respond to Australia's request for clarification whether or not the EC considered that a "benefit" attached to the payment. In the case of payments financed from the proceeds of a producer levy, the "benefit" in that case derives from the governmental action which finances the payment.

As noted on Australia's response to Question 43, the price support to quota sugar does not need to be contingent on export. However, cross-subsidisation of exports from price support has long been recognised as coming within WTO export subsidy definitions. It is not a novel concept and has been given legal expression since the early days of GATT. For example, the Ad Note to Article XVI:3 of GATT 1994 provides legal recognition that a system of domestic price stabilization or of the return to domestic producers of a primary product independently of the movements of export prices may deliver an export subsidy in circumstances where the system results in the sale of a product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market – whether they are wholly or partly financed out of government funds in addition to funds collected from producers. Article 9.1(b) of the Agriculture Agreement also reflects the concept of consumer cross-subsidisation delivered through governmental action. The payment is financed from the price support delivered to beet and sugar product from which the export product is derived.

An export subsidy coming within the description of Article 9.1(c) requires that payments have been made on the export of an agricultural product and the payments in question are financed by virtue of governmental action. It is only when these requirements are both satisfied that an Article 9.1(c) subsidy is made out. The payment on export does not constitute the subsidy – it is the financing of the payment on export, in circumstances where the financing is by virtue of governmental action. Article 9.1(c) does not require that the system of financing should be dedicated to direct export subsidisation. This requirement, unlike the payment requirement, is not linked to export.

It is also important to recall that it is not necessary to show a 'benefit' under Article 9.1(c). It is therefore not necessary to show that 'such benefits are contingent on exports of 'C' sugar'.

The EC's claim that such 'benefits' are typical domestic support and are not linked to export is also in error. As the EC itself has noted, 'C' sugar production is directly linked to quota production[82]. Many government subsidy schemes stimulate excess production but the EC sugar regime is an extreme example. Several features of the EC regime distinguish it from most domestic support arrangements.

  • First, the very high levels of support for quota sugar play a key role in the support to 'C' sugar (see Australia's response to Question 30);
  • Second the EC choice of domestic supply quotas, rather than production quotas.

These two factors alone mean that there is a strong incentive to ensure that quota is always filled and that there is no constraint on production. As indicated in Exhibit ALA-1 and Australia's response to Question 30, those incentives guarantee production well above quota, given the variability of sugar yield.

  • Third, the EC constrains the quantity of 'C' sugar that may be carried over for reclassification as quota sugar;
  • Fourth, the EC constrains the manner in which 'C' sugar carryover may be used (see Australia's response to Question 30(c));
  • Fifth, the EC reclassifies some quota sugar into 'C' sugar (which must be exported)[83]
  • Lastly, the EC requires that any 'C" sugar that is not carried over must be exported. .

QUESTION 50

Article 9.1(c) of the Agreement on Agriculture refers to "payments on the export of an agricultural product", not to payments contingent on the export of an agricultural products. A literal interpretation could suggest that as worded, this part of Article 9.1(c) of the Agreement on Agriculture only requires an examination of the facts in order to establish whether, as a factual matter, the payments in question are being made on, or in connection with, the export of the agricultural product in question. Please comment.

In considering this question it is useful to break down the words of 9.1(c), thus the word 'payments' is linked to the phrase 'on the export'. So that in Article 9.1(c) the payment in itself does not constitute an export subsidy, it is the payment on export which is financed by virtue of governmental action. It is instructive to note that the term 'export subsidies', as defined in Article 1(e) of the Agriculture Agreement, including the export subsidies listed in Article 9.1, are "subsidies contingent on export". Although various formulations were used by the drafters to establish the link to export, by virtue of Article 1(e) the subsidies listed in Article 9.1 are all identified as subsidies contingent on export performance. .

When looking at the application of Article 9.1(c) neither the Panel nor the Appellate Body in the Canada-Dairy case considered in any detail the requirement that the payments be made 'on the export'. It was considered that as the CEM milk was exported any payment was, by definition, 'on the export'. Australia's response to Question 43 is relevant on this point.

QUESTION 51

Assuming that the EC sugar regime, including the price support mechanism, quota restrictions, direct export subsidies to quota sugar exports, constitute the "payments on the export of an agricultural product that are financed by virtue of governmental action", does it mean that such a mechanism will be WTO-inconsistent with regard to export subsidies for C sugar export, even if such a mechanism is within the EC's commitments of domestic support and export subsidies to quota sugar?

Australia's responses to Questions 52 and 54 are relevant. Australia has shown in its First Written Submission and in its oral statement that 'C' sugar receives a "payment" which is made "on the export" and which is "financed by virtue of governmental action". The consequent exports of 'C' sugar result in the EC exporting sugar at levels beyond its reduction commitments, when exports of quota and non-quota sugar are taken together. Australia agrees that if the total of A, B and 'C' sugar was below the EC's 1,273,500 tonnes reduction commitment the EC would not be in breach of its export subsidy obligations. In relation to the domestic support aspect of the question, it is irrelevant whether the export subsidies are within the EC's commitments on domestic support. If the EC was providing support beyond its agreed AMS this would constitute a separate and additional breach of the Agriculture Agreement.

QUESTION 52

The EC seems to argue that in this case, an alleged export subsidy cannot be withdrawn except by withdrawing a legitimate system of domestic price support. Isn't this because such subsidies are not, in fact, contingent on exports. In the view of the complainants, what can and should the EC do in order to withdraw the "export subsidy" to C sugar?

The EC has referred to only one option – possibly the most extreme option. Australia considers that the EC should be asked to clarify what other options are available to it. As noted in the response to Question 30(g), in Australia's view there may be many options open to the EC. One option is to require that any over quota production by quota holders be carried over for use as quota sugar in future seasons. Effectively, that would prohibit the export of 'C' sugar. It would not prohibit exports of sugar by non-quota holders who were genuinely internationally competitive, should there ever be such producers in the EC. Another option could be to reverse the present situation - the imposition of a penalty tax if 'C" sugar is not exported – to the imposition of a commensurate tax on the export of 'C' sugar.

Any suggestion that restrictions on exports of subsidised exports would be contrary to the provisions of Article XI of GATT 1994 is invalid. Article 3.3 of the Agriculture Agreement requires, inter alia, that a WTO Member shall not provide export subsidies in excess of quantity commitment levels. To this end, the EC imposes restrictions on the quantities of sugar which it considers to be in excess of its scheduled commitments. Such restrictions are inherent to compliance with the provisions of Articles 3.3, 8, 9 and 10.1 (in the case of quantities in receipt of subsidies other than Article 9.1 listed export subsidies). By virtue of Article 21.1 of the Agriculture Agreement, Article XI of GATT 1994 applies subject to the provisions of the Agriculture Agreement. If conformity with the Agriculture Agreement is predicated on restrictions on the quantities of subsidised export, it follows that the application of Article XI of GATT 1994 is subject to those provisions

Australia also draws attention to the option proposed in 1973 (COMP-8 page 9) by the Commission. At that time a Commission Memorandum projected a reduction in A quota, restriction of B quota and a complete prohibition on the production 'C' sugar. The Commission proposal demonstrates that the EC has long been aware of the trade distorting problems of 'C' sugar and that it is also aware that there is more than one potential solution to the problem.

The proposals made at the 1981 GATT working party (Document L/5113) are also relevant. In Annex II of that report (page 13) a proposal was made in regard to 'C' sugar: "Possibility of extension of the obligatory storage of sugar 'C' (provided for in Article 26) in such a way that sugar 'C' would be no longer be exported when the world price fell below a price to be determined

QUESTION 53

In para. 55 of its first written submission, Australia states that "factually, domestic production exceeds national consumption." Under the Agreement on Agriculture, is there any (legal) presumption flowing from this fact?

In para 55 Australia described a factual situation that the annual quotas set by the EC sugar regime were 1.5 million tonnes in excess of consumption and that, taking into account total supply including imports, surplus to consumption quota sugar alone effectively guaranteed that quota exports[84] would be at levels well in excess of the EC's WTO reduction commitments.

As noted in para 56 of Australia's first written submission, 'C' sugar production, less carryover, contributes to the exportable surplus.

Under such circumstances the EC regime ensures that that exports will always be in excess of the EC's reduction commitment level; hence the EC would consistently be accountable, under the provisions of Article 10.3 of the Agriculture Agreement, to demonstrate that no export subsidies, whether listed in Article 9.1 or not, have been applied in respect of the quantities in question.

Further, given that all quota sugar is eligible for export refund and that all quota sugar exported is in receipt of export subsidy, the EC could not establish that no export subsidy has been granted in respect of quota exports.

In respect of that part of non-quota exports (as well as quota experts) in excess of reduction commitments, i.e. 'C' sugar, the EC has the burden of proof to demonstrate that no export subsidies are being granted. If the EC is unable to demonstrate that it is not granting any Article 9.1 listed export subsidies to 'C' sugar exports, it follows that the EC is acting inconsistently with Articles 3.3, 8 and 9.1. If, on the other hand, it is able to demonstrate that it is not granting any Article 9.1 listed export subsidies to 'C' sugar exports, it must still demonstrate that no other export subsidies – as defined in any of the WTO Agreements – is being applied to 'C' sugar . If it cannot, it follows that the EC is acting inconsistently with the provisions of Articles 3.3, 8, and 10.1.

Further, under such circumstances, Article 21.1 of the Agreement, read in conjunction with Article 3 of the SCM Agreement, would not serve to exclude the application of the SCM export subsidies prohibitions.

QUESTION 54

Are there circumstances where "income or price support" for a product can be considered to be contingent, in part at least, on export performance for the purposes of Article 10.1 of the Agreement on Agriculture? In particular, can a requirement to export quantities in excess of domestic production eligible for market price support be considered, in conjunction with penalties on domestic sales of such excess quantities, constitute a condition in the sense of Article 3.1(a) of the SCM Agreement?

(a) In regard to the first part of the question:

In Australia's view it is not the system of income or price support that constitutes a subsidy contingent on export performance but whether such support, in whole or in part, comes within the definitional scope of an export subsidy within the meaning of Article 1(e) of the Agriculture Agreement, for example if the subsidy operates or results in sales at prices lower than prices charged to buyers in the domestic market.

As noted in paragraphs 146-148 of Australia's First Written Submission, Article 3.1(a) provides contextual guidance on the definition of an export subsidy, as does Article 1.1 of that Agreement (for the purposes of a definition of a subsidy).

In the context of Article 1.1 of the SCM Agreement, Article 1.1(a)(2) makes it clear that income or price support in the sense of Article XVI of GATT 1994 comes within the scope of a subsidy definition.

For the purposes of those export subsidies listed in Annex I (Illustrative List) of the SCM Agreement and by way of illustration, the element of subsidisation provided through price or income support forms part of an export subsidy in the circumstances described in Items (b), (d) and (l) of the Illustrative List. Read in the context of Article 3.1(a) of the SCM Agreement, all subsidies included in the Illustrative List constitute 'subsidies contingent on export performance' in the circumstances defined in the respective items. The income or price support does not need to be provided exclusively for exports. For instance, in the case of Item (b), a currency retention scheme is not in itself an export subsidy; rather, it constitutes an export subsidy if it involves a bonus on exports.

In the context of Item (l) of the Illustrative List, theexport subsidy definitions of Article XVI:1 of GATT 1994 confirms that income or price support may constitute an export subsidy in circumstances where such support "operates directly or indirectly to increase exports of any products from ... its territory". It is the operation of the system in regard to exports that constitutes a subsidy contingent on export performance.

Also within the context of Item (l) of the Illustrative List, Article XVI:3 of GATT 1994, including the Ad Note, confirms that any form of subsidy which operates to increase the export of a primary product would constitute an export subsidy contingent on export performance. Indeed, the Ad Note to Article XVI:3, paragraph 2, directly addresses the situation in regard to 'C' sugar, in that the arrangements involve:

  • a system of price stabilization or of the return to domestic producers of a primary product independently of the movements of export prices;
  • which results in the sale for export of the product for export at a price lower than the price charged for the like product to buyers in the domestic market; and
  • where the operations of that system are wholly or partly financed out of government funds in addition to the funds collected from producers in respect of the product concerned.

Article XVI:4 of GATT 1994 would also capture such forms of subsidy, in circumstances where such subsidy results in the sale of a product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market.

(b) In regard to the second part of the question:

Australia considers that a requirement to export quantities in excess of domestic production eligible for market price support, in conjunction with penalties on domestic sales, could constitute a condition in the sense of Article 3.1(a) of the SCM Agreement.

A penalty on domestic sales constitutes an indirect tax on domestic production within the meaning of Item (g) of the Illustrative List, as the tax is levied on the producer at the rate of the export refund if 'C' sugar is not exported and is not levied in respect of the production and distribution of quota sugar when sold for domestic consumption. If 'C' sugar is exported, revenue is foregone, as there is a tax exemption specifically related to the export of 'C' sugar.

QUESTION 55

3. Please identify the possible "benefit" that could or does arise from the operation of the challenged sugar subsidies provided by the EC. Please analyse and elaborate the above within the context of Articles 1 and 3 of the SCM Agreement.

In the context of Article 3 of the SCM Agreement a "benefit" is inherent in the definitions of export subsidies coming within the Illustrative List. Unlike Article 1 of the SCM Agreement, there is no specific "benefit" test applied to export subsidies coming within any of the definitions in the Illustrative List, including those export subsidies captured by Item (l) of that List.

In regard to export subsidies defined by application of Article 1.1 of the SCM Agreement, as noted in paragraph 174 of Australia's First Written Submission, a "benefit" refers broadly to "any favourable or helpful factor or circumstance afforded to the recipient of a measure under Article 1.1(a)". The recipients in this instance are those EC sugar producers (all quota holders[85]) who export 'C' sugar.

In addition to the "benefit" identified in paragraph 175 of Australia's First Written Submission, other benefits include:

  • quota insurance, including the high returns from quota sales and the quota asset value
  • the avoidance of a penalty tax on the sales of 'C' sugar on the domestic market
  • the financing of losses on sales at below costs of production.

Australia refers also to its response to Question 49.


[1] US – Superfund GATT Panel Report, BISD 34S/136, para 5.1.9; EC – Bananas III, Appellate Body Report, WT/DS27/AB/R, para 252

[2]US – CDSOA, WT/DS217/AB/R, para. 296.

[3] 1984 ICJ Reports, p 305, para 130

[4]Mc Nair, Law of Treaties, pp 213-215

[5]WT/DS241/R, para. 7.20.

[6] ibid, footnote 58

[7]WT/DS156/R, para. 8.23.

[8] ibid, para. 8.24.

[9] US-FSC WT/DS108/AB/R, para 166.

[10] Part IV of the EC's first written submission is entitled "Footnote 1 to the EC's export subsidy commitments"

[11] The Oxford English Dictionary, 2nd Edition, Volume 1, p. 985.

[12] Sinclair, The Vienna Convention on the Law of Treaties, 2nd Edition, p. 129

[13] WT/DS108/AB/R, Para. 166

[14] Exhibit COMP-20

[15] Exhibit COMP-19

[16] The quantities covered by the protocol are also bound under WTO tariff quota bindings in the EC Schedule

[17] L/4833, para 2.19

[18] L/5113, para 34

[19] An informal group, comprising Argentina, Australia, Canada, EC, Japan, New Zealand, Nordic countries and USA.

[20] EC first written submission, para 21 and Exhibits EC-7 and 8.

[22] See Appellate Body Reports in US - Gasoline and Canada – Dairy

[23] WT/DS50AB/R, para 45

[24] Judgement of 13 March 1997, [1997] ECR I-1453, For case report see http://www.ejil.org/journal/Vol9/No2/sr1-09.html

[25] Exhibit COMP-5F

[26] Paragraph XII of the Modalities text of 20 December 1993 refers (Exhibit COMP-19)

[27]The term "reduction commitments" also appears in the chapeau to Article 9.1.

[28]Article 9.2(b)(iv) provides that, with respect to scheduled products, the budgetary outlay and quantity commitment levels must, by the end of the implementation period, not exceed certain threshold levels, expressed as a percentage of the 1986-1990 base period levels.

[29] In fact it is the additional cost of each extra unit of production, or marginal cost, that is the deciding factor. Here average variable cost, the average of cost of those inputs that can be varied within a season, is taken as being the best available estimate of the marginal cost, given the productive capacity available at the beginning of the season, and the consequent fixed cost.

[30] Exhibit ALA-1, p.20 and footnote 15.

[32] As a percentage of quota, production is 111x0.9=100 and 111x1.1=122 in the best and worst years.

[33] The carryover limit is 20% of A quota, rather than of total quota. For simplicity of illustration, B quota is ignored in the numerical example. Including account of B quota would demonstrate that the constraints would be a little tighter than is assumed here. However, to do so would make little material difference, whilst complicating calculations.

[34] There is less margin to be earned from quota fill from season to season (short term insurance). As well, such a producer is most likely to be located in a member state with other higher cost producers. Amongst such like producers, all with little other incentive to set planned production at high levels, the risk of having quota reallocated to better performers may be low. Both the value of quota and the risk of its loss are low.

[35] see Exhibit ALA-1 pp.17-21.

[36] Bureau of Agricultural Economics 1985, Agricultural Policies in the European Community: Their Origins, Nature and Effects on Production and Trade, Policy Monograph no.2, Australian Government Publishing Service, Canberra, Appendix 11, pp.208-18.

[37] Commission of the European Communities 1973, (Exhibit COMP-8 p.9).

[38] Document L/5113, Annex II, p.13.

[39] Harris, S.A. 1980, EEC sugar and the world market, Paper presented at the International Sweetener and Alcohol Conference on the Future of Sugar, London, 1-3 April, cited Bureau of Agricultural Economics 1985 (cited above), p.200.

[40] Regulation 1260/2001 (Exhibit COMP-5F) includes the following provisions:

Article 5(1) requires a minimum price for beet

Article 21 provides that C beet may be purchased at below the A & B fixed minima

Article 6(1) provides for standardised interprofessional contracts, in accordance with Annex III

Article 6(4) provides that if there are no interprofessional contracts, Member States may take "necessary steps" to protect the interests of the parties concerned.

[41] Depending on the details of the particular interprofessional agreement, market conditions (both domestic and export) and possibly other factors, the notional A and B beet prices used in this calculation may or may not exceed the minimum price set by the EC.

[42] Estimated returns for C sugar are based on the London Daily Price, adjusted for transport to export port as explained in Exhibit ALA-1, p7. The C2 price for Germany is that paid by Sudzucker (DZZ 2000, Die Zuckermarktordnung Instrumente, ZuckerberrüMagazin 2000, no.32, http:// www.vsz.de/dzz/Beilagen/Zuckermarkt/Zuckermarkt.pdf. The C2 price for France is that from the Interprofessional Agreement for France, Le Betteravier 2001, Prix des betteraves hors quota, L'économie betteraviére 2000, http://www.labetterave.com. Cost estimates are average variable cost of beet transport and processing from LMC International.

[43] Correlations were computed between time series of actual C2 prices and series estimated assuming, alternatively, that growers received 60 per cent of 'C' sugar revenue or that growers received 100 per cent of 'C' sugar revenue less average variable cost of beet transport and processing. For France, the correlation between actual C2 prices and both alternative series was 0.80. For Germany, the correlations with actual C2 prices were 0.78 and 0.69 for 60 per cent of 'C' sugar revenue and 100 per cent of 'C' sugar revenue less variable cost of beet transport and processing, respectively.

[44] Exhibit COMP 5-J.

[45] For France, there is an additional allowance whereby reallocation of quota can be higher than the norm in the case of transfer of non-metropolitan quota to metropolitan quota holders.

[46] see Exhibit ALA-1, p.20 and footnote 15 and Australia's response to Question 30.

[47] See Exhibit ALA-11

[48] L/4833, paras 2.19, 4.3

[49] L/5113, paras 15, 21, 24, 32, 33 and Annex II

[50] Exhibit COMP-8, page 9

[51] Exhibit ALA-5.

[52] Eurostat does not disaggregate 'C' and quota sugar.

[53] Including EC institutions and Member State agencies, as well as EC sugar producers

[54] L/5113, para 33

[55] Exhibit COMP-1

[56] Exhibit COMP-2

[57] Exhibit COMP-10

[58] Exhibit COMP 5-F

[59]For example, Exhibits COMP-1, 2, 4, 5F, 10, 11, 12, 13, 17

[60]In recent times, the level of 'C' sugar exports has exceeded exports of quota sugar in receipt of direct export refunds

[61] WT/DSB/M/141, para 18

[62] The Canadian milk producer held the quota, whereas the EC sugar processor holds the quota. However, the EC beet grower holds a quasi-quota, in the form of beet delivery rights, which are regulated by inter-professional contracts stipulated by the EC sugar regime (Exhibit COMP-5F)

[63] It is also partially offset by the reclassification of quota sugar to 'C' sugar.

[64] Canada-Dairy Article 21.5 Panel Report para 6.53

[65] Exhibit ALA-1, p 5.

[66] Canada-Dairy, First Recourse to Article 21.5 (Appellate Body) page 15-16

[67] Canada-Dairy, Second Recourse to Article 21.5 (Panel) page 57

[68] paras 89-91

[69] paras 91-92

[70] Canada Dairy First Article 21.5 Appellate Body Report paras 90-92 WT/DS103/AB/RW

[71] Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products WT/DS103/AB/R 13 October 1999

[72]We note that the payment can be payment-in-kind, as noted in the Appellate Body report from Canada Dairy "It is not contested, in this appeal, that "payments" can include payments-in-kind in Article 9.1(c) of the Agreement on Agriculture." AB Canada Dairy para 71. This was also confirmed in the Second Article 21.5 Appellate Body report WT/DS103/AB/RW2 para 85.

[73] Second Article 21.5 Panel report WT/DS103/RW2 para 5.28

[74] Canada Dairy First 21.5 Appellate Body report p22

[75] This is assumed on the basis that the EC argue that C sugar receives the world market price. There is some evidence that this is not always the case and the legal consequences of this are discussed below.

[76] This is quite different to observing producers sell at prices below the average total cost of production in the absence of a subsidy. If prices fall below expectations after investments in productive capacity have been made, producers may find it worthwhile to continue to produce as long as the price exceeds variable cost. However, without subsidy, such producers will not re-invest if low prices persist and will cease production at or before the end of the useful life of their investments. So, in economic terms, observing exports at below average total cost of production, either for a period beyond the normal life of productive capacity, or at a point in time, with independent evidence that productive capacity is subsidised, is sufficient to demonstrate the existence of an export subsidy. For EC sugar, both of these conditions have been observed.

[77] The reverse does not necessarily hold true. Observing that the export price is greater than the average total cost of production is not sufficient to conclude that there is no export subsidy. The export price may be above average total cost but below the long run marginal cost.

[78] The dual short and long term insurance motives and the ability to make some contribution to fixed costs provide sufficient benefits to more than compensate for the direct cost of exports, as outlined in Exhibit ALA-1 and in Australia's response to Question 30.

[79] Canada-Dairy First Article 21.5 AB Report para 76

[80] See Glossary in Australia's First written submission.

[81] Exhibit ALA-1, pp 10-11

[82] Exhibit COMP-11, page 10, paragraph 38

[83] Exhibit ALA-11

[84] The sugar regime provides for temporary annual adjustments, under delegated Commission authority. However, temporary annual adjustments, which involve the reclassification of quota sugar to 'C' sugar, do not serve to reduce the exportable surplus – see ALA 11 (Commission regulation No 1739/2003).

[85] including processors and growers

Last Updated: 9 January 2013
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