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WTO disputes

European Communities Export Subsidies on Sugar - WT/DS 265

Panel established pursuant to Article 6 of the Understanding on Rules and
Procedures Governing the Settlement of Disputes

Responses by Australia to Questions from the Panel

11-12 May 2004

Questions by the Panel during the second substantive meeting

A. Footnote 1

To all parties:

Question 56 What is the parties' understanding of the phrase "export subsidy commitments" in Section II of Part IV of each Member's Schedule, referred to in Articles 3.1 and 3.3 of the Agreement on Agriculture? On this particular subject parties are requested to provide any document that they consider relevant in support of their answers.

1. As indicated by the title of Section II of Part IV of a Member's WTO Schedule[1], "export subsidy commitments" in a Schedule constitute budgetary outlay and quantity reduction commitments with respect to scheduled agricultural products, as envisaged in the model Uruguay Round format for preparation of schedules[2].

2. The reduction commitments relate to the bound base outlay and quantity levels specified in a Member's Schedule. With the exception of those products designated as 'incorporated products' for which the reduction commitment is limited to aggregate budgetary outlays[3], the scheduled reduction commitments involve a reduction in both budgetary outlays and quantities from the base levels.

3. The EC does not apply any limits to budgetary outlays on subsidised exports or to the quantities of subsidised exports.[4] Current EC budgetary outlays on export refunds are in excess of the base levels specified in the EC's schedule, as are the subsidised quantities exported.

4. A ceiling commitment which does not involve a reduction from the base level would not come within the meaning of "budgetary outlay and quantity reduction commitments", read in its ordinary meaning and context. Article 9.2(b)(iv) of the Agriculture Agreement provides context for the nature of the commitment as a reduction commitment. In that regard, the Appellate Body in US-FSC stated that, with respect to scheduled agricultural products, Members had undertaken, through Article 9.2(b)(iv), "... to reduce the level of export subsidies, as listed in Article 9.1, during the implementation period of the Agreement on Agriculture."[5]

Question 57 Pursuant to Article 31.1 of the Vienna Convention on the Law of Treaties, the first rule of treaty interpretation is the interpretation of the ordinary meaning of a text. Bearing this in mind, what is your understanding of the word "origin" in the context of the first sentence of the footnote which reads "does not include exports of ACP and India origin."?

5. Consistent with the meaning of 'origin' used in its ordinary meaning in the WTO Agreements, 'origin' means country or countries of the production of a good.

6. Article 9(b) of the WTO Agreement on Rules of Origin provides:

rules of origin should provide for the country to be determined as the origin of a particular good to be either the country where the good has actually been wholly obtained or, when more than one country is concerned in the production of the good, the country where the last substantial transformation has been carried out;

7. In accordance with the plain meaning of 'origin' used in the WTO and in accordance also with the EC's own rules of origin, sugar of 'ACP-Indian origin' is distinct from sugar of 'EC origin'. Clearly, the term used in the first sentence of the Footnote limits its application to sugar produced in the ACP and India. The application of Article 31.1 of the Vienna Convention leads to no other result. The EC cannot impute the term 'equivalent' into the text. A Panel cannot read into a text words that are not contained therein to reach an interpretation which is inconsistent with the actual text.

8. In the WTO Committee on Rules of Origin, the EC has advised that, under its own rules of origin, the refining of white sugar from raw cane sugar does not serve to change the origin of the product. Raw cane sugar from the ACP and India imported and refined in the EC would continue to be classified as sugar of ACP and Indian origin.[6]

9. In regard to sugar of 'ACP and India origin' Article 2 of Commission Regulation(EC) 1159/2003[7] provides that 'ACP-India preferential sugar' means the cane sugar referred to in Article 35(1) of Regulation 1260/2001[8] and that 'special preferential sugar' means the raw cane sugar referred to in Article 39(1) of that Regulation.

10. In accordance with the provisions of Articles 14 and 15 of Regulation 1159/2003, before such sugar may be imported, proof of origin of ACP-India sugar is required, in accordance with Article 14 of Protocol 1 of Annex V of the ACP-EC Partnership Agreement, or, in the case of India, Article 47 of Commission Regulation 2454/93.

11. Australia understands that sugar can only acquire the status of 'EC origin' if it has been processed from cane or beet harvested within the EC. For export purposes, the EC distinguishes between sugar of EC origin and sugar of ACP and Indian origin.

12. In accordance with the provisions of Article 27(12) of Regulation 1260/2001, eligibility for export refunds for sugar is limited to:

(a) sugar obtained from sugar beet or sugar cane harvested within the EC;[9]

(b) cane sugar imported from ACP and Indian quota holders under the 'Preferential' sugar arrangements described in Article 35 of the Regulation;

(c) sugar obtained from one of the products imported under Article 35 of the Regulation.

13. For the purposes of application of the Footnote, sugar of 'ACP and India origin' would therefore be limited to sugar described in Article 27(12)(b) and (c) of EC Council Regulation 1260/2001, that is, cane sugar imported under the 'Preferential' arrangements of Article 35 of that Regulation or white sugar refined from raw cane sugar imported under those arrangements.

14. It is Australia's understanding that the 'ACP/India equivalent' sugar is in fact quota sugar obtained from sugar beet or cane harvested within the EC.

To the EC:

Question 58 The EC argues, and the complainants discuss this in their rebuttals, that Article 3.3 of the Agreement on Agriculture does not impose an obligation to have both quantity and budgetary outlay reduction commitments. Could the EC clarify its standpoint on this matter?

(a) Does this mean that a Member does not need to specify both quantity and budgetary outlay commitments, which would imply that a Member could have either (a) a quantity commitment, (b) a budgetary commitment, (c) neither form of commitment?

(b) Does this mean that a Member can choose to specify only budgetary outlay commitments in its schedule, but not quantity commitments, which would imply that a Member would be allowed an indefinite amount of subsidized export as long as the budgetary outlay remains within its commitment level?

No Comment

Question 59 Could the EC clarify its standpoint regarding Article 9.2(a) and (b) of the Agreement on Agriculture, given paragraph 10 of the Preamble of Council Regulation 1260/2001 which provides that:

"The agreement on agriculture concluded under the GATT agreements (herein after referred to as "the Agreement") in particular requires the Community to gradually reduce its export support for agricultural products and in particular for sugar under guarantee of production quotas. The Agreement provides for export support to be reduced, in terms of both the quantities covered and the level of the subsidies involved, over a transitional period...."

15. Australia notes that 'ACP/India equivalent' sugar comes within the definition of sugar "under guarantee of production quota", as quota sugar eligible for production guarantees in terms of domestic and export support.

16. The EC has not imposed any reduction limitation on the quantities of exports of 'ACP/India/equivalent' sugar. It imposes no limits of any kind on the budgetary outlays on export subsidies of such sugar. If anything, budgetary outlays on exports of such sugar appear to have increased since the 1986-1990 base period.

17. As noted in the response to Panel Question 56, the budgetary outlays on sugar under guarantee of production quota and the quantities of quota sugar exported are in excess of the base period levels specified in the EC's schedule.

Question 60 The EC argues that the footnote establishes a de facto ceilingon its budgetary outlay regarding "ACP/India equivalent" export, which is a movingceiling. If the level of the de facto ceiling of its budgetary outlay is affected by the maximum possible export refund which apparently can only be determined at the end of a particular year in retrospect, how can other Members know what the de facto ceiling of a particular year is and whether the budgetary outlays remain within that ceiling?

18. There is no ceiling – de facto or otherwise - on budgetary outlays on 'ACP/India equivalent' sugar. Through Management Committee procedures, the EC periodically grants per unit export refunds of varying levels for all quota sugar[10], including 'ACP/India equivalent' sugar; quota sugar subject to producer financing; and quota sugar used in incorporated products.

19. The per unit subsidy is variable, reflecting the difference between the semi-constant internal price and the world price. The subsidy is set at a level which enables sales to be made on the world market as an alternative to sales into intervention.

20. As there is no fixed relationship between the internal price and the world price, a budgetary outlay ceiling could only operate by adjusting the quantities eligible for export subsidy in a marketing and financial year.

21. A budgetary outlay ceiling is applied to quota sugar subject to producer financed levies, with the ceiling given effect by adjustment of quantities eligible for refund. The budgetary ceiling is applied on a special "sugar" financial year basis (1 July - 30 June) whereas the quantity limits are applied on a marketing year basis (1 October - 30 September)[11]. In respect of such sugar, the EC imposes an overall budgetary ceiling of €499.1 million for each financial year.

22. As all quota sugar is eligible for export subsidy in the form of export refunds, in order to remain within the budgetary outlay ceiling for quota sugar other than 'ACP/India equivalent' sugar, the EC reduces quotas on a temporary annual basis, by a process of reclassification of quota sugar to 'C' sugar.[12]

23. Similarly for incorporated products, for which per unit subsidies on sugar are linked to the per unit subsidy granted for product exported as sugar, the EC imposes a financial year (16 October – 15 October) budgetary ceiling on export subsidies on the sugar content, as a proportion of the overall budgetary outlay ceiling of €648.4 million on export subsidies on all covered basic products contained in incorporated products.

24. While the same per unit subsidy applies to all three groups of quota sugar, 'ACP/India equivalent' exports are not subject to any overall budgetary outlay ceiling or to any adjustment of quantities eligible for export refund. The total level of budgetary outlays on such sugar in any one "sugar" financial year will depend on the difference between the domestic support price and the world price. The greater the gap between the domestic and world price, the higher the budgetary outlay. The total budgetary outlay is not conditioned by the quantitative ceiling which the EC claims to be applying to 'ACP/India equivalent' exports.

25. Under such circumstances, the so-called ceiling on budgetary outlays on 'ACP/India equivalent' sugar could be in excess of the levels of budgetary outlays on such sugar during the base period.

26. The EC does not notify the total budgetary outlays or quantities of 'ACP/India equivalent' sugar exported and has refused to respond to the requests of USA and Australia for such information to be provided to the WTO Committee on Agriculture.[13] Even if the EC were to notify the budgetary outlays and quantities for such sugar, the Notifications would invariably involve a time delay of periods of up to one year and would not necessarily convey data on the budgetary outlays during a financial year.[14]


Question 61 Has the EC notified the total amount of budgetary outlays including those for ACP/India sugar to the Committee on Agriculture, and if not, why has the EC not notified it despite the fact that the EC is making a reduction commitment on "ACP/India equivalent" sugar in the form of a fixed ceiling which is a component of the overall reduction commitment?

27. The EC's Notifications to the Committee on Agriculture do not include the total amount of budgetary outlays for 'ACP/India equivalent' sugar. The only budgetary outlays notified are the budgetary outlays for quota sugar subject to producer-financed levies.[15] Nor does the EC notify the quantities of 'ACP/India equivalent' sugar exported, as compared to the exports of quota sugar subject to producer financing[16] and the total exports of sugar[17].

28. As noted in paragraph 95 of Thailand's First Written Submission, in November 1999, the EC advised the Committee on Agriculture that "...any financial assistance [on exports of ACP or Indian sugar] is not reported to the WTO.[18]

29. Despite repeated questions of a factual nature by Australia in the Committee of Agriculture for clarification on the budgetary outlays and other relevant matters connected to the export of 'ACP/India equivalent' sugar, the EC has refused to provide the information requested.[19] Australia is still awaiting responses to questions to the EC on 'ACP/India equivalent' sugar that were provided in advance of the 25 March 2004 meeting of the Committee on Agriculture.

B.
C
Sugar – Article 9.1(c) of the Agreement on Agriculture

Question 62 According to the EC, there is a payment, if the export production of a product receives an advantage through a transfer of economic resources.

To all parties:

(a) Do the parties, in particular the complainants, agree with the above description?

30. In the First Article 21.5 Canada-Dairy Report the Appellate Body equated 'payments' with a transfer of economic resources. More specifically, the Appellate Body stated that there are payments-in-kind in the form of discounted milk, "…when the price charged by the producer of the milk is less than the milk's proper value to the producer".[20] The Appellate Body stated (in para 74):

Thus, the determination of whether "payments" are involved requires a comparison between the price actually charged by the provider of the goods and services – the prices of CEM in this case – and some objective standard or benchmark which reflects the proper value of the goods or services to their provider – the milk producer in this case.

31. The Appellate Body then went on to determine the most appropriate benchmark in that case was whether sales were made below the "average total cost of production" of the milk.

32. The Appellate Body used this benchmark as it answered the "crucial question, namely, whether Canadian export production has been given an advantage".[21] In this sense, the above statement is correct. However, the EC is attempting to link the idea of 'advantage' to the recipient of the payment, arguing that it is the recipient alone who can and must receive an advantage or, as the EC contends, a 'benefit'.

33. This is an incorrect reading of Article 9.1(c) and the Appellate Body jurisprudence. The fundamental question in Canada-Dairy and in the present case is whether export production has been given an advantage. In the case of 'C' sugar it is clear that without the Article 9.1(c) export subsidies provided by the EC on 'C' sugar there would be no 'C' sugar production or export.

(b) The parties, in particular the complainants, refer to various kinds of payments(export of C sugar to its foreign buyer, sale of C beet from the grower to the processor, payment from the consumers and taxpayers, etc.). Could the complainants clarify,for each of the various kinds of payments, what constitute the "transfer of resources" and the "advantage" and from whom to whom is such "transfer" made?

34. In the Canada-Dairy First Article 21.5 Report the Appellate Body stated 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".[22]

35. In its First Submission (paras 111-113) Australia identified a 'payment' on 'C' sugar in that it is being sold at below the average total cost of production by the sugar producer to the world market. Australia 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. The transfer of resources in this case is from the EC sugar producers to the purchaser in that the price charged by the producer of the sugar is less than the proper value of the sugar to the producer. The export production receives an advantage because the payment is financed by virtue of governmental action.

36. In response to Panel Question 47, Australia went on to identify other payments within the production chain of EC sugar. These are: the payment from the beet grower to the sugar processor in the form of beet sold below its proper value to the grower, i.e. beet sold below its costs of production;[23] and a sale by the sugar processor to the exporter. These payments in the case of both Canada-Dairy and EC sugar involve sales at prices that do not reflect the 'proper value' of the product to the producer.

37. As set out in Exhibit ALA-1, 'C' beet is categorised into 'C1' and 'C2' beet in the main 'C' sugar producing countries, being France and Germany. This categorisation also applies in Austria. 'C2' beet is priced on the basis of an approximately 60/40 split of revenue from 'C' sugar sales. Over the 11 years to 2002-03 the payment for C2 beet is estimated to have averaged 46 per cent of the average total cost of producing beet in France and 30 per cent in Germany.[24] Therefore, for sugar produced from C2 beet, there is a payment-in-kind, in the form of beet sold below its proper value, by the growers to the processors.

38. In relation to the second payment identified above, in most cases that Australia is aware of, sugar is sold onto the world market via an exporter. The exporter purchases the sugar from the sugar processor and then sells it onto the world market. The price paid by the exporter is, in the case of all 'C' sugar exports, below the total average costs of production. Thus there is a payment-in-kind from the sugar processor to the sugar exporter in the form of sugar below its production costs which enables the exporter to sell the sugar onto the world market.

39. While these payments clearly fall within the definition of a 'payment' in Article 9.1(c) and are indistinguishable from the Canada-Dairy case, in Australia's view, it is not necessary to dissect the structure of the EC sugar regime to find a payment. To limit the Appellate Body's ruling to cases of 'inputs' would place an illogical and unworkable restriction on this jurisprudence and on the operation of Article 9.1(c). Under such a reading, if it is possible to find an 'intermediary' so an 'input' can be found, a payment will be deemed to exist, if not, no payment will be found. This would result irrespective of whether the sales are being made at below the value of the product to the producer, i.e. at a loss which must be financed by somewhere, possibly by virtue of governmental action. It would also place undue emphasis on the recipients of the payment, requiring that they obtain an 'advantage' or 'benefit'. But in both the Canada-Dairy case and the current case the payer received an advantage, as he or she were not charging prices which fully reflected their total production costs because of cross-subsidisation of export production from quota production. As the Appellate Body has stated:

To the extent that the producer charges prices that do not recoup the total costs of production, over time, it sustains a loss which must be financed from some other source, possibly "by virtue of governmental action.[25]

40. It is thus clearly the producer who is charging a price which does not recover its total costs who, while making a loss on the specific sale in terms of recouping total costs, is receiving an advantage through the 'financing by virtue of governmental action'.

To the EC:

(c) Could the EC comment on each of the different kinds of payments referred to by the complainants in their submissionswith regard to whether there are "transfer of resources which confers an advantage to export production"?

No Comment

To the complainants:

Question 63 Thailand argues that the recipient of an "advantage" does not have to be the payeeof the payment, and Brazil argues in paragraph 32of its Second submission, that the recipient of the payment does not need to be the same person that receives the subsidy. On the other hand, the EC argues, in paragraph 17 of its oral statement, that the payment cannot provide any benefit to the same person who makes the payment.

(a) Do the complainants consider that the following two questions are two distinct questions; the question of whether the recipient of the benefit/ advantage and the payee of the payment has to be the same person, and the questions of whether the recipient of the benefit/advantage and the payer of the payment can be the same person? Can the payer be at the same time the recipient of the advantage?

41. These are two separate but related questions. Thus the recipient of the advantage and the payee do not have to be the same person. The payer can at the same time receive an advantage.

42. However, it is important to recall that in the Canada-Dairy jurisprudence the Appellate Body was focusing on whether the export production received an advantage. It may also be the case that the payer and the payee also receive an advantage of some sort. In Canada-Dairy, the payer was the dairy farmer and the payee was the milk processor. The dairy farmer received an advantage by being able to sell milk at below its average total cost of production and yet make a profit, based on the marginal costs of producing CEM milk. Thus, as explained by the Appellate Body, because the dairy farmer had covered his or her fixed costs through the profits made on quota milk, he or she was able to produce extra milk, or CEM milk, and make a profit only covering marginal or variable costs, once the capital investments were in place.

43. In the same way, the EC sugar producer is able to sell 'C' sugar at below the total average costs of production because the profits it recoups from 'A' and 'B' quota sugar cover the fixed costs. 'C' sugar need only cover marginal costs to be profitable. Thus the Appellate Body looked at why dairy farmers made the payments, and why they were able to do so without making a loss, indeed while making a profit.

(b) For each of the various kinds of payments that the complainants referred to, please explain who the payer, the payeeand the recipient of the advantageis?

44. With regard to the first payment identified by Australia, the payment made when 'C' sugar is sold onto the world market at below total average costs of production, the payer is the sugar producer and the payee is the world purchaser. In regard to the second payment identified, the sale of beet below its average total costs of production from the beet grower to the sugar processor, the payer is the beet grower and the payee is the sugar processor. With regard to the third payment, the sale of sugar below its average total costs of production from the sugar processor to the sugar exporter, the payer is the sugar processor and the payee is the sugar exporter.

45. In all cases the recipient of the advantage is the export production or 'C' sugar exports.

To Brazil:

Question 64 Brazil argues that becausethe processors are receiving an advantage, through transfer of resources resulting from the sugar regime, which allows them to produce and export C sugar at above marginal costbut below average total cost of production, such export of C sugar to foreign buyers is the payment, or is Brazil arguing that, for the same reason, there is a payment, without specifying who is making such payment to whom?

No Comment

To the EC:

Question 65 The EC argues that the cost of production benchmark may be appropriate where sales are made within the domestic market. Does the EC agree with the complainants that, given the similarity of the situation in Canada-Dairy where below-cost sales of milk from milk producers to the processors in the domestic market and the situation in EC-Sugar where below-cost sales of C beet from the beet growers to the processors in the domestic market, the cost of production benchmark should be applied in this case with regard to the payment in the form of sales of C beet from the beet growers to the processors?

46. Australia would reiterate its position that the cost of production benchmark is applicable not only to the payment from beet growers to processors but also to the other payments it has identified (see Australia's answer to Panel Question 62(b)).

47. Australia notes in regard to this question that the Appellate Body specifically rejected both the domestic market price and the world price as a benchmark in identical circumstances. Further, none of the participants in the Canada-Dairy case argued that world market prices were the appropriate benchmark for determining whether supplies of CEM involved 'payments' within the meaning of Article 9.1(c).[26] This was for the obvious reason that it would be illogical. A comparison between world market prices and 'C' sugar prices received by processors would only reveal that they are comparable. It would provide no indication on the crucial question of whether European export production has been given an advantage.

Question 66 According to the EC's answer to Question 30 (b) from the Panel, C sugar was produced by 36 sugar producing companies out of a total of 48. Could the EC and the complainants provide the panel with the share in volume of sugar production of those 36 companies among all 48 companies? Furthermore, could the EC and the complainants provide the panel with the percentage (in terms of number of companies) and the share of volume of sugar production of the companies that actually produce and sell C beet to the processors?

48. Australia does not have access to the information requested at the disaggregated company level, although some information may be available from company reports (see response to Panel Question 67).

49. Australia refers to page 67 of Exhibit COMP-7, in which the EC estimates:

· that beet sugar production in the EU-15 is in the hands of 30 companies

· in six Member States, there is only one sugar company and in three Member States there are commercial duopolies

· that sugar beet growers control directly or indirectly 35% of EU-15 sugar production capacities and that, following recent changes, this share could even reach 55%.[27]

50. Australia also refers to Exhibit COMP-10, which analyses the quota and geographical market shares of companies in Austria, Belgium, Denmark, France, Finland, Germany, Spain, Sweden and United Kingdom (Tables 2 and 3).

51. According to the Normandy Agriculture Chamber in 1999/2000, 30 per cent by volume of French sugar exports to third countries were made with benefit of export refunds, compared to an EU-wide average of 45 per cent.[28]

Question 67 It is to be assumed the separation between A, B, C sugar does not mean such sugar is produced by three different companies respectively. Rather, it must be assumed that generally, one company produces the three kinds of sugar . Can the EC provide an illustration of how a typical EC sugar company records, in its balance sheets, domestic and export sales of A, B, and C sugar?

52. No EC producer produces 'C' sugar only. Some high cost producers produce no 'C' sugar, or produce 'C' sugar in small quantities in very high yield years only. Similarly, some very high cost producers produce little or no 'B' sugar.

53. Annual reports for the 2002-03 year for Royal Cosun and Sudzucker can be found at www.cosunbusiness.com and www.suedzucker.de. These are the largest sugar producer in the Netherlands and the largest sugar producer in the EC, respectively. 'C' sugar is mentioned in the Sudzucker report (p.66) in the context of the total EC carryover to the 2003-04 season. It is not mentioned in the financial accounts or the description of Sudzucker's sugar operations. The price paid for 'C' beet is mentioned in the Royal Cosun report (p.8 and p.20). There is no explicit reference to 'C' sugar in the financial accounts. In the annual report of St Louis Sucre, 'C' sugar is mentioned in the context of production, carryover and quota/non-quota composition of total sales (www.saintlouis-sucre.com, Annual Report, p.31, p.35 and p.37), but is not separately recorded in financial statements.

54. At a detailed level, processors must account for 'C' sugar in three ways. First, they must be able to account for their total quantities of EC produced sugar sold against their A and B quotas. Second, they must be able to account for each grower's beet delivery against that grower's contracted A, B (and possibly 'quota' 'C' or C1) beet deliveries. Third, if they are the owners of the 'C' sugar, they must export the sugar within a specified period. The only other recording requirement relates to carryover of 'C' sugar. Beyond these simple quantity measures, processors have no obvious reason to track or report the details of 'C' sugar or relate it to particular cost measures.

Question 68 Do the overall operations of a typical EC sugar company operate at a loss or at a profit? Please explain and provide illustrations.

55. Most, if not all, EC sugar producers are profitable, particularly for those companies that operate in the relatively more efficient 'C' sugar producing regions. For example, reported profits for 2002-03 were €31 million and €315 million for Royal Cosun and Sudzucker, respectively (a substantial part of Sudzucker's profit would have been earned through its 85 per cent equity in St Louis Sucre). In the same year, Danisco reported a profit of DKK1017 million. (€139 million)[29] The Associated British Foods group that includes British Sugar as a subsidiary reported a profit of ₤176 (€264 million).[30] According to the Financial Times (15 April 2004, p.24) profit for the Associated British Foods subsidiary appears likely to be higher in 2003-04 than in 2002-03, with high sugar yields accounting for much of an increase in profit for the first half of the year from ₤73 million to ₤85 million. In 2002-03 St Louis Sucre's profit was €132 million.

56. The most representative measure of return to capital available on a common basis is the return to shareholders' funds. Profit as a percentage of shareholders funds for 2002-03 was 6.4, 14.2, 7.5 and 36.2 for Royal Cosun, Sudzucker, Danisco and St Louis Sucre, respectively. To the extent that the value of sugar quotas is included in the reported value of capital, these figures will understate the true contribution of quota sugar profits to rates of return. Only for St Louis Sucre is the issue addressed specifically for sugar quotas in the accounts.[31] There, it is stated that the value of sugar quotas purchased in company amalgamations is amortised over 20 years.

57. Australia provided, in Exhibit ALA-1 and in Box 1 (p.45) of Australia's First Written Submission, evidence from sales of sugar quota and beet quota, that market participants have valued the combination of sugar quota and associated beet delivery rights as high as €1898/t. Those values are a reflection of farmers' and processors' expectations of profit from quota beet and sugar production.

Question 69 How do you reconcile your assertion that the complainants have not proved that the payments on C sugar are export contingent, with Article 13 of Council Regulation 1260/2001, which explicitly requires that C sugar must be exported?

No Comment

Question 70 Without prejudice to the scope of the terms of reference of the Panel, or to the party who would have the burden of proof, does the EC agree that the COP benchmark could apply to the various payments identified by the complainants?

58. The EC has suggested that the world market price operates as an effective benchmark in this case in regard to the first payment argued by Australia. Australia considers that it is unclear how such a benchmark would operate in the present case. Australia has argued that payments are made when the 'C' sugar is sold at below its average total cost of production. If the benchmark were the world price, there is no comparison as 'C' sugar is being sold onto the world market and hence receives the world market price. There could never be a case where a payment existed using the world price as a benchmark.

59. The Appellate Body clearly rejected the world price as an appropriate benchmark in Canada-Dairy. It did, however, state that the world market price "…provide[s] one possible measure of the value of the milk to the producer".[32] This statement was made in the context of the availability of alternative supplies of milk, in this sense the world market provided a relevant point of reference as the prices must be competitive with world market prices otherwise the milk would not be purchased, assuming no other import restrictions. It is useful to quote the entire paragraphs 83 and 84, which is only partially referred to by the EC:

83. The alternative "benchmark" which the Panel relied upon to determine whether CEM prices involve "payments" was the terms and conditions on which alternative supplies are available to processors on world markets, through IREP. [33] In reviewing this benchmark, we recall that, in these proceedings, the standard used to determine whether there are "payments" under Article 9.1(c) must be based on the proper value of the milk to the producer, in order to determine whether the producer foregoes a portion of this value. If a producer wishes to sell milk for export processing, it is obvious that the price of the milk to the processor must be competitive with world market prices. If it is not, the processor will not buy the milk, as it will not be able to produce a final product that is competitive in export markets. Accordingly, the range of world market prices determines the price which the producer can charge for milk destined for export markets. [34] World market prices do, therefore, provide one possible measure of the value of the milk to the producer.

84. However, world market prices do not provide a valid basis for determining whether there are "payments", under Article 9.1(c) of the Agreement on Agriculture, for, it remains possible that the reason CEM can be sold at prices competitive with world market prices is precisely because sales of CEM involve subsidies that make it competitive. Thus, a comparison between CEM prices and world market prices gives no indication on the crucial question, namely, whether Canadian export production has been given an advantage. Furthermore, if the basis for comparison were world market prices, it would be possible for WTO Members to subsidize domestic inputs for export processing, while taking care to maintain the price of these inputs to the processors at a level which equalled or marginally exceeded world market prices. There would then be no "payments" under Article 9.1(c) of the Agreement on Agriculture and WTO Members could easily defeat the export subsidy commitments that they have undertaken in Article 3 of the Agreement on Agriculture. [35]

60. Thus while the Appellate Body states that the world market price provides a possible measure of the value of the milk to the producer it clearly confirms that the world price does not provide a valid basis for determining whether there are payments under Article 9.1(c). The reason the Appellate Body reached this conclusion is the obvious point that sales at the world market price may be possible precisely because there is a subsidy.

61. In arguing that the COP benchmark applies to sales within the domestic market only, the EC misunderstands the meaning of the benchmark. In Canada-Dairy, milk producers were the owners of quota. It was they who had both the incentive and the finance to produce over quota milk for sale at prices below the average total cost of production. For a competitive processing industry, access to milk at a price less than its average total cost of production guaranteed exports of cheese at less than the average cost of production of cheese – less than would have been possible in the absence of the milk subsidy.

62. In Canada-Dairy, the COP applied at the milk producer level demonstrated that Canadian export production of cheese had been given an advantage. In this case applying the COP benchmark at the milk producer level gave the same result as applying it at the aggregate level. The equivalence of the COP benchmark at farm and aggregate levels held because milk producers were the quota holders.

63. For EC sugar, processors are the owners of quota. Processors have incentives to produce 'C' sugar (short term and long term quota insurance and the ability to profit from sales at prices greater than marginal cost). However, they have only indirect control over growers' beet production levels. Processors use a range of methods to encourage farmers to grow over quota beet. Two extremes are:

· providing positive incentives for growers to plan production above (the processor's) quota, by;

  • including an amount of 'C' beet in a grower's beet delivery quota, at an averaged price, or paying a higher price of the first tranche of over quota beet (C1 beet).

· offering no positive incentives – paying for all 'C' beet at C2 beet levels – but cutting next year's beet allocation for those growers who fail to meet quota, reallocating that part of beet quota to more reliable growers.

64. In both cases, beet growers have an incentive to plan production above their share of sugar quota. In the first case, the incentive is to receive the high prices for beet for both quota sugar and their allocated amount of over quota beet. In the second case the incentive is to protect their beet delivery quotas – to enable them to continue to receive high prices for quota beet. In either case, or both, they may also gain where the price of 'C' beet exceeds their marginal cost.

65. In practice processors often use a combination of price systems for 'C' beet. The variation in pricing systems means that there is also variation in the farmer/processor shares of the total net cost of 'C' sugar. However, it is important to note that the average total cost of producing sugar (the total economic resources used in producing and processing beet) is the same, regardless of grower/processor financial shares. As a consequence of the differences in grower/processor shares in financing the cost of production, there are differences in the nature and size of transfers that might be identified as 'payments' when looking at any part of the production process in isolation. For example, consider the 'payment' that Australia has identified when beet growers supply beet to processors at C2 prices. The amount of the 'payment' is the difference between the average total cost of growing beet and the C2 price. The gap between the world sugar price and the C2 beet price is insufficient to cover average total processing cost. So, it is also true that the sugar produced from C2 beet is exported at a price less than its average total cost of production. However, it is only with knowledge of the industry in aggregate that this can be established. Consider the case of 'C' beet that is included in a grower's beet quota and paid for at an averaged price. The price for that beet is generally close to that for A beet,generally well above the average total cost of producing beet. There is no 'payment' from the grower to the processor, but the average total cost of producing the 'C' sugar is unchanged from the previous example.

66. Despite the differences between grower/processor shares in financing 'C' sugar production in the two examples given above, the two cases involve identical export subsidies. In both cases, there is a transfer of economic resources from growers from their receipts for quota beet and sugar to the activities of growing and processing 'C' beet and processing 'C' sugar. Exports are advantaged as 'C' sugar that would not otherwise be produced is in fact produced and must be exported. The growers and processors of 'C' beet gain through receipt of high prices for additional quota sugar produced as a result of setting planned production at higher levels and to the extent that receipts for 'C' beet and sugar exceed marginal cost.

67. The only economic difference between Canada-Dairy and EC sugar is the level at which quota is held. In Canada-Dairy that was at milk producer level. Applying the COP at that level was sufficient to determine whether exports were made at prices below the average total cost of production and thus were advantaged. EC sugar quotas are held at the processor level and price support is paid to both processors (through quota sugar prices) and growers (through minimum quota beet prices). Applying the COP benchmark at the aggregate industry level answers the question of whether the EC's export production of sugar has been advantaged. It is for this reason that the primary 'payment' identified by Australia is the sale of 'C' sugar on the world market at below its average total cost of production. All other 'payments' need to be considered in the context of the average total cost of production of sugar in aggregate.

To all parties:

Question 71 Following the parties' discussion during the second substantive meeting, please comment on the following synopsis having regard, inter alia, to the relationship between, on the one hand, the generic definition of an export subsidy under Articles 1 and 3.1(a) of the SCM Agreement and, on the other, the export subsidies listed in Annex 1 to the SCM Agreement.

For the purposes of the Agreement on Agriculture, "unless the context otherwise requires", export subsidies are defined as referring to "subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement". The general structure of this definition is not greatly dissimilar from that contained in Article 3.1(a) of the SCM Agreement, which refers to "subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I". Articles 1 and 3.1(a) of the SCM Agreement can, where necessary and appropriate, provide contextual guidance for the interpretation of certain of export subsidies listed in Article 9.1 of the Agreement on Agriculture, but beyond this the Article 9.1 listed export subsidies are to be interpreted according to their own terms as per se export subsidies for the purposes of the Agreement on Agriculture. Thus while it may be necessary and appropriate to refer for interpretative guidance to the SCM definition of a subsidy in the context of Article 9.1(a), (d) or (f), or to SCM Article 3.1(a) with respect to export contingency, there is no such necessity or justification for importing elements of the SCM definition of a subsidy or of export contingency into Article 9.1 of the Agreement on Agriculture.

68. Australia agrees with the synopsis, with some qualifications.

69. Australia considers that, in regard to the use of the term 'subsidy' or 'subsidies' in Article 9.1(a), (d) and (f), of the Agriculture Agreement, recourse may be made to Article 1(a) of the Subsidies Agreement. Similarly, in regard to the use of the term 'contingent on export performance' in Article 9.1(a) of the Agriculture Agreement, recourse may be made to Article 3.1(a) of the Subsidies Agreement.

70. In regard to Article 9.1(a) and Article 9.1(e) of the Agriculture Agreement, the close or exact commonality of terminology with those of Items (a) and (c) of the Illustrative List of the Subsidies Agreement would warrant the direct application of relevant jurisprudence of the Subsidies Agreement to interpretations of the export subsidies described in Article 9.1(a) and (e) of the Agriculture Agreement.

71. Otherwise, the definitions of export subsidies in Article 9.1 of the Agriculture Agreement for which no counterpart may be found in the Subsidies Agreement, must be considered to have been deliberately determined by the negotiators of the Agriculture Agreement, notwithstanding some similarities between the relevant export subsidy provisions of the two Agreements. [36]

C.
SCM
Agreement

To all parties:

Question 72 Please explain the relationship between, on the one hand, the definition of Article 3.1 of the SCM Agreement and, on the other hand, the items listed in the Illustrative List of the SCM Agreement.

72. The use of the term 'including' in Article 3.1 of the Subsidies Agreement makes it clear that the Items listed in the Illustrative List constitute subsidies contingent on export performance.

73. Provided a measure falls within the definitional scope of any item in the Illustrative List, it would constitute a prohibited export subsidy for the purposes of Article 3.1 and 3.2 of the Subsidies Agreement. There is no need to determine whether a measure comes within the definition of a subsidy for the purposes of Article 1.1 of that Agreement or to demonstrate export contingency, as the subsidy and contingency elements are inherent in the definitions. This has been confirmed by WTO jurisprudence.[37]

Question 73 The complainants have asserted that the SCM Agreement apply to agricultural products, whereas the EC rejects the application of the SCM to agricultural products. Please elaborate on the reasons for these different positions.

74. Australia refers to its response to Panel Question 1, to paragraph 71 of its Rebuttal Submission and to paragraphs 19, 23, 24, and 58-61 of its statement of 11 May 2004 at the second meeting of the Panel .

75. As is clear from the provisions of Article 21.1 of the Agriculture Agreement and the chapeau to Article 3 of the Subsidies Agreement read together, the Agriculture Agreement does not constitute a lex specialis in regard to agricultural products or to measures applied to agricultural products, whether subsidies or any other obligation subject to WTO disciplines.

76. Nor is the Subsidies Agreement limited to processed agricultural products. The interpretation advanced by the EC is not supported by WTO jurisprudence and would serve to void the relevant provisions of the Agriculture and Subsidies Agreement of any meaning. The interpretation advocated by the EC would also ignore the distinction between the field of application of prohibited subsidies under the Tokyo Round Subsidies Code and the WTO Subsidies Agreement.

77. As noted in para 60 of Australia's statement of 11 May 2004, the Agriculture Agreement affords a legal tolerance to the provision of Article 9.1 listed export subsidies conforming with Articles 9.1 and 3.3 of that Agreement. If the export subsidies granted on any covered agricultural product do not come within the limits of the legal tolerance of the Agriculture Agreement, they are subject to the prohibitions of Article 3 of the Subsidies Agreement. If the measures in question come within the definitional scope of a prohibited export subsidy – as defined through recourse to the Illustrative List or Article 1 of that Agreement - then a finding of inconsistency with Article 3.1 and 3.2 of the Subsidies Agreement would follow.

To the EC:

Question 74 The EC rejects the application of the Canada-Dairy jurisprudence to the interpretation of Article 9.1(c), yet its argumentation is based principally on SCM provisions, such as Articles 1.1, 14(d), and Item (d) of the Illustrative List. How does the EC reconcile its invocation of SCM provisions in this context with its rejection of the application of SCM Agreement to this case?

78. Australia refers to its response to Panel Question 71 and to paragraph 23 of its statement of 11 May 2004 at the second meeting of the Panel.

79. Australia further notes that the application Article 14(d) of the Subsidies Agreement is limited to Part V of that Agreement (Countervailing Measures) and has no application to Parts I or II of the Agreement.

Question 75 Could the EC explain its insistence in using the concept of "benefit", which appears to be a concept imported from the SCM Agreement?

80. The EC argues that Article 9.1(c) must require the existence of a benefit (para 20 of its Second Written Submission). As Australia has stated in its Rebuttal Submission and in response to Panel Questions 49 and 55, there is no requirement in Article 9.1(c) to identify a 'benefit'. Article 9.1(c) contains three elements, and none of these elements require the identification of a 'benefit'. The EC is adding words which are not in the clear text. If the negotiators had intended a separate 'benefit' test in Article 9.1(c) this would have been stated, as it is in Article 1 of the Subsidies Agreement.

81. The EC also claims that the Complainants' interpretation would make it possible to establish the existence of an "export subsidy" in circumstances where the supposedly subsidised goods receive no benefit from the alleged export subsidy. The EC argues that the Complainants' interpretation amounts to saying that the producers of 'C' sugar are subsidising themselves by making "payments" to another party. But the real question is: why are the producers of 'C' sugar making such payments? Because the payments are financed by virtue of governmental action on the basis that 'C' sugar is exported.

82. In fact, the EC put forward a view in the DSB, on the adoption of the First Article 21.5 Appellate Body report, that the test applied by the Appellate Body "was not recipient‑oriented, thus making it possible that a measure would be found to be a subsidy although not involving a benefit."[38] Thus while the EC may not agree with the Appellate Body, it is clearly of the view that the Appellate Body did not require a separate 'benefit' test in Article 9.1(c).

83. The EC's own admission in para 21 of its Second Written Submission reveals the problem with its argument. The EC asserts that "it is difficult to see why Members should concern themselves with a 'subsidy' that provides no 'benefit' to the supposedly subsidised goods". But it is not difficult to see why the Complainants are concerned about the subsidy on 'C' sugar.

84. Even if a 'benefit' test is required, this is clearly established in the present case. In paragraph 61 of its First Written Submission the EC admits that 'C' sugar producers receive a 'benefit' through 'payments' made as a result of the cross-subsidisation of quota to non-quota sugar, as set out above. It is incorrect for the EC to assert that 'C' sugar exports receive an advantage, which is financed by virtue of governmental action, but to assert at the same time that there is no 'payment' involved.

85. In addition, there is nothing which would require any such "benefit" test to be linked to a specific element in the three part test set down in Article 9.1(c). The export production does receive a benefit, in fact, through the payment, on the export, which is financed by virtue of governmental action. Given that no producer sells either 'C' beet or 'C' sugar in the absence of quota sugar production it is not credible to suggest that 'C' sugar exports do not receive an advantage.

86. The EC also mischaracterises Australia's argument in para 15 of its Second Written Submission when it states that "the mere fact of exporting goods below average total cost of production provides no 'advantage' to the 'export production', unlike the provision of inputs below cost within the exporting country." Australia is not arguing that it is the export below average cost which provides an advantage. This is an element of the three part test set down in Article 9.1(c), i.e. the establishment of a payment. There is no test that exporting below costs must confer an advantage, what is relevant is why the product is being exported below costs – it is because it is in receipt of an export subsidy.

Annex 1

Bilan de l'accord OMC dans le secteur betteraves-sucre (French)


[1] Exhibit COMP-16. Section II of Part IV of the EC's own Schedule is titled "Export Subsidies: Budgetary Outlay and Quantity Reduction Commitments"

[2] MTN.GNG/MA/W/25

[3] Exhibit COMP-19. Paragraph 9 of Annex 8 of the Modalities text refers.

[4] Australia's Statement to the Panel of 11 May 2004, paras 28-31 and 33-35

[5] WT/DS108/AB/R, para 147

[6] Harmonization Work Programme: Proposals by the Chairman of the Committee of Rules of Origin. JOB(03)/132/Rev.3 Page 28

[7] Exhibit COMP-5B

[8] Exhibit COMP-5F

[9] In regard to (a), by virtue of Article 13(1) of Regulation 1260/2001, eligibility is limited to 'A' and 'B' quota sugar.

[10] See Exhibit COMP-11, pp 21-22 for a description

[11] Exhibit COMP-16, page 10

[12] As described in para 58 of Australia's First Written Submission. See also Exhibit ALA-11

[13] G/AG/R/17, p 29, G/AG/R/34, pp 3-4, G/AG/R/35 p30.

[14] EC Notifications to the Committee on Agriculture are provided on a marketing year basis. See for instance G/AG/N/EEC/44, included in Exhibit COMP-17

[15] Exhibit COMP-17, Supporting Table ES:1

[16] Exhibit COMP-17, Table ES:1

[17] Exhibit COMP-17, Table ES:2

[18] G/AG/R/17

[19] G/AG/R34, Summary Report of the Meeting Held on 27 March 2003, pp3-4 and G/AG/R/35, Summary Report of Meeting Held on 30 June 2003, page 30

[20] Ibid, para 73

[21] Ibid, para 84

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

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

[24] The beet production costs are the LMC estimates of beet farming cost given in table A3 of Exhibit ALA-1 – assuming that beet yields 13 per cent sugar. C2 beet prices are: Germany; Sudzucker, DZZ (2000), Die Zuckermarktordnung Instrumente, Zuckerberrüben Magazin 2000, no. 32, www.vsz.de/dzz/Beilagen/Zuckermarkt/Zuckermarkt.pdf; France, interprofessional C2, 1992-93 to 2000-01, Le Betteravier (2001), Prix des betteraves hors quota, L'économie betteraviére 2000, www.labetterave.com/fondoc/010302020300Prixdesbetteraveshorsquota.htm, 2001-02, Union SDA (2003), Rapport Annuel: Exercice 2001-2002, www.union-sda.fr, p.34.2001-02, 2002-03, Le Betteravier (2003), Sommaire, no. 804, 18 April, www.lebetteravier.com.

[25] First Article 21.5 Canada-Dairy Report para 87

[26] First Article 21.5 Report Canada-Dairy, footnote 57.

[27] Most of the shares in Sudzucker, the largest EU sugar processor, are held by beet growers (Exhibit COMP-10, para (164) page 30. The EC estimates that more than one-third of sugar firms are now owned by agricultural co-operatives (See COMP-6, page 13, footnote 15)

[30] Farmers Weekly, www.fwi.co.uk.

[31] St Louis Sucre: www.saintlouis-sucre.com Annual Report of St Louis Sucre 2002-2003 Notes to the balance sheet-Assets, page 62

[32] First Article 21.5 Report Canada-Dairy, para 83

[33]Panel Report, paras. 6.22 ff. See, supra, para. 67. We note that, in examining the terms and conditions on which IREP is available, the Panel focused exclusively on the requirements to obtain a discretionary permit and to pay an administrative fee. In assessing whether alternative sources of supply are available on more favourable terms, we consider that panels should take account of all the factors which affect the relative "attractiveness" in the marketplace of the different goods or services. The primary consideration must be price, while the importance of administrative formalities will depend on their nature and characteristics. For instance, if an import permit were granted to importers as a matter of course, in the context of straightforward import procedures, and if import fees were only administrative charges to cover expenses, these formalities would be unlikely, on their own, to mean that imports were available on less favourable terms and conditions.

[34]New Zealand acknowledged, before the Panel, that the price of CEM "will be essentially world market prices". (New Zealand's first submission to the Panel, para. 4.05) Canada also argued that the processor offers producers a price for CEM that is based on world market conditions. (Canada's first submission to the Panel, para. 37; Canada's second submission to the Panel, para. 13; Canada's oral statement before the Panel, paras. 21, 30, 49 and 51; Canada's appellant's submission, para. 39 and footnote 32 thereto)

[35]We note that none of the participants in these proceedings argued that world market prices are the appropriate benchmark for determining whether supplies of CEM involve "payments" within the meaning of Article 9.1(c) of the Agreement on Agriculture.

[36] Para 23 of Australia's opening statement of 11 May 2004 refers.

[37] Cited in paragraph 148 and Footnote 107 of Australia's First Written Submission.

[38] Minutes of the DSB Meeting held 17 January 2003 WT/DSB/M/141

14 February 2003 para 16

Last Updated: 9 January 2013
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