PRESENTED BYDANWE N’DIKWE

&RYAN MYERS

CASE: EUROPEAN COMMUNITIES (EC) vs. BRAZIL:

Export Subsidies on SUGAR

Summary of the case

Complainants: Brazil, Other Complainants: Australia and Thailand

Respondent: European Communities (EC)

Third Parties (22): Barbados; Belize; Canada; China; Colombia; Cuba; Fiji; Guyana; India; Jamaica; Kenya; Madagascar; Malawi; Mauritius; New Zealand; Paraguay; St. Kitts and Nevis; Swaziland; Tanzania; Trinidad and Tobago; United States; Côte d’Ivoire

Main premise of dispute: the complainants contended that EC sugar producers were exporting subsidized “C-sugar” at artificially low prices. Hence, these transactions were perceived as in violation of three particular WTO rules: Agreement on Agriculture (AA), Subsidies and Countervailing Measures (SCM) Agreement, and GATT 1994.

Background/Definition:

The common market organization (CMO) in the sugar sector was set up in 1968 aiming to ensure: Fair income to European Union (EU) producers; and Sufficient domestic supply within EU markets.

Since then, the sugar regime has undergone few minor modifications and it is the only agriculture sector that was not included in the 1992 Common Agriculture Policy (CAP) reform process, which essentially aims to enhance competitiveness through the repeal of price interventions (i.e., export refunds, subsidies).

 The Regulation establishes the basic rules with respect

to: Intervention prices for raw and white sugar; Basic price and minimum beet prices; A and B quotas as well as C

sugar; Import and export licences; levies; export refunds; and preferential

import arrangements.

Background/Definition

The EC sugar regime establishes two categories of production quotas: A & B sugar.

These quotas constitute the maximum quantities eligible for domestic price support (i.e., base price) and direct export refunds for excessive supply of A & B sugar.

C sugar is simply sugar produced in excess of A and B quotas. There is no difference in physical characteristics between A, B, and C sugar. The main difference is the level of levies (taxes) imposed on sales of A & B sugar.

Background/Definition

The total annual quota amount for EU 25 is divided into A-quota (82 %) and B-quota (18%) for each member state.

A and B sugar quotas essentially correspond to the projected demand levels in the internal market, as well as export refunds for any outstanding supply of A & B sugar.

For sugar produced outside the quota there is no support, nor can it be freely marketed within the EU. This sugar is declassified and considered C-sugar, and is not eligible for any export refunds.

Background/Definition

Features of EC Sugar Regime: Intervention price Base /minimum prices A & B levies Import and export licenses Export refunds Management Committee for Sugar Commitments for scheduled A & B sugar quotas

 Intervention prices for both white (processed) and raw sugar products are determined by the projected demand levels during a particular market year.

Base / minimum prices are established for both raw and processed A & B sugar. Basic production levy and B levy

In accordance with Article 15, a base production levy shall be imposed on manufactured A and B sugar. Such a levy shall not exceed 2 % on the intervention price for A sugar. However, a maximum levy of 37.5 % on the intervention price of B sugar may be imposed if the levies on A sugar are deemed ineffective.

Background/Definition

Import and export licenses EC farmers need licenses to import and export cane or beet

sugar and isoglucose. Export refunds

To enable the sugar products to be exported without further processing at world market prices, the difference between the world market price and the EC price may be covered through export refunds, directly from EC budget.

Background/Definition

Management Committee for Sugar Article 42 of the Regulation establishes a Management Committee

for Sugar to assist the EC Commission to consider any issue referred by the Commission or by a member State, such as the preparation of supply and demand forecasts.

Commitments The commitments established in the EC's Schedule are

subject to annual demand forecasts.

Background/Definition

Preferential import arrangements The EC imposes import quotas for “preferential

sugar” (raw), pursuant to the African Caribbean Pacific (ACP)/India Partnership Agreement.

Preferential sugar is imported at zero duty and at guaranteed prices.

The rationale of the ACP/India Partnership Agreement is to ensure adequate supplies of raw sugar for EC refineries.

Historical background /Time line

On September 27, 2002, Australia and Brazil requested consultations with the European Communities concerning Council Regulation (EC) No. 1260/2001 on the EC’s common organization of the markets in the sugar sector.

On July 9, 2003, Brazil, in conjunction with Australia and Thailand, requested the establishment of a panel.

At its meeting on July 21, 2003, the DSB deferred the establishment of the panels. Following complainants’ subsequent requests to establish a panel from, the DSB established a single panel on August 29, 2003.

22 WTO members reserved their third party rights.

Historical background /Time line

On October 15, 2004, the Panel circulated to Members its findingsOn December 13, 2004, following a request from

all the parties, the DSB agreed to extend the 60-day period for the adoption of the Panel report until January 31, 2005.

On January 13, 2005, the EC notified its intention to appeal certain issues of law and legal interpretations developed by the Panel.

On April 28, 2005, the Appellate Body’s report was circulated.

Brazil’s Argument

In Brazil’s view, the EC intervention price system is providing export subsidies for sugar that exceed the reduction commitment levels for sugar specified in the EC’s Schedule (Section II of Part IV).

EC provided subsidies in excess of its commitment to approximately 1.6 million tons per year.

Brazil also believes that EC sugar regime accord less favorable treatment to imported sugar and it is thus violating article 3:4 of the GATT 1994.

Brazil’s Argument

EC’s subsidization of exported sugar violates EC’s obligation under the: Agreement on Agriculture (Article 3.3, 8, 9.1, 10.1 SCM (article 3.1 & 3.2) GATT 1994 ( Article III:4 & XVI )

Brazil’s Argument

Brazil contends: the EC violates Article 9.1(a) of the Agreement on Agriculture since it does not subject to its

reduction commitments all of the sugar to which it grants direct export subsidies;

the EC accords subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture to its exports of C sugar; the EC therefore grants subsidies in excess of its quantity reduction commitment for sugar inconsistently with Articles 3.3 and 8 of the Agreement on Agriculture;

  the export subsidies that the EC grants to A and B quota sugar and to ACP/India sugar are

subject to the EC's reduction commitments for sugar; the EC therefore grants subsidies in excess of its quantity reduction commitment for sugar inconsistently with Articles 3.3 and 8 of the Agreement on Agriculture; and

  the EC's export subsidies for quota sugar, C sugar and ACP/India equivalent sugar are granted

inconsistently with Articles 3.1(a) and 3.2 of the SCM Agreement;  

alternatively, if the Panel finds that the footnote is a valid qualification of the EC's substantive obligations under the Agreement on Agriculture, the EC is not complying with the terms of its footnote and is thus violating Articles 3.3, 8 and 9.1 of the Agreement on Agriculture.

  alternatively, if the Panel finds that the EC's subsidies on sugar are not export subsidies within

the meaning of Article 9.1 of the Agreement on Agriculture, these subsidies are export subsidies that are applied in a manner which results in, or threatens to lead to, circumvention of the EC's export subsidy reduction commitments and are therefore inconsistent with Article 10.1 of the Agreement on Agriculture.

 

EC Argument

EC Position: The Complainants had to identify, in their panel requests,

"the specific measures at issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly".

The European Communities considered that the Complainants' claims under Article 10.1 of the Agreement on Agriculture failed to meet that standard. Moreover,

exports of sugar were not a "measure" within the meaning of Article 6.2 of the DSU. They were private transactions which could not, as such, be the subject of dispute settlement.

Brazil’s Counter-argument

The Complainants stressed that the European Communities' contentions had to be examined in light of Article 10.3 of the Agreement on Agriculture. Because of the reversal of the burden of proof, it was not incumbent on them to identify or enumerate the WTO agreements, provisions, or export subsidy definitions that the European Communities might choose to invoke in its defense.

It was the European Communities' duty to prove that no subsidy of any kind, under any WTO agreement, had been granted by any EC measure to sugar exports in excess of its reduction commitments.

The Complainants also countered that they had sufficiently identified the regulations that were likely to be relevant in the present dispute in their requests for consultations, in their respective requests for the establishment of a panel, as well as in their first submissions. They considered the reference to (EC) Council Regulation No. 1260/2001 to be sufficiently specific to meet due process requirements.

EC Counter-argument

EC Position The European Communities maintained its argumentation.

Thus, of the several claims raised by the Complainants with respect to C sugar under Article 9.1(c) of the Agreement on Agriculture, only one was properly before the Panel, i.e. the claim that exports of C sugar were "payments on exports" because they were made below average total cost of production.

With respect to the footnote in the EC's Schedule, the EC contended that any suggestion that the European Community was acting inconsistently with Article 9.2(b)(iv) of the Agreement on Agriculture had appeared for the first time during the first substantive meeting of the Panel, not in the requests for panel establishment, nor in the first written submissions of the Complainants, but only in the first oral statements of Brazil and Thailand.

Since that provision was not mentioned in the Panel's terms of reference, it could not form the basis for a finding of inconsistency with any other provision of the Agreement on Agriculture.

Counter-arguments

The Complainants reiterated that they had shown that EC exports of sugar exceeded its reduction commitments

Unless the European Community could prove that the excess was not subsidized, the European Community was acting inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture, and Article 3 of the SCM Agreement.

EU Position the European Communities first recalled that its

objection related to the fact that it could not identify, in the panel’s requests, some of the "claims" stated by the Complainants in their first submissions

Counter-arguments

The Complainants submitted that, under Article 10.3 of the Agreement on Agriculture, the burden of proof rested with the European Communities to demonstrate that no export subsidy, whether listed in Article 9 of the Agreement on Agriculture or not, had been granted to sugar exports in excess of the European Communities' reduction commitment level.

European Communities had exported 4.097 million tons of sugar in the 2001-2002 marketing year, an excess of more than three times the scheduled quantity reduction commitment level of 1.273 million tons

in every marketing year since 1995, the European Communities had exported sugar in amounts three to four times the level of its reduction commitments.

excess exports were accounted for by the C sugar and ACP/India equivalent sugar categories

EC Concession / Justification

The European Communities admitted that current exports of sugar were in excess of the figure shown in the EC's Schedule. However, this did not mean that the European Communities had breached its export subsidy reduction commitments; rather the Complainants' claim was based on a misunderstanding of the information contained in the EC's Schedule.

The European Communities concluded that the breach of the European Communities' reduction commitments alleged by the Complainants would thus result exclusively from a scheduling error.

base quantity level would have been 3,188,200 tons instead of 1,612,000 tons, and the final commitment level would have been 2,514,700 tons (i.e. 79 per cent of 3,188,200 tons) instead of

1,273,500 tons (i.e. 79 per cent of 1,612,000 tons) if C sugar had been taken into account. Total exports of sugar during marketing year 2001/2002 were 2,443,600 tons

Complainants’ Counter-arguments

Brazil made it clear that under the DSU, the Panel did not have the authority to permit the European Communities to correct a scheduling error.

Moreover, Thailand underlined that under Article 48, a State may invoke error only where "the error relates to a fact or situation which was assumed by that State to exist at the time when the treaty was concluded…"

Panel Decision

1. In the Panel's view, the Complainants' allegation that exports of C sugar, subsidized through the operation of EC Regulation No. 1260/2001, are in excess of the European Communities' scheduled commitments and, thus, contravene Articles 3 and 8 of the Agreement on Agriculture, is sufficiently specific so as to allow the European Communities and the third parties to be "informed of the legal basis of the complaints“

2. the Panel is of the view that a claim under Article 3 of the Agreement on Agriculture requires allegations that, first, the European Communities has exported sugar above its commitment level and, second, that such exports of sugar were subsidized.

3. In the Panel's view, the Complainants' panel requests sufficiently informed the European Communities what measures the Complainants were challenging and what violations were claimed.

4. Therefore, the Panel considered that the Complainants' panel requests complied with the requirements of Article 6.2 of the DSU in that they adequately identified the measures at issue and the violations claimed to have occurred (i.e. that the European Communities' exports of subsidized sugar exceeded the European Communities' commitment level contrary to Articles 3 and 8 of the Agreement on Agriculture.)

5. Consequently, the Complainants' argument that C sugar receives advantages from various subsidies and payments, within the meaning of Article 9.1(c) of the Agreement on Agriculture, is not outside the Panel's terms of reference.

6. In conclusion, the panel found the EC in violation of WTO rules

Appellate body

On 13 January 2005, the European Communities notified the DSB of its intention to appeal Panel misinterpreted the notions of a "claim" and an "argument". The panel did not examine all the provisions of EC Regulation 1260/2001 The panel fail to 'provide a brief summary of the legal basis' The European Communities also argues that the provision of Article 10.3 of the  Agreement on

Agriculture  relating to burden of proof does not exclude or limit the application of Article 6.2 of the DSU.

The EC appealed the case on the bases of error and misinterpretation of evidence.

However the complainants, particularly Brazil, submit that the European Communities fails to demonstrate that the Panel's legal conclusions are in error, and requests the Appellate Body to uphold the Panel's conclusions and reject the European Communities' appeal.

Appellate body conclusionFINDINGS AND CONCLUSIONS

The appellate body essentially upheld the panel’s key recommendations: The Appellate Body recommends that the Dispute Settlement Body

request the EC bring Council Regulation (EC) No. 1260/2001, as well as all other measures implementing or related to the EC sugar regime, found in this Report, and in the Panel Reports as modified by this Report, to be inconsistent with the Agreement on Agriculture, into conformity with its obligations under that Agreement.

Outcome / Resolution

On May 19, 2005, the DSB adopted the Appellate Body’s report and the Panel Report.

On June 13, 2005, the EC informed the DSB of its intention to implement the recommendations and rulings of the DSB, and noted that it would require a reasonable time period to implement them.

Outcome / Resolution

On August 9, 2005, the Complainants informed the DSB that the parties could not concur on a “reasonable time period”; thus, they requested such a time period should be determined through binding arbitration, pursuant to Article 21.3(c) of the DSU.

On September 5, 2005, Mr. A.V. Ganesan accepted the parties’ joint appointment to be an arbitrator.

On October 28, 2005, the Arbitrator formally determined that a “reasonable time period” is 12 months and 3 days, expiring on May 22, 2006.

Outcome / Resolution

During this time period, the Complainants, on September 27, 2005, expressed concerns about the EC decision to increase exports of “C sugar” by approximately 2 million tons.

Instead of providing a direct explanation, EC claimed that it would comply with DSB’s recommendations and rulings within the reasonable time frame fixed by the arbitrator.

Outcome / Resolution

Finally, on June 8, 2006, Australia, Brazil, and Thailand informed DSB that they each had reached an understanding under Article 21 and 22 of the DSU with the EC.

Roots and Significance of Case

According to Pedro de Camargo, Brazil’s former Secretary of Production and Trade for Brazilian Ministry of Agriculture, failure to implement sugar reform at the Uruguay Round Negotiations left Brazilian policymakers “very frustrated”.

Subsequently, Brazil started to deliberate ways in which it could challenge the EC sugar regime and United States’ cotton policies through WTO’s DSB.

Roots and Significance of Case

Camargo noted that preparing such bilateral WTO cases “helped policy makers identify which developed countries are most damaging to Brazilian exports, and hence develop a solid position in the Doha Round negotiations targeted at challenging the rules that are most harmful.”

Apparently, the Canada Dairy case, which essentially ruled that cross-subsidization of dairy products was “tantamount” to an export subsidy, prompted Brazil to draw parallels of such practices with the subsidization of exported “C” sugar in the EC.

Roots and Significance of Case

Several Brazilian policymakers hoped that the resolution of the EC sugar case, as well as the U.S.’ cotton case, could serve as a “foundation for their positions in the Doha Round Negotiations.”

As Camargo noted, Brazil is not opposed to the EC imports of sugar from ACP countries and India, but opposes the re-exports of subsidized “c” sugar at artificial prices below world market prices.

In the sugar case, Brazil had to prioritized its focus on the most harmful effects of the EC sugar regime – subsidization of exported “C” sugar products.

Roots and Significance of Case

Why not focus on the EC ACP/India preferential access provisions, which contradict WTO’s obligations?

There may be more pressing concerns surrounding

the subsidization of exported “C” sugar products. However, Brazil itself is a member of Mercosul, and

thus also engages in preferential access practices. Brazil may have deliberately (or coincidentally) undertaken a cautious approach with this case.

Roots and Significance of Case

Why doesn’t Brazil feel threatened by ACP / India’s preferential access arrangements with the EC?

Several market analysts believe the current arrangements with the EC sugar regime serve as disincentives for these developing countries to invest in the production of value-added, refined sources of sugar for other lucrative markets. It is unclear as to whether Brazil shared this perception during the EC sugar case.

Potential Implications for Doha Round

It remains to be seen whether the rulings of the EC sugar case (and US’ cotton case) will further enhance its leverage at the Doha Round negotiations over agriculture subsidies.

22 WTO members (both developed and developing countries) requested third party rights for this case because of the crucial effect this ruling could set for future Doha Round negotiations.

Potential Implications for Doha Round

While most developing, sugar-producing countries share Brazil’s frustration with agriculture subsidies (i.e., sugar and cotton), they, however, are also concerned that Brazil would ultimately dominate the world market under favorable Doha Round reforms. After all, Brazil is the most competitive sugar exporter in the world.