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Lawyers, other representatives, expert(s), tribunal’s secretary

Complaint by Australia - Report of the Panel

TABLE OF CASES CITED IN THIS REPORT

Short TitleFull Case Title and Citation
Argentina – Poultry Anti‑Dumping Duties Panel Report, Argentina – Definitive Anti-Dumping Duties on Poultry from Brazil, WT/DS241/R, adopted 19 May 2003
Australia – Automotive Leather II Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, adopted 16 June 1999, DSR 1999:III, 951
Australia – Automotive Leather II (Article 21.5 – US) Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather – Recourse to Article 21.5 of the DSU by the United States, WT/DS126/RW and Corr.1, adopted 11 February 2000, DSR 2000:III, 1189
Australia – Salmon Appellate Body Report, Australia – Measures Affecting Importation of Salmon, WT/DS18/AB/R, adopted 6 November 1998, DSR 1998:VIII, 3327
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/R, adopted 20 August 1999, as modified by the Appellate Body Report, WT/DS46/AB/R, DSR 1999:III, 1221
Brazil – Aircraft Appellate Body Report, Brazil – Export Financing Programme for Aircraft, WT/DS46/AB/R, adopted 20 August 1999, DSR 1999:III, 1161
Canada – Aircraft Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/R, adopted 20 August 1999, as upheld by the Appellate Body Report, WT/DS70/AB/R, DSR 1999:IV, 1443
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377
Canada – Aircraft (Article 21.5 – Brazil) Panel Report, Canada – Measures Affecting the Export of Civilian Aircraft – Recourse by Brazil to Article 21.5 of the DSU, WT/DS70/RW, adopted 4 August 2000, as modified by the Appellate Body Report, WT/DS70/AB/RW, DSR 2000:IX, 4315
Canada – Aircraft (Article 21.5 – Brazil) Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft – Recourse by Brazil to Article 21.5 of the DSU, WT/DS70/AB/RW, adopted 4 August 2000, DSR 2000:IX, 4299
Canada – Aircraft Credits and Guarantees Panel Report, Canada – Export Credits and Loan Guarantees for Regional Aircraft, WT/DS222/R and Corr.1, adopted 19 February 2002
Canada – Dairy Panel Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products, WT/DS103/R, WT/DS113/R, adopted 27 October 1999, as modified by the Appellate Body Report, WT/DS103/AB/R, WT/DS113/AB/R, DSR 1999:VI, 2097
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products, WT/DS103/AB/R, WT/DS113/AB/R and Corr.1, adopted 27 October 1999, DSR 1999:V, 2057
Canada – Dairy (Article 21.5 – New Zealand and US) Panel Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products – Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/RW, WT/DS113/RW, adopted 18 December 2001, as reversed by the Appellate Body Report, WT/DS103/AB/RW, WT/DS113/AB/RW
Canada – Dairy (Article 21.5 – New Zealand and US) Appellate Body Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products – Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/AB/RW, WT/DS113/AB/RW, adopted 18 December 2001
Canada – Dairy (Article 21.5 – New Zealand and US II) Appellate Body Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products – Second Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/AB/RW2, WT/DS113/AB/RW2, adopted 17 January 2003
Canada – Dairy (Article 21.5 – New Zealand and US II) Panel Report, Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products – Second Recourse to Article 21.5 of the DSU by New Zealand and the United States, WT/DS103/RW2, WT/DS113/RW2, adopted 17 January 2003, as modified by the Appellate Body Report, WT/DS103/AB/RW2, WT/DS113/AB/RW2
Chile – Price Band System Appellate Body Report, Chile – Price Band System and Safeguard Measures Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 23 October 2002
EC – Asbestos Panel Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/R and Add.1, adopted 5 April 2001, as modified by the Appellate Body Report, WT/DS135/AB/R
EC – Bananas III (US) Panel Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas – Complaint by the United States, WT/DS27/R/USA, adopted 25 September 1997, as modified by the Appellate Body Report, WT/DS27/AB/R, DSR 1997:II, 943
EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591
EC – Computer Equipment Panel Report, European Communities – Customs Classification of Certain Computer Equipment, WT/DS62/R, WT/DS67/R, WT/DS68/R, adopted 22 June 1998, as modified by the Appellate Body Report, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, DSR 1998:V, 1891
EC – Computer Equipment Appellate Body Report, European Communities – Customs Classification of Certain Computer Equipment, WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, DSR 1998:V, 1851
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135
EC – Poultry Appellate Body Report, European Communities – Measures Affecting the Importation of Certain Poultry Products, WT/DS69/AB/R, adopted 23 July 1998, DSR 1998:V, 2031
EC –Sugar Exports (Australia) Panel Report, European Communities – Refunds on Exports of Sugar(Complaint by Australia), adopted 6 November 1979, BISD 26S/290
EC –Sugar Exports (Brazil) Panel Report, European Communities – Refunds on Exports of Sugar(Complaint by Brazil), adopted 10 November 1980, BISD 27S/69
EC – Tariff Preferences Panel Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/R, adopted 20 April 2004, as modified by the Appellate Body Report, WT/DS/246/AB/R
EC – Tariff Preferences Appellate Body Report, European Communities – Conditions for the Granting of Tariff Preferences to Developing Countries, WT/DS246/AB/R, adopted 20 April 2004
EEC (Member States) – Bananas I Panel Report, EEC – Member States' Import Regimes for Bananas, 3 June 1993, unadopted, DS32/R
Guatemala – Cement I Panel Report, Guatemala – Anti-Dumping Investigation Regarding Portland Cement from Mexico, WT/DS60/R, adopted 25 November 1998, as modified by the Appellate Body Report, WT/DS60/AB/R, DSR 1998:IX, 3797
Guatemala – Cement II Panel Report, Guatemala – Definitive Anti-Dumping Measures on Grey Portland Cement from Mexico, WT/DS156/R, adopted 17 November 2000, DSR 2000:XI, 5295
India – Autos Panel Report, India – Measures Affecting the Automotive Sector, WT/DS146/R, WT/DS175/R and Corr.1, adopted 5 April 2002
India – Autos Appellate Body Report, India – Measures Affecting the Automotive Sector, WT/DS146/AB/R, WT/DS175/AB/R, adopted 5 April 2002
India – Patents (US) Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9
India – Quantitative Restrictions Panel Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/R, adopted 22 September 1999, as upheld by the Appellate Body Report, WT/DS90/AB/R, DSR 1999:V, 1799
India – Quantitative Restrictions Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WT/DS90/AB/R, adopted 22 September 1999, DSR 1999:IV, 1763
Korea – Various Measures on Beef Panel Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/R, WT/DS169/R, adopted 10 January 2001, as modified by the Appellate Body Report, WT/DS161/AB/R, WT/DS169/AB/R, DSR 2001:I, 59
Korea – Various Measures on Beef Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5
Mexico – Corn Syrup (Article 21.5 – US) Panel Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSUby the United States, WT/DS132/RW, adopted 21 November 2001, as upheld by the Appellate Body Report, WT/DS132/AB/RW
Mexico – Corn Syrup (Article 21.5 – US) Appellate Body Report, Mexico – Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the United States – Recourse to Article 21.5 of the DSUby the United States, WT/DS132/AB/RW, adopted 21 November 2001
Thailand – H-Beams Panel Report, Thailand – Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-Beams from Poland, WT/DS122/R, adopted 5 April 2001, as modified by the Appellate Body Report, WT/DS122/AB/R
Thailand – H-Beams Appellate Body Report, Thailand – Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H-Beams from Poland, WT/DS122/AB/R, adopted 5 April 2001
Turkey – Textiles Panel Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/R, adopted 19 November 1999, as modified by the Appellate Body Report, WT/DS34/AB/R, DSR 1999:VI, 2363
Turkey – Textiles Appellate Body Report, Turkey – Restrictions on Imports of Textile and Clothing Products, WT/DS34/AB/R, adopted 19 November 1999, DSR 1999:VI, 2345
US – Corrosion-Resistant Steel Sunset Review Appellate Body Report, United States – Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan, WT/DS244/AB/R, adopted on 15 December 2003
US – Cotton Yarn Panel Report, United States – Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan, WT/DS192/R, adopted 5 November 2001, as modified by the Appellate Body Report, WT/DS192/AB/R
US – Cotton Yarn Appellate Body Report, United States – Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan, WT/DS192/AB/R, adopted 5 November 2001
US – Export Restraints Panel Report, United States – Measures Treating Exports Restraints as Subsidies, WT/DS194/R and Corr.2, adopted 23 August 2001
US – FSC Panel Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/R, adopted 20 March 2000, as modified by the Appellate Body Report, WT/DS108/AB/R, DSR 2000:IV, 1677
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619
US – FSC (Article 21.5 – EC) Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/RW, adopted 29 January 2002, as modified by the Appellate Body Report, WT/DS108/AB/RW
US – FSC (Article 21.5 – EC) Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002
US – FSC (Article 22.6 – US) Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales Corporations" – Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement, WT/DS108/ARB, 30 August 2002
US – Hot-Rolled Steel Panel Report, United States – Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan, WT/DS184/R, adopted 23 August 2001 as modified by the Appellate Body Report, WT/DS184/AB/R
US – Hot-Rolled Steel Appellate Body Report, United States – Anti-Dumping Measures on Certain Hot‑Rolled Steel Products from Japan, WT/DS184/AB/R, adopted 23 August 2001
US – Offset Act (Byrd Amendment) Appellate Body Report, United States – Continued Dumping and Subsidy Offset Act of 2000, WT/DS217/AB/R, WT/DS234/AB/R, adopted 27 January 2003
US – Section 301 Trade Act Panel Report, United States – Sections 301-310 of the Trade Act of 1974, WT/DS152/R, adopted 27 January 2000, DSR 2000:II, 815
US – Shrimp Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 2755
US – Sugar Panel Report, United States Restrictions on Imports of Sugar, adopted 22 June 1989, BISD 36S/331
US – Sugar Waiver Panel Report, United States – Restrictions on the Importation of Sugar and Sugar-Containing Products Applied under the 1955 Waiver and under the Headnote to the Schedule of Tariff Concessions, adopted 7 November 1990, BISD 37S/228.
US – Superfund Panel Report, United States – Taxes on Petroleum and Certain Imported Substances, adopted 17 June 1987, BISD 34S/136.

I. INTRODUCTION

1.1.
This proceeding was initiated by three complaining parties, Australia, Brazil and Thailand.
1.2.
In communications dated 27 September 2002, Australia and Brazil requested consultations with the European Communities pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU"), Article XXII:1 of the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), Article 19 of the Agreement on Agriculture, and Articles 4.1 and 30 of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), with respect to export subsidies provided by the European Communities to its sugar industry1. Australia and Brazil held consultations with the European Communities in Geneva on 21 and 22 November 2002 but these consultations did not result in a resolution of the dispute.
1.3.
On 14 March 2003, pursuant to Article 4 of the DSU, Article XXIIIof the GATT 1994, Article 19 of the Agreement on Agriculture, and Articles 4 and 30 of the SCM Agreement, Thailand requested consultations with the European Communities with respect to certain subsidies provided by the European Communities in the sugar sector.2Consultations were held in Geneva on 8 April 2003 but failed to resolve the dispute.
1.4.
On 21 July 2003, Australia, Brazil and Thailand requested the establishment of a panel pursuant to Articles 4.7 and 6 of the DSU and Article XXIII:2 of the GATT 1994.
1.5.
At its meeting on 29 August 2003, the Dispute Settlement Body (DSB) established a panel pursuant to the requests of Australia (WT/DS265/21); Brazil (WT/DS266/21); and Thailand (WT/DS283/2), in accordance with Article 6 of the DSU. At that meeting, the parties to the dispute agreed to establish a single panel pursuant to Article 9.1 of the DSU with standard terms of reference.

1. Terms of reference

1.6.
The terms of reference are the following:

"To examine, in the light of the relevant provisions of the covered agreements cited by Australia in document WT/DS265/21, by Brazil in document WT/DS266/21 and by Thailand in document WT/DS283/2, the matters referred therein to the DSB by Australia, Brazil and Thailand, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."

2. Panel composition

1.7.
On 15 December 2003, Australia, Brazil and Thailand requested the Director-General to determine the composition of the panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:

"If there is no agreement on the panellists within 20 days after the date of the establishment of a panel, at the request of either party, the Director-General, in consultation with the Chairman of the DSB and the Chairman of the relevant Council or Committee, shall determine the composition of the panel by appointing the panellists whom the Director-General considers most appropriate in accordance with any relevant special or additional rules or procedures of the covered agreement or covered agreements which are at issue in the dispute, after consulting with the parties to the dispute. The Chairman of the DSB shall inform the Members of the composition of the panel thus formed no later than 10 days after the date the Chairman receives such a request."

1.8.
On 23 December 2003, the Director-General accordingly composed the Panel as follows:

Chairman: Mr Warren Lavorel

Members: Mr Gonzalo Biggs

Mr Naoshi Hirose

3. Third parties

1.9.
Australia, Barbados, Belize, Brazil, Canada, China, Colombia, Côte d'Ivoire, Cuba, Fiji, Guyana, India, Jamaica, Kenya, Madagascar, Malawi, Mauritius, New Zealand, Paraguay, Saint Kitts and Nevis, Swaziland, Tanzania, Thailand, Trinidad and Tobago, and the United States notified their interest to participate in the panel proceedings as third parties.
1.10.
At the request of some third parties, all third parties were invited to attend, as observers, the entirety of the first and second substantive meetings with the parties (see paragraphs 2.5-2.9 below).

4. Organizational meeting

1.11.
On 9 January 2004, the Panel sent a draft timetable and draft working procedures to the parties. These were subsequently discussed at the organizational meeting that the Panel held with the parties on 14 January 2004. The timetable (tentative) and working procedures were adopted as amended at the organizational meeting. No decision with respect to third parties was taken at the organizational meeting. (See also paragraphs 2.1-2.9 below.)

5. Meetings with the parties and third parties

1.12.
The Panel met with the parties on 30, 31 March, 1 April, and on 11 and 12 May, 2004. In accordance with paragraph 6 of Appendix 3 of the DSU, third parties were invited to a session during the first substantive meeting set aside for that purpose. Third parties were also invited to observe the entirety of the first and second substantive meetings (see paragraphs 2.5-2.9 below).

6. Reports

1.13.
At the request of the European Communities, pursuant to Article 9.2 of the DSU on multiple complaints, the Panel is issuing three reports for this dispute, one for each complaining party.
1.14.
On 4 August 2004, the Panel issued its Interim Reports to the parties. On 17 August 2004, the Panel received comments from the parties. On 24 August 2004, the parties submitted further written comments on the comments received on 17 August 2004. The Panel issued its Final Reports to the parties on 8 September 2004.

II. PRELIMINARY RULINGS BY THE PANEL AND OTHER ISSUES

1. Notification of third parties' interest

2.1.
In this case, the Republic of Kenya (Kenya) on 26 September, 2003 and the Republic of Côte d'Ivoire (Côte d'Ivoire) on 5 November, 2003 requested to participate as third parties after the ten-day notification period specified by the Chairman of the DSB at the time of the establishment of the Panel, but before the Director-General was asked by the parties to compose the Panel pursuant to Article 8.7 of the DSU. The parties agreed to accept Kenya as a third party but the Complainants objected to the participation of Côte d'Ivoire.
2.4.
On the basis of these considerations, the Panel therefore decided, in its ruling dated 16 January 2004, to accept as third parties all Members that had expressed a third-party interest and saw no reason to treat them differently. In doing so, the Panel emphasized that its decision was specific to this dispute and was not intended to offer a legal interpretation of the ten-day notification period referred to in the GATT Council Chairman's Statement.

2. Third parties enhanced rights

2.6.
In a letter dated 1 April 2004, the same countries requested enhanced rights as third parties in the remaining procedure of the Panel. After comments by the parties on this request, the Panel decided, in a ruling dated 14 April 2004 "that, beyond those rights already provided for in the DSU, in the Working Procedures adopted by this Panel, as well as in its ruling dated 16 January 2004 (see paragraph 2.4 above), the following additional rights were granted to all third parties for the purpose of this case:

(a) "the third parties will receive a copy of the written questions to the parties posed in the context of the first substantive meeting of the Panel;

(b) the third parties will receive the written rebuttals of the parties to the second meeting of the Panel and the parties' replies to the questions mentioned in (i) above;

(c) the third parties may attend the second substantive meeting of the Panel to take place on 11 and 12 May 2004, as observers (but it is not envisaged that the third parties will provide any further written submission or make an oral statement to the Panel during that second meeting); and

(d) the third parties will review the summary of their respective arguments in the draft descriptive part of the Panel report."

2.8.
On behalf of the sugar-exporting ACP countries, Guyana, on 22 April 2004, requested that ACP sugar-producing countries be allowed to "present arguments, including oral statements and observations " at the second substantive meeting of the Panel with the parties.
2.9.
After consideration of Guyana's request on behalf of ACP sugar-producing countries, the Panel did not see any need to change its decision of 14 April 2004 (see paragraphs 2.6 and 2.7 above) and reiterated its invitation to all third parties to attend the second meeting of the Panel as "observers", on the understanding that the third parties would not make any (further) written or oral statements to the Panel.

3. Request for additional working procedures for the protection of proprietary information

2.10.
On 13 January 2004, Australia and Thailand requested that the Panel adopt additional working procedures for the protection of proprietary information purchased from LMC International (LMC) relating to data on EC costs of sugar production that the complaining parties claimed they would use in their first written submission.6 Such additional working procedures would, inter alia, limit the third parties' access to such confidential information to "view-only" prescriptions.
2.11.
The European Communities opposed7 the request, arguing, inter alia, that LMC statistical data was not the type of information that should benefit from exceptional and additional rules for the protection of confidential information. It added that the rules suggested by Australia and Thailand were discriminatory vis-à-vis third parties who would only be entitled to "view" the confidential data.
2.12.
After consideration of the parties' arguments, the Panel decided, in a ruling dated 27 January 2004, to reject the request from Australia and Thailand.
2.13.
The Panel recalled, in particular, that the following provisions of the DSU and of the Rules of Conduct, were relevant and applicable to the issue of confidential information in WTO dispute settlement proceedings.
2.14.
Article 18.2 of the DSU on communications with panels or the Appellate Body provides:

"2. Written submissions to the panel or the Appellate Body shall be treated as confidential, but shall be made available to the parties to the dispute. Nothing in this Understanding shall preclude a party to a dispute from disclosing statements of its own positions to the public. Members shall treat as confidential information submitted by another Member to the panel or the Appellate Body which that Member has designated as confidential. A party to a dispute shall also, upon request of a Member, provide a non-confidential summary of the information contained in its written submissions that could be disclosed to the public." (emphasis added)

Moreover, paragraph 3 of Appendix 3 to the DSU states:

"3. The deliberations of the panel and the documents submitted to it shall be kept confidential. Nothing in this Understanding shall preclude a party to a dispute from disclosing statements of its own positions to the public. Members shall treat as confidential information submitted by another Member to the panel which that Member has designated as confidential. Where a party to a dispute submits a confidential version of its written submissions to the panel, it shall also, upon request of a Member, provide a non-confidential summary of the information contained in its submissions that could be disclosed to the public." (emphasis added)

2.15.
The Panel further ruled that "All parties and third parties would thus have to treat as confidential any information identified by a party to this dispute as confidential (including the statistical data from LMC if Australia and Thailand had designated them as such). The parties and third parties shall not disclose any such information without the formal authorization of the party who had designated such information as confidential. In this regard, parties and third parties have the responsibility for all members of their delegation. In particular, no member of the delegation of any party or third party shall disclose to any person outside the delegation any information designated as confidential by a party to the present dispute. Any such information could only be used for the purposes of submissions and argumentation in this dispute."
2.16.
The Panel noted also that it had the right not only to receive confidential information, but also to seek it. To this effect, Article 13 of the DSU on the Right to Seek Information provides that:

"1. Each panel shall have the right to seek information and technical advice from any individual or body which it deems appropriate. However, before a panel seeks such information or advice from any individual or body within the jurisdiction of a Member it shall inform the authorities of that Member. A Member should respond promptly and fully to any request by a panel for such information as the panel considers necessary and appropriate. Confidential information which is provided shall not be revealed without formal authorization from the individual, body, or authorities of the Member providing the information." (emphasis added)

2.17.
The Panel was of the view that parties and third parties were bound by the DSU provisions on confidentiality. In the present circumstances, these provisions were, according to the Panel, sufficient to protect the confidentiality of the statistical data from LMC, during the panel process and afterwards, as indicated above.
2.18.
As for the Panel, pursuant to the DSU and the Rules of Conduct8, it was bound not to disclose, in the panel reports, or in any other way, any information designated as confidential by a party under these procedures.
2.19.
Finally, the Panel recalled that it had the right to reconsider the need for additional working procedures for the protection of confidential information if circumstances changed and so warranted such exceptional working procedures after consultation with the parties.

4. Amicus curiae

2.20.
On 24 May 2004, the Panel received an unsolicited amicus curiae brief from Wirtschaftliche Vereinigung Zucker ("WVZ"), an association representing German sugar producers. The Panel invited the parties to make comments thereon, if they so wished. Australia, Brazil and Thailand requested in their comments that the Panel reject the document submitted by WVZ on the grounds, inter alia, of due process as well as the late submission of the document. The European Communities did not wish to make any comments on the WVZ document.

5. Breach of confidentiality

2.21.
Brazil informed the Panel on 2 June 2004 that the amicus curiae brief submitted by WVZ disclosed information that Brazil had submitted to the Panel in confidence. Brazil, accordingly, wished to bring this breach of confidentiality to the Panel's attention, and requested that the Panel "investigate how the breach occurred". Thailand supported the request made by Brazil in this regard.
2.22.
The Panel noted the seriousness of the matter at issue, and invited the parties and third parties to comment on Brazil's allegation, and on the appropriate remedy, "if such a breach had in fact occurred." Such comments were to be submitted by the end of the day on 8 June 2004.
2.23.
The European Communities noted that it attached the utmost importance to the strict observance of the confidentiality rules set out in the DSU and in the working procedures of the Panel by all parties and third parties. It shared the concerns expressed by Brazil. It noted further that it had treated as strictly confidential all information designated as such by Brazil in these proceedings.
2.24.
On 4 June 2004, the Panel invited, by letter, comments from the parties and third parties "on Brazil's allegation, and on the appropriate remedy, if such a breach has in fact occurred."
2.25.
The Panel received responses, dated 8 June 2004, from Australia, the European Communities (parties), and from India (third party). All three Members supported the request made by Brazil (see paragraph 2.21 above).
2.26.
On 10 June 2004, the Panel requested, in a letter, information from the WVZ "with respect to the exact source[s] (documents, websites, etc.) used for the data referred to" in its document. The Panel further requested "information about the original currency nominations if different from the nominations in Euros used" in the document.
2.27.
The Panel received a response from WVZ on 15 June 2004 in which WVZ indicated that it had been able to examine an attachment to Brazil's submission, the Datagro report, which referred to another LMC study than the one used by WVZ in the document received by the Panel on 24 May 2004. According to WVZ, this LMC document was not designated as confidential. It also indicated that WVZ was "not in a position to reveal the source of its information regarding the evidence submitted by Brazil."
2.28.
Comments on the response from WVZ were received from Brazil on 18 June 2004 in which Brazil reiterated its request (see paragraph 2.21) that the Panel summarily reject the WVZ amicus curiae brief. Brazil also requested that the Panel "make a full report of this incident to the Dispute Settlement Body."

III. FACTUAL ASPECTS

3.1.
The European Communities established, in 1968, a Common Organization (CMO) for Sugar, the main rules of which are today set out in "Council Regulation (EC) No. 1260/2001 on the common organization of the markets in the sugar sector" (the Regulation), dated 19 June 2001. The Regulation is valid for marketing years 2001/2002 to 2005/2006 and the information below refers to those years.
3.2.
The Regulation sets out the basic rules with respect to, inter alia, the intervention prices for raw and white sugar, respectively; the basic price and the minimum price for beet; A and B quotas as well as C sugar; import and export licences; levies; export refunds; and preferential import arrangements.

1. Product coverage

3.3.
The EC sugar regime applies inter alia to cane and beet sugar, sugar beet, and sugar cane as well as to isoglucose.9 The sugar cane and the sugar beet are primarily transformed into raw sugar and/or white sugar.

2. Quotas

3.4.
The sugar regime establishes two categories of production quotas: one for A sugar and the other one for B sugar (see paragraph 3.6). These quotas constitute the maximum quantities eligible for domestic price support and direct export subsidies (in EC terminology, "refunds"). The quota system does not involve any limits on the quantities of sugar that may be produced or exported. However, sugar produced in excess of A and B quantities, called C sugar, while not subject to quota, is not eligible for domestic price support or direct export subsidies and must be exported.10 If no proof has been supplied that the C sugar has been exported within the required time limits, a charge is levied on that sugar.11
3.5.
Sugar production quotas are allocated in the first instance to member States, with current quotas applying to the marketing years 2001/02 to 2005/06. Member States, in turn, allocate quota to each undertaking (processor) on the basis of its actual production during a particular reference period.12
3.6.
The Regulation fixes a basic quota for the entire Community for the production of A and B sugar. The basic quantities for A and B sugar are set, respectively, at 11,894,223.3 tonnes (white sugar)13 and 2,587,919.20 tonnes (white sugar)14. Each of these quantities is broken down by member State which in turn allocates quantities to producer undertakings established on its territory. A Member state may transfer quota between undertakings, "taking into consideration the interests of each of the parties concerned, particularly sugar beet and cane producers", up to a maximum of 10 per cent of an undertaking's A or B quota (with some limited exceptions).15 Each undertaking may carry forward to the next marketing year sugar that it has produced in excess of its A and B quota (i.e. C sugar) up to a limit of 20 per cent of its A quota.16 It may also carry forward all or part of its B sugar production. In addition, an undertaking may carry forward all or part of its production of A and B sugar which has been reclassified as C sugar after reduction of the guaranteed quantities in conformity with Article 10 of the Regulation. Quantities carried forward must be stored for 12 consecutive months from a date to be determined.17

3. Intervention price

3.7.
To achieve the objectives of the common agricultural policy and in order to stabilize the EC sugar market, the EC Regulation provides for intervention agencies to buy in sugar. An intervention price is established for this purpose at a level which will ensure a fair income for sugar-beet and sugar-cane producers.18 The intervention price valid for standard quality19 is €63.19/100 kg for white sugar and €52.37/100 kg for raw sugar.20 The actual price received for white sugar is, on average, around 10 to 20 per cent in excess of the intervention price. The intervention price is valid for the domestic market and as a guaranteed minimum price to be paid by EC purchasers for imports of sugar from ACP states and India.

4. Basic and minimum prices

3.8.
A basic price for quota beet of standard quality21 is derived from the intervention price of white sugar and has been established at €47.67 per tonne.22 The Regulation also establishes minimum prices for A and B beet, standard quality, intended to be processed into A and B sugar, respectively and paid by sugar manufacturers buying beet. The minimum price of A beet has been set at €46.72 per tonne whereas the minimum price for B beet has been fixed at €32.42 per tonne.23 Manufacturers are required to pay growers at least the minimum price for A and B beet they process into A and B sugar. The price for beet paid by the manufacturer to produce C sugar may be lower than that paid for A and B beet.24

5. Basic production levy and B levy

3.9.
In accordance with Article 15, a basic production levy shall be charged to manufacturers on their production of inter alia A and B sugar, when the forecasts and adjustments25 result in a foreseeable overall loss.26 Such a levy shall not exceed 2 per cent of the intervention price for white sugar. Another levy of a maximum 37.5 per cent of the intervention price for B sugar may be charged if the loss is not fully covered by the proceeds from the levy mentioned above.

6. Import and export licences

3.10.
Imports into and exports from the European Communities of inter alia cane or beet sugar and isoglucose are subject to the presentation of an import or export licence, issued by the respective member States. These licences are valid throughout the Community and are subject to the lodging of a security.

7. Export refunds

3.11.
In order to enable inter alia the products mentioned in paragraph 3.3 above to be exported without further processing at world market prices, the difference between the world market price and the Community price may be covered by export refunds. The export refund for raw sugar may not exceed that of white sugar. Such refunds shall be the same for the whole Community and for all sugar except C sugar but may vary according to destination. Refunds may be fixed at regular intervals or by a tendering procedure for products for which such a procedure has been used in the past.27 Refunds are paid directly from the EC budget. However, the system of levies outlined in paragraph 3.9 is designed to recover from EC producers part of the cost of export refunds for quota sugar produced in excess of EC consumption.

8. Management Committee for Sugar

3.12.
Article 42 of the Regulation establishes a Management Committee for Sugar to assist the EC Commission to consider any issue referred to it by the Commission, or by a member State, with respect to the management of the sugar regime, such as the preparation of supply and demand forecasts.

9. Commitments

3.13.
The commitments set out in the table in Section II, of Part IV of the EC's Schedule amount to €499.1 million and 1,273.5 thousand tonnes. A footnote to the table provides:

"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."

According to the European Communities' latest notification (marketing year 2001/2002) to the Committee on Agriculture, total exports of sugar amounted to 4,097 million tonnes (product weight).

10. Preferential import arrangements

3.14.
The European Communities is required to import 1,294,700 tonnes (white sugar equivalent) of cane sugar, called "preferential sugar" under Protocol 3 to Annex IV to the ACP/EC Partnership Agreement.28 It also has agreed to import 10,000 tonnes of preferential sugar from India. Preferential sugar is imported at zero duty and at guaranteed prices.29
3.15.
In addition to imports of ACP/India preferential cane sugar, special preferential raw cane sugar (SPS sugar) may be imported from the same countries which benefit from the ACP/India preferential arrangements in order to ensure adequate supplies to Community refineries.30 Volumes of SPS sugar vary from year to year but have amounted to around 320,000 tonnes per year in recent years. A reduced rate of duty is levied on imports of such sugar. The quantities of SPS sugar to be imported is decided on the basis of a supply balance forecast for each marketing year.

11. Review

3.16.
The current EC sugar regime is scheduled for review in 2006.

IV. MAIN ARGUMENTS31

A. PARTIES' REQUESTS FOR FINDINGS

4.1.
The complaint examined by the Panel is related to the European Communities' measures with respect to the common organization of its markets in sugar.
4.2.
Australiarequests, for the reasons set out in its submission, that the Panel make the following rulings:

· C sugar produced under the EC regime is provided with an export subsidy within the meaning of Article 9.1(c) of the Agreement on Agriculture;

· this export subsidy has not been subjected to the EC's reduction commitments under the Agreement on Agriculture, inconsistently with the provisions of Article 9.1 of that Agreement

· as C sugar exports – which are provided with export subsidies defined under Article 9.1(c) – are in excess of the quantity outlay commitment levels specified in Section II of Part IV of the EC Schedule, the EC is acting inconsistently with the provisions of Article 3.3 of the Agreement on Agriculture;

· alternatively, if the Panel finds that the EC's export subsidies on C sugar are not export subsidies within the meaning of Article 9.1 of the Agreement on Agriculture, the EC is applying other export subsidies in a manner which results in, or threatens to lead to, circumvention of export subsidy commitments, inconsistently with the provisions of Article 10.1 of the Agreement on Agriculture;

· under either of the alternatives, as the EC provides export subsidies on C sugar otherwise than in conformity with the Agreement on Agriculture and with the commitments as specified in its Schedule, the EC is acting inconsistently with its undertaking under the provisions of Article 8 of the Agreement on Agriculture;

· the EC is providing export subsidies to C sugar inconsistently with the provisions of Articles 3.1(a) and 3.2 of the SCM Agreement;

· the EC grants direct export subsidies on the export of 'ACP/India equivalent' sugar, within the meaning of Article 9.1(a) of the Agreement on Agriculture;

· the export subsidies have not been subjected to the EC's reduction commitments under the Agreement on Agriculture, inconsistently with Article 9.1;

· the footnote to the EC's Schedule does not permit the EC to derogate from its reduction commitment obligations under Articles 9.1, 3.3 and 8 of the Agreement on Agriculture;

· the export subsidies on 'ACP/India equivalent' sugar are in excess of the budgetary outlay and quantity reduction commitments specified in the EC's Schedule, inconsistently with Article 3.3 of the Agreement on Agriculture;

· as the EC is providing export subsidies on 'ACP/India equivalent' sugar otherwise than in conformity with the Agreement on Agriculture and with the commitments specified in its Schedule, it is acting inconsistently with the provisions of Article 8 of the Agreement on Agriculture;

· the EC is providing direct export subsidies to 'ACP/India equivalent' sugar, within the meaning of paragraph (a) of Annex I of the SCM Agreement, inconsistently with the provisions of Article 3.1(a) of that Agreement.

4.3.
Australia requests that the Panel recommend to the Dispute Settlement Body, in accordance with Article 19.1 of the Understanding on Rules and Procedures Governing the Settlement of Disputes and Article 4.7 of the Subsidies Agreement, that the EC:

· bring its export subsidies for sugar into conformity with its obligations under the Agreement on Agriculture; and

· withdraw the export subsidies inconsistent with the SCM Agreement within 90 days.

4.4.
Brazil requests, for the reasons set out in its submission, that the Panel make the following rulings:

· 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.

4.5.
Brazil also requests that the Panel recommend to the DSB, in accordance with Article 19.1 of the DSU and Article 4.7 of the SCM Agreement, that the European Communities bring its export subsidies for sugar into conformity with its obligations under the Agreement on Agriculture by withdrawing without delaythe export subsidies for sugar inconsistent with the Agreement on Agriculture.
4.6.
In view of the remedy to which Brazil is entitled under Article 4.7 of the SCM Agreement, Brazil requests that the Panel make a finding and recommendation with regard to its claim under Article 3 of that Agreement. Brazil further requests that the Panel specify in its recommendation the time period within which the European Communities must withdraw the illegal portion of the export subsidies for sugar, and that the period not exceed the 90 days previous panels have allowed for withdrawal of prohibited subsidies.32
4.7.
Thailand requests, for the reasons set out in its submission, that the Panel make the following rulings:

· the EC accords subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture to its exports of C sugar;

· exports of ACP/India equivalent sugar are covered by the EC's reduction commitments and are accorded subsidies within the meaning of Article 9:1(a) of the Agreement on Agriculture;

· the quantity of sugar in respect of which the EC grants export subsidies within the meaning of Article 9:1 of the Agreement on Agriculture is in excess of its export quantity reduction commitment;

· the expenditures that the EC allocates for subsidies within the meaning of Article 9:1 of the Agreement on Agriculture to its exports of sugar are in excess of its budgetary outlay reduction commitment; and

· to rule in the light of these findings that the subsidies granted by the EC to its exports of sugar are inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture;

· alternatively, if the Panel finds that the EC's subsidies on exports of sugar are not export subsidies within the meaning of Article 9.1 of the Agreement on Agriculture, these subsidies are export subsidies inconsistent with Article 10.1 of that Agreement;

· the EC's export subsidies for quota sugar and ACP/India equivalent sugar are granted inconsistently with Articles 3.1(a) and 3.2 of the SCM Agreement.

4.8.
Thailand requests the Panel to recommend, in accordance with Article 19.1 of the DSU and Article 4.7 of the SCM Agreement, that the DSB request the European Communities to bring its export subsidies for sugar into conformity with its obligations under the Agreement on Agriculture by withdrawing within 90 days the export subsidies for sugar that are inconsistent with that Agreement.
4.9.
For the reasons set out in its submissions, the European Communities requests the Panel to find that:

· exports of C sugar did not benefit from export subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture;

· the Complainants' claim under Article 10.1 of the Agreement on Agriculture was outside the terms of reference of the Panel; or,

· alternatively, exports of C sugar did not benefit from any "other export subsidies" within the meaning of Article 10.1;

· subsidiarily, exports of C sugar were not in excess of the EC's reduction commitments;

· subsidiarily, by bringing this claim, the Complainants were acting inconsistently with the general principle of good faith and Article 3.10 of the DSU;

· subsidiarily, the alleged inconsistencies did not nullify or impair any benefits accruing to the Complainants;

· the SCM Agreement did not apply to subsidies granted with respect to agricultural products or, to the extent that it did, that exports of C sugar did not benefit from export subsidies within the meaning of Article 3.1(a) of the SCM Agreement.

· footnote 1 was consistent with the Agreement on Agriculture;

· subsidiarily, by bringing this claim, the Complainants were acting inconsistently with the general principle of good faith and Article 3.10 of the DSU;

· subsidiarily, the alleged inconsistency did not nullify or impair any benefits accruing to the Complainants;

· to the extent that it was within the Panel's terms of reference, the claim that footnote 1 did not permit the EC's practice of exporting with refunds a quantity equivalent to the ACP/India imports was unfounded.

B. TERMS OF REFERENCE

1. Provisions and measures at issue

4.10.
The European Communities submitted that certain issues brought by the Complainants constituted separate "claims" and thus fell outside the Panel's terms of reference.
4.11.
The European Communities contended that, while the Complainants' panel requests cited Article 10.1 of the Agreement on Agriculture (but not Item (d) of the Illustrative List of Export Subsidies), none of the Complainants specified the measure which was allegedly inconsistent with that provision. In the European Communities' view, Article 10.3 of the Agreement on Agriculture did not relieve the Complainants of their obligations under Article 6.2 of the DSU. 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. In particular, the allegation that the provision of C beet was an export subsidy within the meaning of Item (d) of the Illustrative List, was not an argument, but a "claim" on its own, which was not within the terms of reference of the Panel. Moreover, the European Communities continued, 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.
4.12.
The European Communities submitted that a mere reference to the EC's "sugar regime" or to Council Regulation (EC) No. 1260/2001 (which consisted of 51 articles, with numerous paragraphs and subparagraphs, as well as 6 annexes, and covered 45 pages of the Official Journal of the European Communities) was not sufficiently "specific". Rather, the Complainants should have identified the specific elements of the EC's sugar regime which, according to them, provided the alleged export subsidies applied by the European Communities so as to circumvent its reduction commitments inconsistently with Article 10.1. of the Agreement on Agriculture. In the European Communities' opinion, the Complainants had failed to do so. For example, while the panel requests claimed that exports of C sugar were subsidized because they were made at prices below the average total cost of production of sugar, they contained no trace of what the European Communities considered as separate "claims" that: (a) the "exemption" of C beet from the minimum prices for A and B beet provided an export subsidy to the sugar producers; and that (b) there was a "payment" from European Communities consumers to EC sugar producers in the form of "artificially high" domestic prices for A and B sugar, as advanced by Brazil.
4.13.
The European Communities submitted further that Brazil and Thailand had made a claim, on a subsidiary basis, regarding an alleged failure to respect the terms of the footnote in the EC's Schedule, which according to the European Communities, was not made in their panel requests. Consequently, the European Communities contended that these claims fell outside the terms of reference of the Panel.
4.14.
The Complainants asserted that they had properly stated their claims in their panel requests, and specifically referred to the original texts in these requests. They denied having submitted, in their first written and oral submissions, further legal claims involving separate legal provisions or measures different from those presented in their respective panel requests. In their view, the European Communities was confusing "claims", which must be stated in panel requests, with "arguments", to be developed in the course of the Panel's proceedings. According to the Appellate Body, Article 6.2 of the DSU required that the claims, but not the arguments, had to be sufficiently specified in the request for the establishment of a panel in order to allow the defending party and any third parties to know the legal basis of the complaint.33
4.15.
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 defence. 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. In the Complainants' view, any and all EC measures that might confer a subsidy on these sugar exports, any and all WTO agreements with subsidy provisions were thus within the terms of reference of the Panel by virtue of Article 10.3 of the Agreement on Agriculture. In particular, since the scope of Article 10.1 of the Agreement on Agriculture extended to export subsidies as defined in the WTO agreements other than those listed in Article 9.1, the Article 10.1 obligation was not contingent on a claim of inconsistency with the provisions of the SCM Agreement or any other WTO Agreement. For the Complainants, the export subsidy definitions of GATT 1994 had application to the export subsidies covered by the provisions of Article 10.1 of the Agreement on Agriculture.
4.16.
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. For example, Article 10.1 of the Agreement on Agriculture had been clearly identified in their respective panel requests as a claim in the alternative in relation to their basic claim regarding exports in excess of export subsidy reduction commitments. To allege subsidized exports in excess of reduction commitments as well as an inconsistency with Articles 3.3 and 8 of the Agreement on Agriculture was sufficient, in their view, to meet the requirements of Article 6.2 of the DSU. By virtue of Article 10.3, it was then up to the exporting Member to prove that "no export subsidy, whether listed in Article 9 or not, has been granted with respect to" those exports of sugar in excess of reduction commitment levels. Imposing the requirement on the Complainants to identify all "other" export subsidies individually would have the effect of limiting the burden of the exporting Member, re-reversing the burden of proof of Article 10.3 as applied to Article 10.1, and ultimately rendering Article 10.3 meaningless and ineffective, contrary to the basic rules of treaty interpretation.
4.17.
Australia added that the European Communities would fall short of meeting its own standard given that, on a number of occasions it had used comparable language in its own panel requests. Brazil underlined that while it was theoretically possible that some subsections of EC Regulation No. 1260/2001 played no role in the provision of the challenged subsidies, Brazil's failure to identify and expressly exclude any of those subsections from its description of the measure at issue would not mean that Brazil had not properly identified the measure at issue within the meaning of Article 6.2 of the DSU. Australia and Brazil refuted the European Communities' contention that their panel requests only covered certain "payments", as suggested by the European Communities. In their opinion, the existence of payments was only one aspect of the subsidies at issue in the present dispute. Australia emphasized that the measures at issue were clearly identified in its panel request as the subsidies provided by the European Communities in excess of reduction commitment levels. Australia identified the source of the subsidization and the nature of legal complaint, including the relevant legal provisions. Australia noted that the precise nature of the "payments" under Article 9.1(c) were legal arguments that did not have to be included in the panel request.
4.18.
Furthermore, in the Complainants' view, nothing prevented them from anticipating the European Communities' rebuttal arguments, either in their first written submissions or in their rebuttal submissions. Article 9.2(b)(iv), for example, was brought into the case by the Complainants as a counter-argument, not as a claim of inconsistency, in response to arguments made by the European Communities. As the European Communities itself had raised the footnote as justification for non-compliance with its obligations, the Complainants were entitled to provide rebuttal arguments in that context, citing any WTO provisions, any EC laws or regulations, or other factual evidence. The Complainants had referred specifically to Article 9.2(b)(iv) to underline that the footnote, even if interpreted as imposing a quantity limit, would lead the European Communities to act inconsistently with its obligations by failing to achieve the reductions required by that provision. As a consequence, the European Communities would be providing export subsidies in contravention of the Agreement on Agriculture – a violation of Article 8, which undisputedly was within the terms of reference. The Complainants reiterated that such rebuttal arguments needed not be mentioned in the panel requests, and that, in the present case, their assertions regarding the scope of application of the footnote were thus subsidiary arguments supporting their basic legal claim that the European Communities was exceeding its export subsidy reduction commitments.
4.19.
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 European Communities contended that any suggestion that the European Communities 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. Nor had any of the Complainants set out a brief summary suggesting that the alleged failure of the European Communities to respect the terms of the footnote was the legal basis of their complaint. In the European Communities' view, the Complainants should have claimed that the European Communities did not, in fact, re-export ACP/India sugar but rather exported an equivalent amount. This would have required a reference to, and identification of, the footnote, because that was the legal provision allegedly infringed. The European Communities also considered that this was necessarily a separate claim, because it was premised on the assumption that the footnote was a valid justification for the European Communities exceeding its commitments, but that the footnote did not sanction an excess in respect of ACP/India equivalent sugar but only re-exported ACP/India equivalent sugar. As proof that the alleged non-respect of the footnote was a separate claim, the European Communities observed that Brazil and Thailand had made the "claim" as an "alternative claim." However, the corresponding legal basis was not set out in the requests for establishment of a panel.
4.20.
The European Communities acknowledged that Article 10.3 of the Agreement on Agriculture relieved the Complainants from the obligation of having to prove their claim that the European Communities granted export subsidies in excess of its reduction commitments. In its view, however, Article 10.3 did not exempt the Complainants from identifying, in their panel requests, the relevant measures that provided the alleged export subsidies, in accordance with Article 6.2 of the DSU (see also paragraph 4.12). Moreover, the European Communities observed that Article 10.3 was not listed among the special or additional rules and procedures on dispute settlement in Appendix 2 to the DSU and thus did not derogate from the requirements imposed by Article 6.2 of the DSU. The European Communities further considered that the issue of who should bear the burden of proof should not be confused with the distinct issue of who must state the claims. The Complainants' interpretation of Article 10.3 would be incompatible with the basic requirements of due process because it would impose upon the European Communities the impossible task of identifying all the conceivable export subsidies. The inversion of the burden of proof could not have the consequence of depriving the defending party of the fundamental procedural right "to know what case it has to answer and what violations have been alleged".34
4.21.
The Complainants reiterated that they had shown that EC exports of sugar exceeded its reduction commitments (see paragraphs 4.28- 4.29). Unless the European Communities could prove that the excess was not subsidized, the European Communities was acting inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture, and Article 3 of the SCM Agreement. If the European Communities could not prove that the excess was not subsidized, no other provisions of the agreements were relevant. But if the European Communities claimed that the excess was not subsidized, or that reduction commitments did not apply to all or part of the excess, then the Complainants were entitled to raise, by way of counter-arguments, any WTO provisions, as well as any EC laws or regulations, or other factual evidence, to rebut the EC claims. In the Complainants' views, none of these rebuttal arguments or evidence needed to be mentioned in their requests for panel establishment.

2. Procedural matters

4.22.
Australia observed that the European Communities did not raise any concerns in regard to alleged deficiencies in its panel request until six months after the Panel was established and more than two months after the Panel was composed. The European Communities did not raise any concerns with respect to the establishment of the Panel nor did it seek a preliminary ruling at an early stage of the Panel process, actions it had taken in recent disputes in which it was a respondent. Instead, the European Communities had waited until its first written submission to raise concerns in regard to Article 10.1. Nor had it sought to discuss the issue with Australia, in the context of the opportunity provided by Article 7 of the DSU to modify the standard terms of reference. In this regard, Australia recalled that the principle of good faith under Article 3.10 of the DSU required respondents to act promptly in identifying procedural deficiencies and bringing them to the attention of the complaining Members, and to the DSB, or the Panel.
4.23.
Brazil was of the opinion that the European Communities had not made any credible attempt to show that it had suffered prejudice in the conduct of its defence due to an alleged lack of clarity or deficiencies in the panel request. According to Brazil, a showing of prejudice was essential to any argument that a claim had not been set out with sufficient specificity in a panel request.
4.24.
In response, the European Communities first recalled that its objection related to the fact that it could not identify, in the panel requests, some of the "claims" stated by the Complainants in their first submissions. The European Communities, therefore, could not have complained before receiving the Complainants' first submissions. Secondly, although it had suffered a prejudice, the European Communities did not agree that it was required to show prejudice, because that requirement was not mentioned in Article 6.2 of the DSU.

C. BURDEN OF PROOF

4.25.
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.
4.26.
Drawing attention to the analyses by the Appellate Body in a number of cases35, the Complainants held that they only bore the burden of proof in relation to the quantitative aspect, i.e. that the European Communities was exporting quantities in excess of its scheduled reduction commitment level. If the Complainants met this burden and the European Communities contested the export subsidization aspect of the claim, then the European Communities had an obligation, or legal burden, to establish that no export subsidy had been granted to the quantity exported in excess of the reduction commitment level specified in its Schedule. According to the Complainants, this analysis applied to their claims under Articles 3, 8, 9 and 10.1 of the Agreement on Agriculture.36
4.27.
The European Communities agreed that it would have the burden of proof under Article 10.3 of the Agreement on Agriculture with respect to the "subsidization aspect" of the Complainants' claim, assuming that the Complainants had met their burden of proof with respect to the "quantitative aspect" of their claims. However, the European Communities held that some of the Complainants' "claims", in its view, had not been properly stated in the panel requests as required by Article 6.2 of the DSU, and were therefore outside the terms of reference of the Panel (see paragraphs 4.10-4.13 and 4.19-4.20).

1. Quantitative aspect

4.28.
In order to discharge their burden of proof in respect of the quantitative aspect of their claims under Articles 3, 8, 9 and 10.1 of the Agreement on Agriculture, the Complainants referred to the European Communities' notifications to the Committee on Agriculture.37 The notified data showed that the European Communities had exported 4,097 million tonnes of sugar in the 2001-2002 marketing year. The Complainants pointed out that this figure, which excluded food aid, represented more than three times the scheduled quantity reduction commitment level of 1,273 million tonnes, andunderlined that in every marketing year since 1995, the European Communities had exported sugar in amounts three to four times the level of its reduction commitments. The Complainants stressed that it was the fact that the European Communities' total exports of sugar exceeded the European Communities' reduction commitment levels that mattered, regardless of how the sugar was categorized. Having met their burden of proof in respect of the quantitative aspect of their claim, the Complainants noted that the European Communities did not contest the supplied factual evidence.
4.29.
The Complainants indicated that, to the best of their knowledge, most, if not all, of the excess exports, were accounted for by the C sugar and ACP/India equivalent sugar categories. With particular reference to ACP/India "equivalent" sugar, Australia and Thailand observed that, during the marketing year 2001-2002, the European Communities notified export subsidies amounting to €482.8 million against a scheduled budgetary outlay reduction commitment of €499.1 million but excluded from its reduction commitments some €800 million in direct export subsidies on 1.6 million tonnes of sugar from its reduction commitments. Similarly, quantity commitments had been exceeded by 1,378 million tonnes.
4.30.
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.
4.31.
The European Communities explained that it did not grant any export subsidies to exports of C sugar. However, if the Panel were to find that C sugar indeed benefited from export subsidies, the European Communities submitted that its sugar exports would not be in excess of the reduction commitments when those were interpreted in good faith and in the context of the Modalities Paper. With respect to ACP/India equivalent sugar, the European Communities submitted that the burden of proving their case rested with the Complainants because they had also misinterpreted the footnote. In the European Communities' view therefore, exports of ACP/India equivalent sugar were not in excess of its scheduled commitments, when these were interpreted in good faith.38

2. Export subsidization aspect

4.32.
The Complainants submitted that, as the party claiming that the excess quantity was not subsidized, the European Communities had the obligation to demonstrate that such excess had not been granted export subsidies. In other words, that none of the Article 9.1 listed subsidies had been granted in respect of the quantity of sugar that was exported in excess of the European Communities' scheduled reduction commitment level; and no "other" export subsidies were being applied to such sugar exports, for the purposes of Article 10.1. The Complainants held that, if the European Communities did not produce any evidence in that regard, it would have failed to establish that an export subsidy was not being applied to sugar, within the meaning of either Article 9.1 or Article 10.1 of the Agreement on Agriculture.
4.33.
The European Communities responded that the Complainants' interpretation of Article 10.3 of the Agreement on Agriculture was incompatible with the basic requirements of due process39 because it would impose upon it the impossible task of identifying all the conceivable export subsidies which, the European Communities held, it did not grant. The inversion of the burden of proof could not possibly have the consequence of depriving the defending party of this fundamental procedural right. Referring to the Appellate Body's analysis in Canada – Dairy40, the European Communities indicated that it was not requesting that the Complainants make a prima facie case that the elements of the "claimed exports subsidies" were present. Rather, the European Communities contended that the export subsidization aspect was also part of the claim to be made by a complaining party, and that Article 10.3 did not exempt the Complainants from identifying the relevant "payments" that provided the alleged export subsidies.41 While acknowledging that Article 10.3 transferred to the respondent the burden of proof with respect to the "export subsidization aspect", the European Communities stressed that, before such transfer could take place, the Complainants had to comply with the requirements of Article 6.2 of the DSU.
4.34.
The Complainants reiterated that the European Communities had failed to discharge its burden of proof in its submissions and in panel hearings. As already indicated in paragraph 4.18 above, Article 10.3 of the Agreement on Agriculture did not require them to lead in the presentation of evidence to the Panel in relation to the export subsidization aspect. Nevertheless, for reasons of procedural efficiency, but without relieving the European Communities of its burden, and without waiving their rights under Article 10.3 of the Agreement on Agriculture, the Complainants had addressed several points in their respective submissions, but only in anticipation of arguments that they expected the European Communities to submit.

D. C SUGAR

4.35.
With respect to C sugar, the Complainants recalled that, by subsidizing exports in excess of its reduction commitments42, the European Communities had acted inconsistently with Articles 3.3, 8, and 9.1(c) or, alternatively, 10.1 of the Agreement on Agriculture, and that the European Communities had the burden of proof (see Section IV.C above).

1. Article 9.1(c) of the Agreement on Agriculture

4.36.
The Complainants submitted that C sugar benefited from export subsidies falling within the description of Article 9.1(c) of the Agreement on Agriculture and observed that Article 9.1(c) subsidies were subject to reduction commitments in accordance with the provisions of Article 9.1. A measure that met the description of any of the subparagraphs (a) through (f) of Article 9.1 was, by definition, an export subsidy and, as such, necessarily subject to the reduction commitments of the scheduled product in question. They pointed out that Article 9.1 was, in that respect, similar to the Illustrative List of Export Subsidies in Annex I of the SCM Agreement. Since the European Communities had not subjected C sugar to the required quantity reduction commitments, the Complainants argued that the non-inclusion of C sugar in the quantity reduction commitments was inconsistent with Article 9.1, and thus with Articles 3.3 and 8, of the Agreement on Agriculture.
4.37.
The European Communities replied that the exports of C sugar did not benefit from export subsidies falling within Article 9.1(c) of the Agreement on Agriculture or from any "other export subsidy" within the meaning of Article 10.1. Moreover, even if exports of C sugar were found to benefit from export subsidies, the European Communities submitted, subsidiarily, that those would not exceed the reduction commitments scheduled by the European Communities, or, if they did, would do so by much less than claimed by the Complainants, if the reduction commitments were interpreted in good faith and taking into account the context provided by the Modalities Paper (see also Section IV.D.3(a)).

(a) "Payment"

4.38.
The Complainants first recalled the Canada – Dairy jurisprudence, on which they had principally based their arguments. They asserted that, in order to determine whether a payment had been made, an examination was needed of all monetary and non-monetary economic costs of production, i.e. whether the price of the exported agricultural product at issue reflected all the economic resources invested in the production of that product43, not only those invested by the economic operator who engaged in the processing or export of C sugar. Theyrecalled that a "payment" within the meaning of Article 9.1(c) denoted a "transfer of economic resources" whether in the form of money or in some other form which conferred value such as payments-in-kind; that it "may take place in many different factual and regulatory settings"44 and that it was not limited to payments by governments, but could be made and funded by private parties.45 The existence of a payment-in-kind would be determined by comparing prices with an objective standard, reflecting the proper value of the product to the producer.46 The appropriate benchmark for ascertaining if a payment was made was whether the prices paid to the producers were below the "total cost of production".47 This benchmark represented an objective standard against which to assess whether the prices paid were sufficient for producers to recover the average fixed and variable costs of production and thus avoid making "losses" over the longer term.48 Furthermore, since the international obligations of the European Communities, not of its member States, were at issue in the present case, the benchmark had therefore to be a single, Community-wide, cost of production figure rather than the cost of production figures for each individual EC member State.49
4.39.
Australia identified a "payment" on C sugar in that it was 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 was from the EC sugar producer to the purchaser, in that the price charged by the producer of the sugar was less than the proper value of the sugar to the producer. According to Australia, the export production received an advantage because the payment was financed by virtue of governmental action. In response to additional questions from the Panel, Australia went on to identify other "payments" within the production chain which involved sales at prices that did not reflect the "proper value" of the product to the producer. In respect of these payments, Australia indicated however that while, in its view, they clearly fell within the definition of Article 9.1(c), and were indistinguishable from the Canada – Dairy case, it was not necessary to dissect the structure of the EC sugar regime to find a payment. These payments were as follows:50

(a) 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. As set out in the evidence presented by Australia, C beet was categorized into C1 and C2 beet in the main C sugar-producing countries, with C2 beet being priced on the basis of an approximately *** split of revenue from C sugar sales. Over the 11 years to 2002-03 the payment for C2 beet was estimated to have averaged *** per cent of the average total cost of producing beet in France and *** per cent in Germany. Therefore, for sugar produced from C2 beet, Australia submitted that there was a payment-in-kind, in the form of beet sold below its proper value, by the growers to the processors.51

(b) a sale by the sugar processor to the exporter: in most cases that Australia was aware of, that sugar was sold onto the world market via an exporter. The exporter purchased the sugar from the sugar processor and then sold it onto the world market. The price paid by the exporter was, in the case of all C sugar exports, below the total average costs of production. Thus, Australia submitted that there was a payment-in-kind from the sugar processor to the sugar exporter in the form of sugar below its production costs which enabled the exporter to sell the sugar onto the world market.

4.40.
Brazil noted that there may be multiple "payments" within the meaning of Article 9.1(c) involved in the production and sale for export of a single product such as sugar.52 Brazil underlined that it could have simply shown that C sugar was being sold for export below the average total cost of production, but that it went further and identified three examples of "payments" within the meaning of Article 9.1(c) that occurred in the process of production and export sale of C sugar, and which gave "an advantage" to "export production" of C sugar. These "payments" were as follows:

(a) high internal prices paid by EC consumers, through a combination of governmental actions such as intervention prices, quotas, export refunds and import restraints, to processors of C sugar.53 According to Brazil, a similar payment was made by EC taxpayers who were taxed to support export refunds. The transfer of economic resources consisted of the transfer of money from the consumers and taxpayers (the "payers") to the processors and exporters (the "payees"). Through these "payments", the export of C sugar at prices below the average total cost of production of C sugar was facilitated;

(b) a "payment" was found in the EC sugar regime's requirement for minimum prices for A and B quota beet, which enabled beet growers to sell C beet to processors at prices below its cost of production. Such a "payment" constituted a transfer of economic resources in the form of a payment-in-kind to the sugar processors. Brazil underlined that, in this case, the "payers" were the beet growers who transferred C beet to the processors (the "payees") at prices that did not reflect the cost of production of the beet. Brazil noted that although prices between growers and processors for C beet were not regulated by the EC, available evidence indicated that the growers normally received *** per cent of the world market price for a large portion of C beet, except for that portion that was treated as C1 beet.54 This price was far less in monetary terms than the 58 per cent of the intervention price that growers received for A and B beet, and far below the average total cost of producing beet.55

(c) a third "payment" was found in the export sale of C sugar on the world market at prices below its average total cost of production. This "payment" constituted a payment-in-kind by the producers (the "payers"), who transferred resources provided by the European Communities to the world market buyers of this sugar (the "payees"). The world market buyers gained access to this sugar supply at prices below its average total cost of production. Brazil submitted that, by enabling C sugar producers to make this payment-in-kind, the EC regime conferred an advantage to EC export production, notwithstanding the fact that the exporters themselves "made" the payment.

4.41.
Calling for a sector-wide approach, Thailand submitted that, in light of the Canada – Dairy jurisprudence summarized in paragraph 4.38 above, there was no requirement to distinguish between C sugar sold to exporters, C sugar sold abroad, and C beet sold to processors, or to identify the individual transactions through which the payments were made, or to examine, in a disaggregated manner, the "payments" made by beet farmers and those made by sugar processors. All that was required in order to determine the existence of a "payment" was a comparison between the average total cost of production of all operators involved in the production of C sugar and the average price at which C sugar was sold for export. Thailand nonetheless stated that it would have no objection if the Panel were to examine separately the payments, including those made by beet farmers and those made by sugar processors.56
4.42.
The Complainants contended that the existence of "payments" within the meaning of Article 9.1(c) of the Agreement on Agriculture could be established from data on costs of production and returns on world markets. They submitted production cost data57 which showed that, for the marketing years 1992/93 to 2002/03, beet growers failed to recoup between *** and *** per cent of their total cost of producing C beet. These losses were financed by the very high returns received by the growers of beet for A and B quota sugar. During the same period, the processors failed to recover between *** and *** per cent of their total cost of production of C sugar, while export market returns from C sugar represented *** per cent of the average total production costs.58 Further statistical evidence59 showed that, while the average total cost of sugar production in the European Communities was higher than the prices received for C sugar on the world market, C sugar continued to be exported in what the Complainants considered to be significant quantities. In their view, the losses would be unsustainable in normal commercial operations if processors were to produce only C sugar. The fact that there was no independent production of C sugar confirmed that C sugar could not be produced absent a payment.
4.43.
Citing various studies60, theComplainantscontended that in 2002/03, the Community-wide cost of production of all sugar in the European Communities was *** per tonne. At the same time, the world market price for sugar (as measured by the London Daily Price) was on average €144.88 per tonne, which was less than *** per cent of the cost of production in the European Communities, implying that the cost of producing sugar was more than *** times the price that same sugar commanded on the world market. The Complainants pointed to the assessments undertaken by the European Communities' own official bodies, which had acknowledged that the gap between the cost and the price of C beet and C sugar was financed by virtue of the governmental action taken by the European Communities through its sugar regime.61 According to the Complainants, the figures also showed that for the entire period from marketing year 1992/93 through 2002/03, although C sugar prices were below average total costs,62 these prices exceeded marginal costs. Thus, C sugar prices were able to generate a positive contribution to net income once marginal costs were covered.63 Whichever method was considered the most accurate for estimating the world market price, the price received for C sugar was invariably lower than the average cost of producing C sugar (see also paragraph 4.74 et seq.).
4.44.
The European Communities responded that only one of the payments cited by the Complainants was properly before the Panel, i.e. the payments-in-kind from EC sugar producers in the form of export sales of C sugar below total average cost of production. The EC considered that each of the other "payments" alleged by the Complainants constituted a distinct claim that was not within the Panel's terms of reference (see Section B above, Terms of reference). While raising doubts regarding the precise nature of those "payments" and the way in which they would provide an export subsidy within the meaning of Article 9.1 (c.) of the Agreement on Agriculture, the European Communities disagreed that the prices paid by the EC consumers for A and B sugar involved "payments". The EC consumers paid the prevailing domestic market price and, therefore, transferred no "economic value" to the sugar producers.
4.45.
In the European Communities' view, the Complainants had misread the jurisprudence in Canada – Dairy, on which they were basing their claims and allegations. The Canada – Dairy cases concerned different factual circumstances involving the provision of an agricultural input below its average total cost of production which constituted a "payment" to the processor of that input. If that payment was "financed by virtue of government action", and if it was contingent on the subsequent exportation of the processed product, only then was the processed product deemed to benefit from an "export subsidy" subject to reduction commitments.
4.46.
The European Communities considered that the Complainants' allegations in paragraphs 4.38‑4.42 would imply that the producers of C sugar were at the same time the providers and the recipients of the alleged export subsidy, and that C sugar was at the same time the subsidized product and the product which conferred the export subsidy. The European Communities contended that, insofar as the sales of C sugar involved a "payment"64, the recipient of such payment and, therefore, of the alleged subsidy, would be the foreign buyers of C sugar, rather than the producers of C sugar. In turn, the goods subsidized by such payments would not be the exports of C sugar, but instead the goods manufactured by the foreign buyers of C sugar into which C sugar was incorporated.
4.47.
While a cost of production benchmark may be appropriate in certain cases where sales were made within the domestic market, the European Communities continued, it would not always be so, as illustrated by the first Canada – Dairy case. The Appellate Body had emphasized that in order to establish the existence of a "payment", it was "necessary to scrutinize carefully the facts and circumstances" of the measure at issue in each case.65 Furthermore, even if the provision of C beet constituted a "payment on exports", the Complainants would still have to show that it was "financed by virtue of governmental action". In this regard, the European Communities considered that the Complainants had overlooked some important differences between the production of milk at issue in Canada – Dairy, and the production of C beet. The availability and the cost of C beet could vary greatly between EC regions, as well as from one year to another, depending on a multiplicity of factors, which did not involve "governmental action", or at least the type of action at issue in this dispute. For example, the production of beet was affected by climatic conditions and diseases to a much greater extent than the production of milk. Also, beet farmers were much less specialized than milk farmers as beet was produced on a rotational basis. As a result, the production of C beet, according to the European Communities, was as likely to be "financed" by A and B beet as by other alternative crops, and vice versa. For those reasons, the "causal link" between the alleged "governmental action" and the provision of C beet was not "tight" enough to consider that sales of C beet were "financed by virtue of governmental action".
4.48.
The European Communities further submitted that the cost of production of sugar was not a relevant benchmark in order to establish whether export sales of C sugar involved "payments". Instead, the relevant benchmark was the world market price for sugar. The European Communities held that the Appellate Body had resorted to a cost of production benchmark in view of the specific circumstances of Canada – Dairy. That benchmark could not be mechanically applied to the present case but it might be appropriate in situations where, as in Canada – Dairy, the sales were made within the domestic market. However, when the sales were made in the world market, the only relevant benchmark for determining the existence of "payments" was the price prevailing in that market.66 The use of a cost of production benchmark in cases involving input subsidies to exported goods was supported by Items (j) and (k) of the Illustrative List of the SCM Agreement, as explained by the Appellate Body. Those two provisions were not concerned with the export of goods below cost of production, but instead with the granting of subsidies to exported goods through the provision of certain financial services (export credits, guarantees and insurance) at a price below the cost to the service provider. Like the measure at issue in Canada – Dairy, and unlike the measure at issue in this dispute, Items (j) and (k) of the Illustrative List were concerned with input subsidies.
4.49.
Recalling that Article 9.1(c) did not identify any specific benchmark, and that the examination of whether a measure involving "payments" had to be made, in each case, having regard to the "factual and regulatory setting of the disputed measure"67, the European Communities drew attention to the reasoning of the Appellate Body with respect to the "administered domestic price"68, as well as with world market prices69, when these had been considered for their relevance as possible benchmarks in Canada – Dairy:

"... a comparison between CEM prices and world 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."70

4.50.
According to the European Communities, this statement was additional proof that the Appellate Body's decision not to use the world market price as a benchmark in Canada – Dairy was linked to the fact that the alleged "payments" consisted of the provision of inputs for processing within Canada (see also paragraph 4.45). The European Communities asserted that the mere fact of exporting goods below the average total cost of production provided no "advantage" to that "export production", unlike the provision of inputs below cost within the exporting country.
4.51.
The European Communities submitted further that the alleged payments conferred no "benefit" to C sugar and that the Complainants' interpretation of Article 9.1(c) would make it possible to establish the existence of an export subsidy in a situation where, far from receiving a benefit through the alleged subsidy, the supposed recipient of the subsidy was in fact making a financial contribution and providing a benefit to another operator in another Member. The European Communities reasoned that if the sales of C sugar involved a "payment", it would follow that the producers of C sugar were foregoing part of the sugar's "proper value" to them. Insofar as the C sugar producers received a benefit, such benefit was not conferred by the "payments" themselves, but instead by the previous "financing" of the payments "by virtue of governmental action". Such government "financing", however, did not necessarily involve a subsidy and, even if it did, it was not contingent upon export performance. According to the European Communities, the Complainants' interpretation of Article 9.1(c) would render inapplicable the other constituent element of the notion of subsidy, i.e. the requirement that the measure provided a "benefit". It would transform Article 9.1(c) into a per se rule against exports below cost of production, totally disconnected from the existence of subsidization. Article 9.1(c) would then become a form of anti-dumping instrument, which was not even found in the Anti-Dumping Agreement. The European Communities contended that neither the Agreement on Agriculture nor its drafting history contained any suggestion that the drafters had intended to impose stricter disciplines against the dumping of agricultural products through Article 9.1 (c).
4.52.
Responding to the European Communities' argument in paragraphs 4.45, 4.48, and 4.50 above, the Complainants held that the legal reasoning and conclusions in Canada – Dairy were not limited to the specific case of subsidized inputs for processing, and that the citations mentioned were not only intended to explain the factual situation existing in that case. To the contrary, the Complainants reaffirmed that, on the basis of the jurisprudence cited in paragraph 4.38, neither the text of Article 9.1(c), nor Canada – Dairy, limited the universe of export subsidies or payments as alleged by the European Communities. The Appellate Body had interpreted the precise provision that the Complainants had argued was being breached in the present case, i.e. Article 9.1(c). In their view, the European Communities' assertion would imply that no Appellate Body or panel reports would be considered relevant because of differing factual situations.
4.53.
The Complainants considered that, even if Canada – Dairy were to be construed in the limited manner suggested by the European Communities, the present case fitted directly within the scope of that case because one of the "payments" at issue involved the sale of C beet (a primary product) to sugar processors at below the average total cost of production. The Complainants went on to underline the similarities between the milk regime in Canada – Dairy and the sugar regime in the present case. Both were quota-based systems delivering price support; in both cases the product at issue was manufactured from a primary product, and the final product had to be exported; "governmental action" provided the supply of the primary product at prices below that for which the same product could be sold on the domestic market; and in both cases the primary product was sold at below the average total cost of production and the losses were financed by the governmental action.
4.54.
The Complainants further argued that there was nothing in the wording of Article 9.1(c) and the rulings of the panel and Appellate Body in Canada-Dairy to suggest that Article 9.1(c) only applied to payments made in the form of sales of inputs to domestic processors. If the European Communities' argument were correct, Article 9.1(c) would not, for example, apply to cases involving agricultural products that needed no processing prior to exportation; products that were processed by farmers themselves; those processed by cooperatives or other entities owned by the farmers; or those which farmers exported for processing abroad. Therefore the Complainants contended that if Article 9.1(c) were interpreted to exclude such products, a distinction would be made that was completely divorced from the purpose of that provision, and Members would be given the opportunity to escape their export subsidy reduction commitments simply by integrating the production and processing of agricultural products. An acceptance of the European Communities' interpretation would therefore defeat the purpose of Article 9.1(c).
4.55.
In the context of the application of Article 9.1(c), the Complainants continued, the factual situation in regard to C sugar was even more compellinggiven the emphasis by the Appellate Body on the importance of maintaining the distinction between the domestic support and export subsidies disciplines in the Agreement on Agriculture.71 That distinction had been ignored by the European Communities. In this way, the European Communities was eroding the rights of other WTO Members accruing from its export subsidy commitments and obligations under the Agreement on Agriculture, as the level of C sugar exports, as well as the European Communities' overall sugar exports, had increased over the period 1995 to the present. Since, unlike in the Canadian milk regime, there were no independent producers of either C beet or C sugar in the European Communities, he cross-subsidization was total. Moreover, all C sugar was exported at prices below cost of production with the losses financed from the sales of quota sugar in the domestic and export market with the benefit of EC price support. The level of C sugar production as a percentage of total production was much higher than in the Canadian dairy regime. The difference between the costs of production and the returns on C sugar was equally higher, implying a higher level of cross-subsidization.
4.56.
The Complainants maintained that the cross-subsidies provided from price support were captured by WTO definitions of subsidies contingent on export performance. They considered that the European Communities' arguments conflicted with the jurisprudence of Canada – Dairy as they rested on the proposition that domestic price support could never form part of an export subsidy definition within the meaning of Article 9.1(c). On the contrary, subsidization of exports through legitimate price support had been captured by export subsidy definitions since the early days of GATT. The fact that the system of income or price support constituted a subsidy contingent on export performance was irrelevant. The real issue, according to the Complainants, was whether such support, in whole or in part, came within the definitional scope of an export subsidy within the meaning of Article 9.1(c) of the Agreement on Agriculture. (See also paragraph 4.59 below).
4.57.
Referring to the European Communities' arguments summarized in paragraph 4.46, the Complainants submitted that the provider of the export subsidy was the European Communities itself, because there were "payments on the export of an agricultural product that are financed by virtue of governmental action" within the meaning of Article 9.1(c). The European Communities itself, not its sugar producers, took the governmental action that financed the payments, thereby giving rise to the subsidy. The EC producers were the recipients of the subsidy, in that they could increase their net income by making sales of C sugar at prices well below the cost of production. The EC producers, in turn, also made the "payments" when selling the C sugar to the world market buyer at prices below total cost. But this was irrelevant as "the payment could be made by private parties."72 According to Article 1 of the SCM Agreement, however, a "subsidy" could only be provided by a government, or at government direction.
4.58.
The Complainants submitted further that the "subsidy" was conferred by the "payments financed by virtue of governmental action", and that the European Communities had erred in assimilating the concept of "payment" with the broader concept of "subsidy". In their view, the "payment" was only one element of a "subsidy" as defined in Article 9.1(c). Nothing in the text of Article 9.1(c), or in the Appellate Body's interpretation thereof, suggested that the recipient of the payment was, or needed to be, the same person that received the subsidy. The payment could be made by, or to, a private party. Moreover, it was well established that there could be more than one beneficiary of a subsidy, with one party being the beneficiary of a subsidy that was actually paid to another party.73 In the present case, the EC sugar producers received a subsidy notwithstanding the fact that the world market buyers of C sugar might also benefit. Citing the ruling of the Appellate Body in Canada – Dairy74, the Complainants maintained that a payment could only be financed by virtue of a governmental action that conferred a benefit on the entity making the payment. However, for there to be a "payment" by the entity benefiting from that governmental action, it was not necessary that the benefits of that governmental action be transferred to the recipient of the payments.75
4.59.
The Complainants, referring to the European Communities' arguments with respect to "benefit" (see for instance paragraph 4.51) disagreed that the notion of "benefit", or the requirement that a benefit be "conferred" on the recipient of the payments, was a constituent element of Article 9.1(c). That word was not even reflected in the text of that provision. The Complainants recalled that the chapeau of Article 9.1 made clear that all the items listed in the subsections of that article constituted an "export subsidy." Because Article 9.1 stipulated that a payment within the meaning of Article 9.1(c) constituted an export subsidy, once the elements of Article 9.1(c) were satisfied, then for the purposes of the Agreement on Agriculture, there was no need to make any additional showing that the other elements of an export subsidy as defined under Article 1 of the SCM Agreement were also present.76 The Complainants also recalled that, in any case, under Article 10.3 of the Agreement on Agriculture, the burden was on the European Communities to show that it was not providing the benefit that it considered to be required under Article 9.1(c).
4.60.
The Complainants maintained that payments by private parties came within the definitional scope of Article 9.1(c). In this connection, they argued that the European Communities' argument that the "payment" must confer the benefit was based on the importation of a notion into Article 9.1(c) that could not logically be applied to payments by private parties. While a government may decide for non-economic reasons to sell a product on non-commercial terms, a private party would, in the normal course of business, make sales on conditions prevailing in the market, thus in a manner that did not confer a "benefit" on the recipient of the payment. If the European Communities were correct that only sales on terms conferring a benefit on the purchaser were regarded to be "payments" within the meaning of the Article 9.1(c), this provision would in practice not apply to payments by private parties. Therefore, yet again its purpose would be defeated.
4.61.
In the Complainants' view, the European Communities' interpretation would also place undue emphasis on the recipients of the payment, requiring that they obtain an "advantage" or "benefit". The Complainants submitted that the European Communities' argument could not be reconciled with the jurisprudence of the Appellate Body relating to this issue. In Canada – Dairy, the panel had found that "[a] reading of Article 9.1(a) to the effect that a 'payment' exists only if a benefit is granted, is further mandated by the general context of this provision which includes Article 1 of the SCM Agreement… [t]hat provision explicitly requires that a "benefit" be conferred for there to be a 'subsidy' under the SCM Agreement". This reasoning was explicitly rejected by the Appellate Body, which noted that while "[t]he concept of 'benefit' is an integral part of the definition of 'subsidy' in Article 1.1 of the SCM Agreement… the Panel used this term, not to assist in defining the term "direct subsidies" in Article 9.1(a) of the Agreement on Agriculture but to define the word "payment". This ruling was held to demonstrate that the Appellate Body did not consider the concept of benefit to be relevant for determining the existence of payments. It was also argued that the European Communities' position was inconsistent with the reasoning of the Appellate Body in Canada – Dairy (Article 21.5 I). In that case, the Appellate Body considered whether the sale of so-called "commercial export milk" ("CEM") to domestic milk processors at world market prices would constitute a "payment" within the meaning of Article 9.1(c). In the Complainants' opinion, it was clear that the Appellate Body considered that a sale of a product at a price below the average cost of production constituted a payment within the meaning of Article 9.1(c) even if the purchaser could have bought the product at the same price on the world market and the sale therefore did not confer on the purchaser a "benefit". As the Appellate Body pointed out, the crucial question for a panel applying Article 9.1(c) was whether export production had been given an advantage. If the losses that producers incurred as a result of export sales at prices below the average cost of production were financed by virtue of government action, then export production had been given an advantage. For the Complainants, it was obvious that a payment could only be "financed by virtue of a governmental action" where that governmental action conferred a benefit on the entity making the payment. However, for there to be a "payment" by the entity benefiting from that governmental action, it was not necessary that the benefits of that governmental action be transferred to the recipient of the payments.
4.62.
The Complainants underlined that, in both the Canada – Dairy case and in the present case, the payers received an advantage as they were not charging prices which fully reflected their total production costs because of cross-subsidization of export production from quota production. In the same way, export production had been given an advantage. Further, as outlined in paragraph 4.58, the "subsidy" was not found in the "payment" itself, but in regard to the three elements comprising the export subsidy definition of Article 9.1(c), taken together, and by examining the losses made and the financing received by the entities making the "payment". In this connection, the Complainants underlined that there was no need to adopt a "recipient-oriented" approach to the determination of the payments, and thus no need to show a "benefit". The Complainants argued that, even though private parties could make the payments, it was the Member which was "responsible for ensuring that it respects its export subsidy commitments under the covered agreements".77
4.63.
Brazil pointed out that EC sugar producers did, in any case, obtain a benefit from the Article 9.1(c) subsidies on the export of C sugar to the extent that those subsidies made profitable sales that were made well below the producers' total cost of production. Brazil considered that, as a factual matter, the European Communities had not disputed this benefit. Further, this benefit satisfied the requirements of Article 1.1(b) of the SCM Agreement.
4.64.
In relation to the European Communities' contention regarding the appropriate benchmark in order to determine the existence of payments, the Complainants reiterated that the most appropriate benchmark in this case was the cost of production benchmark, for the reasons articulated by the Appellate Body in Canada – Dairy, and referred to in paragraph 4.38 above. As in Canada – Dairy, the domestic price was not appropriate because the intervention prices ensured it remained at artificially high levels. Similarly, the world market price did not provide a suitable benchmark because C sugar could only be sold at prices competitive with world market prices because it received export subsidies that made it competitive on that market. Applying the world market price as a benchmark would allow most subsidizing practices to escape the strictures of Article 9.1(c). The only subsidies that would be captured under that provision would be those designed to undercut the world market price. The Complainants noted that the European Communities provided no substantive reasons in support of its arguments and did not explain, in particular, why the factual differences between Canada – Dairy and the present case called for a different benchmark; why in the present circumstances, the cost of production benchmark could not serve as an appropriate test; and why the world market price was more appropriate in spite of the reasoning of the Appellate Body.78 In contrast, the Complainants highlighted that the Appellate Body in Canada – Dairy found that in circumstances "where the alleged payment is made by an independent economic operator and the domestic price is administered" the average cost of production represents the appropriate standard. As the factual circumstances in the present case were that the payments were also made by private operators and the domestic price was administered, the average cost of production was the appropriate benchmark.
4.65.
The European Communities responded that the Canada – Dairy jurisprudence confirmed that the requirement to show an "advantage" or "benefit"79 was implicit in the requirement that there must be a "payment". The "crucial question" was whether the "payments" themselves conferred an "advantage" to the "export production", rather than to the foreign purchasers of that production. The European Communities stressed that the "payments" alleged in the present dispute did not transfer any "economic value" to the sugar producers and therefore did not confer any "advantage" to "export production". To the contrary, through those "payments", it was the sugar producers who transferred "economic value" to their foreign customers. The "actions" which, according to the Complainants, "financed" the "payments", constituted distinct measures from the alleged "payments" and were subject to specific disciplines under the Agreement on Agriculture, since some of those actions were not subsidies (e.g. the tariff protection), while others involved subsidies (e.g. the intervention purchases), but were not export contingent. Even assuming that the exports of C sugar involved "payments", the European Communities continued, such "payments" would not confer a subsidy on exports of C sugar.
4.66.
Even if Article 9.1(c) did not use the term "benefit", the European Communities considered that all the measures listed under Article 9.1 were described as "export subsidies" in the chapeau of that provision. They had, therefore, to be interpreted in the context of the notion of "subsidy". The existence of a "benefit" was inherent in the notion of "subsidy". Consequently, if the exports of a given agricultural product received no benefit from a certain measure, these products could not be deemed "subsidized" by such a measure.
4.67.
The European Communities submitted that its reading of Article 9.1(c) and of Canada – Dairy as addressing exclusively the supply of inputs within the exporting country, was supported contextually both by the SCM Agreement, as confirmed by the Appellate Body80, and by the Members' schedules. The European Communities held that the definition of a subsidy in the SCM Agreement envisaged the existence of a subsidy without a "financial contribution"81 or in circumstances where the "financial contribution" was made by a private party rather than by a government, similar to Article 9.1(c).82 In contrast, Article 1 of the SCM Agreement always required, as an indispensable element for the existence of a subsidy, the conferral of a "benefit"83, and provided no exception to this requirement. Furthermore, under the SCM Agreement, the provision of goods by the government or by a private party, in the circumstances described in Article 1.1(a)(1)(iv), could constitute a subsidy if it conferred a benefit to the enterprise receiving such goods. The existence of a benefit had thus to be determined in relation to prevailing market conditions in the country of provision or purchase84 or, in the case of export subsidies, in the world market.85 On the other hand, under the SCM Agreement, the mere fact of exporting goods at "too low" a price had never been considered a subsidy, let alone an export subsidy, regardless of the benchmark.
4.68.
The European Communities thus considered that the solution reached by the Appellate Body in Canada – Dairy was in line with the applicable rules of the SCM Agreement with respect to input subsidies, except that the Appellate Body took the view that, in certain circumstances, the existence of a subsidy had to be established in relation to a cost of production benchmark, rather than to a domestic market or world market price benchmark. The European Communities saw no apparent reason why agricultural products should be subject to stricter disciplines on export subsidies than other products. Recalling that the starting point for the negotiation of the rules on subsidies included in the Agreement on Agriculture was Article XVI of the GATT 1947, which only prohibited export subsidies on non-primary products, the European Communities asserted that the intention of the drafters of the Agreement on Agriculture was rather the opposite.
4.69.
With regard to the Members' Schedules, the European Communities noted that the schedules of reduction commitments were part of the WTO Agreement and, as such, relevant context for the interpretation of Article 9.1(c) of the Agreement on Agriculture. The European Communities reasoned that, if the Complainants' interpretation of Article 9.1(c) were correct, those Members, which prior to the conclusion of the WTO Agreement provided export subsidies covered by the Complainant's interpretation, should have been expected to schedule reduction commitments with respect to those measures. Yet, not a single WTO Member did so, even though many of them applied, and continued to apply, price support measures (or tariff protection) having the effect of "cross-subsidizing" exports at below cost of production. In the European Communities' view, this demonstrated that the interpretation of Article 9.1(c) advanced by the Complainants was not envisaged by any Member, including the Complainants themselves, and would have, if upheld, far-reaching and unintended implications, including for developing countries. In support of this argument, the European Communities referred to documentation suggesting that a number of countries, including Australia, Brazil, and Thailand, had been exporting sugar at a loss for years, and applying measures to keep domestic prices above world market prices.8687

(b) "Financed by virtue of governmental action"

4.70.
The Complainants submitted that there was a strong demonstrable link between the "payments" and the "governmental action" in the present case and referred to an assessment by the EC Commission88 suggesting that full liberalization of the EC sugar market would lead to a reduction in EC production of sugar to one third of present levels and even to its disappearance in the long run, and that profitability was only maintained through the EC sugar regime. The Complainants inferred that, under such circumstances, sugar production, including C sugar, in the European Communities depended on governmental action for its existence.
4.71.
The Complainants recalled that the EC sugar regime regulated C sugar production and exports through Council Regulation No. 1260/2001. The funding of the payments that C sugar producers were making was the direct consequence of the extremely tight regulatory framework set out in that Regulation, under which quota holders were accorded the exclusive rights to make sales at guaranteed prices covering all or most of their fixed costs of production. The European Communities had created a legal framework that encouraged overproduction, segregated the export market for C sugar from the domestic market, generated the profits used to fund the export of that sugar, and imposed sanctions for failure to export such sugar. The EC Commission itself regarded the regime as a factor of market balance89, fulfilling market stabilization objectives.90 According to the Complainants, the governmental action involved in the EC sugar regime represented therefore a strong nexus with the 'payments', sufficient to meet the Appellate Body's test established in Canada – Dairy.
4.72.
The Complainants asserted that the instruments of the regime provided a strong incentive to EC quota holders to defend their quotas through surplus C sugar production, whether or not the production of C sugar would be below the costs of its production. A quota value was delivered to a sugar quota holder through a combination of the EC system of subsidies and domestic supply restrictions. The intervention price provided a guaranteed price some three times greater than the world price, but due to the domestic supply restrictions, quota holders secured market prices substantially in excess of the intervention price. They also received export subsidies for quota quantities in excess of domestic supply needs. As there had not been any intervention purchasing for around 25 years, subsidized exports were obviously more profitable than selling into intervention. Given that high costs of production made EC sugar processors uncompetitive by world market standards, the quota value was directly attributable to the governmental action prescribed in the EC regime.
4.73.
The Complainants sustained that beneficiaries of sugar production quotas were protected from virtually all foreign sources of competition, through a combination of import tariffs and special safeguard measures, and through the exportation, with export refunds, of a quantity of sugar allegedly "equivalent" to the quantity imported from the ACP countries and India. They were also protected from potential competition from new domestic suppliers because only sugar produced by holders of production quota was entitled to receive price support and export refunds. As a result, there was no competition between domestic sugar quota holders, and no re-allocation of quotas to the more efficient domestic producers. The level of the intervention prices covered the production costs of the least efficient sugar producer with the consequence that the more efficient producers enjoyed, what the staff of the EC Commission described as, "comfortable margins".91
4.74.
The Complainants contended that, as in Canada – Dairy,this controlling governmental action was "indispensable" to the transfer of resources from consumers and tax payers to sugar processors for A and B quota sugar and, through them, to growers for A and B quota beet.92 The European Communities' action thereby financed growers to supply beet for C sugar to processors at prices that did not reflect the average total cost of the beet, and for those processors, in turn, to provide C sugar to buyers at world market prices that did not reflect its average total cost. EC sugar producers were thus able to recover most or all of their fixed costs by producing and selling quota sugar either in the protected domestic market or, with export refunds, in the world market. EC producers could then produce and export C sugar profitably as long as the world market price was higher than the marginal cost of producing C sugar.93 The Complainants argued that allocation of the right to supply the EC domestic market through quotas and the high prices for A and B quota sugar provided producers with a strong quota insurance incentive to produce C sugar. That is, in the face of unpredictably variable yield, producers can ensure that they always produce sufficient sugar to receive those high prices for their full quota and to protect their long term access to quota. The Complainants considered that these EC policy induced reasons for C sugar production were confirmed by the fact that, as mentioned in paragraph 4.43 above, there were no independent producers producing exclusively C sugar: C sugar production was profitable only for the beneficiaries of A and B quota allocations.94
4.75.
Furthermore, the Complainantscontinued, the governmental action regulating the domestic sugar market cross-subsidized sales of C sugar that otherwise would not be made, or would be made at a loss. They maintained that there was a single line of sugar production, for all sugar, irrespective of the destination markets. The same was true, mutatis mutandis, for sugar beet. The higher revenue sales for quota sugar in the internal market effectively financed some or all of the costs of C sugar. C sugar was cross-subsidized through direct subsidies, price support mechanisms and related mechanisms for quota sugar, all of which were regulatory instruments of the EC sugar regime. The sales of C sugar were profitable at prices that merely exceeded marginal costs because the higher revenue sales in the internal market "effectively 'financed' part of the lower revenue sales by funding the portion of the shared fixed costs attributable to the lower priced products."95 Again, the same was true, mutatis mutandis, for sugar beet. In the Complainants' view, this provided further evidence of the "demonstrable" link between the government action and the payment. Further, the Complainants argued that the structure of support through quotas and restrictions on quota trade and carryover of C sugar provided a particularly strong quota insurance reason for C sugar production.96 The Complainants asserted that, if the producer had a choice to either sell on the EC domestic market or on the world market, the former would be more attractive, given that the EC regime delivered a domestic price of some 3.5 times the world price of A quota sugar and 2.5 times that of B quota sugar.
4.76.
The Complainants considered that the distinction between domestic support and export subsidies in the Agreement on Agriculture would be eroded if a WTO Member were entitled to use domestic support without limit to subsidize the exports of agricultural products. The benefits intended to accrue through a WTO Member's export subsidy commitments would thus be undermined.97 This rationale applied to the EC sugar industry, including both growers and processors who disposed of C beet and C sugar at prices that did not recover their total costs of production. The provision of domestic support measures coupled with high levels of tariff protection allowed extensive support to producers, inconsistent with the limitations imposed through the export subsidy disciplines.
4.77.
The Complainants contended that C sugar exports were not incidental to the manufacture and sale of quota sugar as these amounted to between *** per cent and *** per cent of quota production between the 1992/93 and 2001/02 marketing years.98 The share of C sugar in production and exports demonstrated that C sugar was thus not a mere "spill over" of quota production, but a significant structural component of EC sugar production. As EC sugar production was dependent on governmental action for its very existence, there was clearly a demonstrable link between the payment and the governmental action sufficient to meet the tests established by the Appellate Body. The regulation of the EC regime, in the form of guaranteed prices for quota sugar and the forced export of over-quota production, the Complainants continued, underscored this governmental action. The maintenance of C sugar production and exports in the face of the high difference between production costs and prices received was only made possible by the subsidies on quota sugar and sugar processed from imported raw cane sugar and because of the absence of controls in the EC regime to prevent cross-subsidization. Australia noted that, with respect to subsidies for processing, competition from imports was effectively neutralized in regard to the guaranteed prices for some imported sugar, equating to the domestic support price for quota sugar. The Complainants reiterated that there was thus a "payment" which had been financed "by virtue of governmental action".
4.78.
The European Communities responded that even if the domestic support provided to A and B quota sugar had the incidental effect of "financing" or "cross-subsidizing" exports of C sugar, this would not be sufficient to consider that those exports benefited from "export subsidies" subject to reduction commitments under the Agreement on Agriculture. The relevant question was not whether exports of C sugar were contingent upon subsidization, but instead whether the subsidies provided by the European Communities were contingent upon such exports.99 The European Communities considered that the Complainants had not alleged, let alone proven, that the measures which, according to them, "financed" or "cross-subsidized" the exports of C sugar were contingent, i.e. "conditional", "dependent for their existence" on the exports of C sugar.
4.79.
The European Communities noted that some of the measures cited by the Complainants, such as import tariffs or safeguard measures (see for instance paragraph 4.73), were not even subsidies. Other measures, such as the intervention price and the production quotas, were indeed typical domestic price support mechanisms, and were already subject to the European Communities' domestic support reduction commitments under the Agreement on Agriculture. Therefore, the question of whether these measures provided export subsidies to C sugar did not even arise, in the European Communities' opinion. Even if these measures provided an indirect benefit to C sugar, they were not contingent upon the export of C sugar and, therefore, could not be characterized as "export subsidies". The European Communities explained that a sugar producer's eligibility for A and B production quotas did not depend on whether it exported any sugar. Likewise, the right to sell A and B sugar into intervention was not conditional upon whether it exported C sugar or indeed any sugar at all.
4.80.
In relation to the Complainants' assertions in paragraph 4.77, the European Communities observed that the volume of C sugar production fluctuated considerably from one marketing year to another, due to weather conditions, which affected both the beet yield and the sugar content of the beet, and to the evolution of the world market prices for sugar.100 Sugar producers were free to decide whether or not to produce C sugar for export. The European Communities submitted that, far from requiring the exportation of C sugar, the EC regulations provided for the possibility to store and "carry forward" to the next marketing year any sugar produced in excess of the A and B quotas up to an amount equivalent to 20 per cent of the A quota (see also paragraph 4.48).101
4.81.
The Complainants responded that the European Communities' arguments in paragraphs 4.78 and 4.79 disregarded the fact that any type of governmental action financing payments on exports of agricultural products was covered by Article 9.1(c).102There could be no doubts therefore that the governmental action financing the payments could take the form of import tariffs, safeguard actions and other measures that would not constitute subsidies within the meaning of Article 1 of the SCM Agreement.
4.82.
The European Communities also incorrectly ascribed a test to Article 9.1(c) requiring that the financing it provided to C sugar exports be contingent on such exports. In doing so, the European Communities was shrinking the export subsidy definition of that provision into one single element, thus implying that the governmental action constituted the subsidy. The terms of Article 9.1(c) clearly linked the requirement of export contingency to the "payments", not to the "governmental action" by virtue of which they were financed.103 Hence, in order for the "payment on the export", including that made by a private party, to constitute an export subsidy in accordance with Article 9.1(c), such a payment had to be financed "by virtue of governmental action", with the requisite nexus existing between both elements.104 The Complainants thus considered that the "demonstrable link" and "clear nexus" between the "payments" and the "governmental action" was well established in this case.
4.83.
The Complainants submitted that it was this additional requirement which prevented Article 9.1(c) from becoming a per se anti-dumping rule, as advanced by the European Communities (see paragraph 4.51), and distinguished the subsidization defined in Article 9.1(c) from the kind of price discrimination by private actors with which anti-dumping instruments were concerned. In response to the European Communities' argument that the Complainants' interpretation would transform Article 9.1(c) into a provision prohibiting dumping by private operators, it was argued that Members would not be made responsible for export transactions by private operators that escaped their control. This was because there could only be an export subsidy within the meaning of Article 9.1(c) if there were (i) "payments" (ii) "on the export" (iii) "financed by virtue of governmental action". As to "payments", the Appellate Body stated that that the government "must play a sufficiently important part in the process by which a private party funds 'payments', such that the requisite nexus exists between 'governmental action' and 'financing'". It was thus clear that only payments which were directly linked to a governmental action were covered by Article 9.1(c). As to the requirement that the payments be "on the export", the Canada – Dairy panel correctly concluded that there was a payment "on the export" only if the Member caused it to be a payment contingent upon export performance. In the Complainants' view, the mere fact that private persons decided to export products below the average total cost of production was consequently not sufficient to establish export contingency. Finally, not any "financing" was covered by Article 9.1(c) but only financing that resulted from a governmental action. Each of the three elements constituting an export subsidy within the meaning of Article 9.1(c) was thus present only if the Member, not private operators, caused it to be present.
4.84.
The Complainants held that the inconsistency of the C sugar regime was attributable to numerous governmental decisions. In particular, the Complainants noted that: first, the European Communities had decided to provide price support to sugar producers, thereby "financing" the "payments on the export" of C sugar; second, the European Communities had chosen to deliver that support through a set of shares in quota access to the domestic market, third,; third, the European Communities had decided to permit (and encourage) producers to sell an amount of sugar that exceeded the amount of that quota, which – together with a series of other measures – had created the requisite nexus between the "payments" and the "governmental action" by virtue of which they were financed; and, fourth, the European Communities had decided to require producers to sell the excess amount of sugar on the world market, thereby ensuring that all payments were "on the export" of C sugar. The presence of all three elements constituting an export subsidy within the meaning of Article 9.1(c) was thus the direct and foreseeable consequence of actions by the European Communities, not merely the decisions of private sugar producers responding to market incentives.
4.85.
The European Communities responded that an "advantage" had to be conferred by the "payment", i.e. by the provision of goods, rather than by the measures that "financed" the "payment", consistently with the definition of a "subsidy" in the SCM Agreement, which required that the "benefit" had to be conferred by the "financial contribution". The European Communities held that in the present case, the "financial contribution" would be the exports of C sugar. Accordingly, it was those exports which would need to provide a "benefit" to the sugar producers. In the European Communities' opinion, the Complainants were combining two of the three requirements of Article 9.1(c), i.e. the requirement that there must be a "payment" and the requirement that such "payment" be "financed by virtue of governmental action". The European Communities reiterated that the existence of an "advantage" was necessary in order to establish that there was a "payment". If there was no "payment", the subsequent question of how such "payment" was financed did not even arise. Consequently, the Complainants could not rely on the actions that supposedly financed the "payments" in order to conclude that there was a "payment". Rather, they should have demonstrated first that there was a "payment".
4.86.
The European Communities submitted that, from the fact that a party had derived an "advantage" from certain "governmental actions", it did not follow necessarily that any provision of goods made by that party would "transfer economic resources" to the recipient of the goods. The European Communities was not saying that the "governmental action" referred to in Article 9.1(c) might never provide a "benefit" to the producers of exported goods. Rather, the European Communities' contention was that the "benefit" had to be examined on its own merits, and under the relevant WTO rules. It was essential to maintain this distinction because the notion of "governmental action" encompassed a very broad range of measures, including measures that were not subsidies (e.g. import duties). In the European Communities' view, by de-linking the "benefit" from the "payment" and attaching it to the "governmental action", the Complainants' interpretation of Article 9.1(c) would extend the application of the strict rules on export subsidies provided in the Agreement on Agriculture to virtually any form of government intervention which might have the incidental effect of "financing" sales at a loss. According to the European Communities, this was never intended by the drafters of the Agreement on Agriculture.

(c) "payment on the export"

4.87.
The Complainants contended that the payments made by C sugar producers were payments "on the export" of "an agricultural product" within the meaning of Article 9.1(c). C sugar was included in Annex 1 of the Agreement on Agriculture and was therefore an agricultural product within the meaning of that Agreement. Further, C sugar could only be sold upon its exportation: if not carried forward, C sugar "may not be disposed of on the Community's internal market and must be exported without further processing."105 Because of that legal requirement, the Complainants considered that subsidies to C sugar, which must be exported, were subsidies "on the export" of that product. Similarly, because C beet could be processed only into C sugar, a product that had to be exported, payments to growers of C beet were also payments "on the export" of that product.
4.88.
The European Communities responded that the alleged "payments" took the form of exports, but were not made on "exports." The requirement of "contingent upon export performance" set out in the Agreement on Agriculture had to be read in the same way as the same requirement imposed by the SCM Agreement.106 Unlike in Canada – Dairy, the making of the alleged "payments" was not conditional on any exports being made by the recipient of the payments or by a third party. By ignoring this difference, the Complainants' interpretation of Article 9.1(c) collapsed two distinct legal requirements, i.e., the existence of "payments", and the existence of "exports", with the former action being contingent upon the second. Combining the two requirements made it possible to characterize as "export subsidies" payments which were not conditional upon exports. In the European Communities' view, this amounted to saying that the alleged "payments" were contingent upon themselves, which would render the second legal requirement, "on exports", redundant. Such interpretation also confused the distinction between the disciplines on domestic support, export subsidies and market access, a distinction which was, in the European Communities' opinion, a fundamental feature of the Agreement on Agriculture.
4.89.
From the domestic support perspective, the European Communities continued, the Complainants' interpretation would imply that, whenever a system of price support had the incidental effect of financing exports below average total cost of production, the Member concerned would be required, in order to avoid a breach of its export subsidy commitments, to dismantle that system of price support, even if such a system was fully in conformity with the relevant provisions of the Agreement on Agriculture concerning domestic support. If a subsidy were export contingent, the European Communities continued, it should be possible, at least in theory, to remove the condition which made it export contingent, while maintaining the subsidy. If an alleged export subsidy could not be withdrawn except by withdrawing a legitimate system of domestic price support, it was because, according to the European Communities, it was not contingent "on exports".
4.90.
With respect to market access, the European Communities recalled that the terms "governmental action" in Article 9.1(c) encompassed a broad range of government measures107, including import tariffs.108 The Complainants' interpretation would imply that, if high import duties had the incidental effect of "cross-financing" exports below the average total cost of production, the Member concerned would have no alternative but to lower its import duty levels, even if such duties were within that Member's tariff bindings. The European Communities reiterated that the domestic support for A and B sugar was not contingent upon exports of C sugar which was demonstrated by the fact that some sugar producers did not produce any C sugar at all. The European Communities noted that according to data for the most recent marketing year, there were no exports of C sugar from Italy, Greece and Portugal, while exports from Finland, Spain and Belgium/Luxemburg represented only a fraction of their total sugar output.
4.91.
The Complainants responded that the European Communities incorrectly ascribed to them an interpretation that the "payments themselves" were "exports" and considered that the sole argument in that regard rested on the assertion that domestic support could not form part of export subsidization. Having rebutted such argument in paragraphs 4.55, 4.59 and 4.82 above, the Complainants disagreed that they were required to establish that the domestic support provided to sugar producers was contingent on exports of C sugar. As shown by the Complainants, since C sugar had to be exported, all sales of C sugar constituted sales for export. Conversely, if C sugar were not required to be exported, there would be no payment on C sugar. Thus, a payment occurred only when C sugar was exported.
4.92.
Moreover, when interpreting the terms of Article 9.1(c) that defined export contingency, the Complainants considered that it was important to recall that that provision defined the obligations of Members, not those of private persons acting independently of their government. A payment could therefore be regarded as a payment "on the export" only if the Member caused it to be a payment on the export. The mere fact that private persons decided to export products below the average cost of production was consequently not sufficient to establish export contingency. In the present case, the European Communities had adopted a regulation that required the export of all C sugar. Sugar producers were free to decide whether or not to produce C sugar but they were not free to decide whether to sell that sugar for domestic consumption or for export. The export contingency was thus the result of a measure taken by the European Communities.
4.93.
Australia submitted that C sugar exports were a significant structural component of EC sugar production, with C sugar exports fluctuating around 17 per cent of the combined A and B quota for the European Communities during the decade to 2001-02. Also, production of C beet and C sugar was due in part to the need for producers to ensure 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.109 In Australia's view, beet and sugar producers did not decide to produce and export C sugar through market based decisions.
4.94.
The Complainants concurred with the EC Commission's reference to the EC sugar regime as "a factor of market balance, fulfilling the market stabilization objectives of the sugar regime" (see also paragraph 4.71 above.) and considered that this was relevant, not only in regard to the requirement that the payments be made "by virtue of governmental action", but also in regard to the requirement that payments be made "on the export". In their view, the payments to C sugar, which had already been shown by the Complainants to be made "by virtue of governmental action", were made on the export because they were contingent and dependent on C sugar being exported.
4.95.
The Complainants disagreed that their interpretation would have the consequence that Members would be required to dismantle their price support systems whenever these had the incidental effect of financing exports below average total cost of production. Such an effect, by itself, did not give rise to an export subsidy within the meaning of Article 9.1(c). The payments financed by such programmes had also to be contingent upon export performance. The Complainants recalled that in Canada – Dairy, the panel had noted that the mere existence of parallel markets for domestic use and for export with different prices did not necessarily constitute an export subsidy within the meaning of Article 9.1.110 Consequently, the mere existence of a domestic and an export market with different prices, and spill-over effects, from one to the other did not constitute an export subsidy within the meaning of Article 9.1(c). It was thus not the effect of cross-subsidization resulting from the decisions of private operators, by itself, that rendered the European Communities' scheme of domestic support inconsistent with Article 9.1(c).
4.96.
There were many options available to the European Communities to deliver support in accordance with the Agreement on Agriculture, including the possible removal of the contingency element, while maintaining the underlying subsidy. In the present case, the Complainantssuggested that the European Communities could repeal the requirement that C sugar be exported and permit C sugar to be sold in the domestic market or introduce changes requiring that any sugar produced in excess of any year's quota be carried over to the next year's quota. The sugar regime was the only EC regime governing an agricultural product that required excess production to be exported. Thailand stressed in this connection that the CMO for sugar was the only CMO of the European Communities that permitted (and indeed encouraged) producers to exceed their production quotas and required them to export the surplus. Thailand's interpretation of Article 9.1(c) would therefore not require the European Communities to do anything that it was not already doing in the field of agriculture. If the European Communities were to align its sugar policies to those followed in other agricultural sectors, it would ensure their consistency with Article 9.1(c). According to the Complainants, this also suggested that the European Communities was fully capable of devising means to provide permissible domestic support without allowing this support, in the words of the Appellate Body, to produce "spill-over economic benefits for export production."111 The Complainants noted in this regard that the Appellate Body had specifically stated in Canada – Dairy that an appropriate benchmark in determining whether "payments" existed under Article 9.1(c) should respect the separation between export subsidy and domestic support disciplines. The Appellate Body had stated that if domestic support could be used, without limit, to provide support to exports, it would undermine the benefits intended to accrue through a Member's export subsidy commitments.
4.97.
The European Communities responded that if it permitted sales of C sugar in the EC market, those sales would depress the prices within the EC internal market, thereby undermining the level of domestic price support. Further, they would not be made at below the average total cost of production, but rather at the supported price prevailing within the EC market. In the European Communities' view, therefore, those sales would not involve "payments". In order to withdraw the alleged "export contingency", the European Communities would have no option but to eliminate the price differential between its domestic market and the export market, which was the very essence of any system of domestic price support. Removing the "export contingency" element by preventing exports of C sugar would amount, in the European Communities' opinion, to withdrawing the subsidy, since the alleged subsidies were the "payments" and not the domestic support and other measures that, according to the Complainants, financed the "payments".
4.98.
Furthermore, the European Communities maintained that the Complainants' interpretation would introduce an unjustified difference in treatment between two equally legitimate forms of domestic support: price support (including price support resulting from tariff protection) and income support linked to production (e.g. through "deficiency payments" equal to the difference between the market price and a target price). In the European Communities' opinion, both systems of domestic support were just as apt to "finance" exports below cost of production. Yet, on the Complainants' interpretation, such exports would be prohibited only if they were "financed" by a system of price support, or by tariff protection, but not if they were "financed" by deficiency payments or a similar system. Any Member providing domestic price support or tariff protection would be required to put in place mechanisms to ensure that it made no exports below cost of production. In contrast, Members would be free to "finance" an unlimited quantity of exports below cost of production via "deficiency payments" or other systems of income support linked to production, because sales in the domestic market would also be made below cost. The Complainants' interpretation would alter the architecture of the Agreement on Agriculture by redrawing the agreed boundary between domestic support and export subsidies in a manner that no participant in the Uruguay Round negotiations could have anticipated. And it would introduce a totally unjustified difference in treatment between different forms of domestic support and, ultimately, between Members.

2. In the alternative, Article 10.1 of the Agreement on Agriculture

4.99.
Should the Panel decide that the exports of C sugar were not subsidized by payments financed by virtue of governmental action within the meaning of Article 9.1(c), the Complainants submitted, in the alternative, that the European Communities had to address their claims under Article 10.1. In this regard, they recalled that under Article 10.3 of the Agreement on Agriculture, the European Communities had the burden of establishing that sugar exported in excess of its quantity commitment level was not subsidized by way of export subsidies not listed in Article 9.1112, and that this reversal of the burden of proof extended to establishing the absence of any export subsidy whether listed in Article 9.1 or not (See section IV.C, Burden of proof).
4.100.
Referring to the Appellate Body finding in US-FSC113, the Complainants continued, three elements had to be met under Article 10.1 of the Agreement on Agriculture, i.e. that: (a) there was a subsidy not identified in Article 9.1; (b) that subsidy was contingent on export; and (c) the subsidy resulted in, or threatened to lead to, circumvention of a Members' export subsidy commitments (the "circumvention" element). Though the European Communities had the obligation to demonstrate that these elements were not present, the Complainants set out the following arguments for reasons of procedural efficiency, and without waiving their rights under Article 10.3 of the Agreement on Agriculture. TheComplainants thus argued that the European Communities was applying an export subsidy of a type not listed in Article 9.1, in a manner which resulted in, or which threatened to lead to, circumvention of export subsidy commitments, inconsistently with Article 10.1.
4.101.
The European Communities responded that certain issues brought by the Complainants under Article 10.1 of the Agreement on Agriculture actually constituted "claims" which were, in its view, outside the terms of reference of the Panel (see section I.1, Terms of reference). Alternatively, the European Communities submitted that exports of C sugar did not benefit from any "other export subsidies" within the meaning of Article 10.1 of the Agreement on Agriculture.

(a) Item (d) of the Illustrative List of Export Subsidies

4.102.
The Complainants submitted that Item (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement was clearly applicable to the present case. They specifically referred to the analysis of the panel in Canada – Dairy setting outthe three elements which needed to be established:

(a) the provision of products for use in export production on terms more favourable than for provision of like products for use in domestic production;

(b) by governments either directly or indirectly through government mandated schemes; and

(c) on terms more favourable than those commercially available on world markets.114

4.103.
With respect to the first element115, theComplainants submitted that, physically, C beet was identical to A and B quota beet, and had the same end use as an input into a manufacturing process. The three classes of beet were thus "like products". However, the regime provided for the supply of C beet and quota beet to processors on different terms. First, C beet could not be processed into sugar for sale on the domestic market, and thus most C beet was processed into C sugar for export.116 All C sugar must be exported without an export refund.117 Conversely, most sugar on the domestic market was quota sugar, processed from A and B beet. Second, while growers were guaranteed a fixed minimum price for quota beet,118 no fixed price was set for C beet, the Regulation permitting the provision of C beet at a lower price than quota beet. While the price obtained for C beet was not uniform, as a general rule C beet was provided to processors on terms more favourable than those of A and B beet. Referring to the average prices, as did the panel in Canada – Dairy119, products for export production, the Complainants continued, were being supplied for less than like products for domestic production. By controlling the disposal of C sugar, the European Communities limited the use to which C beet could be put and hence ensured that C beet was available at prices that were "more favourable" than the prices of A and B beet. According to the Complainants, the first element of Item (d) of the Illustrative List was therefore satisfied.
4.104.
With respect to the second element, the Complainants noted its similarity to the "governmental action" component of Article 9.1(c) of the Agreement on Agriculture as both phrases denoted some level of governmental involvement in the subsidization of export products. However, the Complainants pointed out that the residual nature of Article 10.1 meant that it might cover export subsidies which did not satisfy some component of an Article 9.1 subsidy.120 Thus, this second element had been interpreted more broadly, according to the Complainants, than similar phrases in Article 9.1(a) and Article 9.1(c) of the Agreement on Agriculture.121 The Complainants submitted that should the Panel find that there was no 'governmental action' component under Article 9.1(c), this would not preclude a positive finding on the second element of Item (d) of the Illustrative list.
4.105.
Turning to the substantive test of the second element, the Complainants recalled that the panel in Canada – Dairy had held that the prohibition on diversion of CEM back into the domestic regulated market and the exemption which gave processors for export access to the lower CEM prices were sufficient for a finding that the provision of milk was "made or mandated by government for export."122 They considered that these two factors were also present in the EC sugar regime as the European Communities exempted C beet from the minimum price requirement under Article 5 of the Regulation, while Article 13 of the Regulation operated to ensure that C beet could not be used to produce products that would obtain the higher regulated prices for sugar sold within the European Communities. Similarly, by exempting C beet from the minimum price requirement and preventing the use of C beet to produce sugar that could be placed on the domestic market, the European Communities mandated the provision of beet for C sugar exports on terms more favourable than would be available for beet used for the production of sugar for sale on the domestic market. The second element of Item (d) of the Illustrative List was therefore satisfied.
4.106.
As concerns the third element, the Complainants considered that the focus of the third element was on the comparative attractiveness to exporters of sourcing products for export production from either the domestic market or from the world market, rather than specifically on the regulation of access to the world market. If the domestic market was a more attractive source than the world market, this element was established. Furthermore, the domestic product supplied on favourable terms for export production was beet. There was no world market for beet in commercial quantities, as beet was perishable and comparatively expensive to transport. Pointing to footnote 57 to Item (d) of the Illustrative List, the Complainants held that, when comparing the attractiveness to exporters of sourcing beet from the EC domestic market or the world market, the former was necessarily more attractive to exporters as, for technical and other reasons (including protective tariffs against imports)123 commercial quantities of beet could not be acquired on the world market on any terms. The terms of domestic supply were thus inevitably more favourable, according to the Complainants. The third element of Item (d) of the Illustrative List was therefore satisfied.
4.107.
Contending that they had established the three elements of Item (d) of the Illustrative List, the Complainants held that it was not necessary to consider whether the subsidies provided were "contingent upon export performance"124, as all measures within the Illustrative List were, by definition, contingent upon export performance. Recalling the Appellate Body's finding that the determination of 'export subsidies' under Article 10.1 of the Agreement on Agriculture should draw on the interpretation of that term under the SCM Agreement125, the Complainants argued that the export subsidy provided under the sugar regime thus fell within the terms of Article 10.1 of the Agreement on Agriculture. Under Article 10.1, the European Communities had the burden of establishing that its regime in respect of C beet was not an export subsidy to C sugar within the meaning of Item (d) of the Illustrative List.
4.108.
Turning to the circumvention test, the Complainants recalled the jurisprudence in Canada – Dairy126 and in US – FSC127 and held that the appropriate test of circumvention was whether the European Communities was transferring economic resources to excess exports through methods other than those prohibited under Articles 3.3 and 9.1 of the Agreement on Agriculture. The Complainants observed that they had previously established (see paragraph 4.28 in Burden of proof) that the European Communities exported quantities of sugar in excess of the quantities specified in its reduction commitments. Having demonstrated that part of the excess quantity, C sugar, received an export subsidy within the meaning of Item (d) of Annex I of the SCM Agreement, or alternatively, within the meaning of Article 1.1 of the SCM Agreement, and having established the export contingency element, the Complainants submitted that the European Communities was circumventing its export subsidy commitments, inconsistently with Article 10.1 of the Agreement on Agriculture.
4.109.
The European Communities responded that exports of C sugar did not benefit from export subsidies within the meaning of Item (d) of the Illustrative List and that this claim was unfounded. The relevant issue, in the European Communities' view, was whether the EC sugar regime mandated the provision of C sugar. From the fact that the EC sugar regime "mandated" minimum prices for A and B beet, it did not follow that the "provision" of C beet to the sugar producers was directly or indirectly "mandated" by the EC authorities. The European Communities reiterated that the beet farmers were entirely free to decide whether or not to produce C beet for export, and that the price of the C beet was freely agreed between the growers and the sugar producers. In the European Communities' view, the absence of any element of government compulsion was confirmed by the fact that, in some member States, there was no production of either C beet or C sugar (see also paragraph 4.90).
4.110.
The European Communities was of the view that the mere fact that a government measure enabled or promoted the provision of goods by private parties was not sufficient to consider that such action was "mandated" by the government. The interpretation of "mandated" found contextual support in the definition of "subsidy" included in Article 1 of the SCM Agreement, according to which the supply of goods to an enterprise could not be considered as a subsidy unless it was carried out by the government or by a public body. The only exception to this was provided in paragraph 1.1(a)(1)(iv). The European Communities recalled that the panel in US – Export Restraints128, had rejected the claim by the United States that a restriction on exports of an input conferred a subsidy to the processors simply because it had the effect of making that input available at a lower price in the Canadian market. To the European Communities, the term "mandated" suggested a greater degree of government compulsion than the terms "entrust" or "direct". Since the EC authorities had not "explicitly and affirmatively delegated or commanded" the beet farmers to provide beet to the sugar producers for export, it was not providing goods indirectly through a "government-mandated scheme" within the meaning of Item (d) of the Illustrative List.
4.111.
The European Communities contended that the Complainants' reasoning with respect to the term "mandated" and their reliance on the interpretation made by the panel in Canada – Dairy, disregarded the ordinary meaning of that term. According to the European Communities, that reasoning had been implicitly but unequivocally rejected by the Appellate Body in that same case, when it had emphasized that the terms "by virtue of governmental action" did not, unlike the term "mandated", involve any "compulsion".129 In the European Communities' opinion, therefore, Article 9.1(c) of the Agreement on Agriculture encompassed a broader range of government measures than Item (d) of the Illustrative List. Like the Canadian producers of CEM, the EC beet farmers were free to decide whether or not to produce C beet. Consequently, the measures at issue could not be characterized as "obligating", "driving" or "mandating" the beet farmers to "provide" additional beet for export.130
4.112.
The Complainants considered that the European Communities' argument in paragraph 4,109 was based on an interpretation of Item (d) of the Illustrative List which suggested that the export subsidy definition should be restricted to state trading operations. The relative freedom of a beet grower to grow C beet did not form part of the tests of Item (d). Instead, the tests related to whether the European Communities mandated the production of C beet to exporters on the same terms as beet sold on the domestic market, i.e. whether the beet farmer had the freedom to sell C beet to exporters on the same terms that he obtained for beet destined for the domestic sugar market. This was clearly not the case: C beet did not benefit from the fixed minimum price guarantee for quota beet and could not be used to produce sugar for sale on the domestic market.

(b) Article 1.1 of the SCM Agreement

4.113.
Australia submitted, in the alternative, that if it were found that the EC regime did not provide an export subsidy under Item (d) of the Illustrative List, the European Communities still had to show that no other export subsidy was provided, according to the general definition of a subsidy in Article 1.1 of the SCM Agreement. Australia noted that, for the purpose of the SCM Agreement, a subsidy shall be deemed to exist if there was any form of income or price support in the sense of Article XVI of GATT 1994; and a benefit was thereby conferred.
4.114.
With respect to the first requirement, Australia held that the EC regime was explicitly designed to provide income support for beet growers through the minimum price scheme previously outlined above (see for instance paragraphs 4,103 and 4,105,) The "chapeau" of Council Regulation No. 1260/2001131 described the objectives of the sugar regime as "to ensure that Community growers of sugar beet and sugar cane continued to benefit from the necessary guarantees in respect of employment and standards of living…". To achieve this, Australia continued, the regime provided for an intervention price which "…must be fixed at a level which will ensure a fair income for sugar-beet and sugar-cane producers…". The high import barriers and the existence of quota limits maintained the high price of sugar sold on the domestic market, and supported the income of growers and processors.
4.115.
Australia noted that Article XVI of GATT 1994 included within its scope any income or price support "which operates directly or indirectly to increase exports of any product". According to Australia, the income guaranteed to EC growers and processors from the sale of quota sugar acted to counter any loss incurred on C sugar, in effect cross-subsidising C sugar exports. Moreover, the exclusion of C beet from the fixed minimum price required to be paid for quota beet allowed for its supply at a lower price, thus reducing the cost to the sugar processor. The fact that the price and income support were delivered through quota sugar was no barrier to the application of Article XVI, which governed measures acting "directly or indirectly to increase exports". Moreover, citing Article XVI:4, Australia noted that the EC regime obtained a price on the world market for C sugar which was lower than that obtained on the domestic market for A and B sugar. The regime therefore provided a subsidy within the definitional terms of Article XVI:4. Considering that Section B dealt with the export subsidy subset of the broader terms of Article XVI:1, Australia was of the view that the EC regime also provided a subsidy "which operated directly or indirectly to increase exports of any product." The EC sugar regime was therefore within the terms of Article 1.1(a)(2) of the SCM Agreement.
4.116.
To constitute a subsidy under Article 1.1 of the SCM Agreement, Australia continued, it must further be shown that a benefit was conferred by the regime. According to Australia, the term 'benefit' under Article 1.1(b) of the SCM Agreement referred broadly to any "favourable or helpful factor or circumstance" afforded to the recipient of a measure under Article 1.1(a), and required a comparison between the situation of a recipient of this measure, and the situation of that recipient absent the measure.132 If the measure delivered any form of advantage to the recipient, the measure rendered a "benefit" under Article 1.1(b). Australia asserted that, in the present case, the provision as a whole referred to an advantage enjoyed by the recipients of income or price support under the EC regime, and that this advantage was readily identified. The price support given to quota beet and sugar, from which C beet and C sugar were excluded, allowed for the provision of beet for export sugar production at a lower price, thereby reducing the cost to the processor of producing export sugar. Further, the subsidies delivered through the high domestic price support level contributed to the offsetting of the cost of production, incurred by the sale of C sugar at the world market price. The definition of a subsidy under Article 1.1 of the SCM Agreement was therefore satisfied in Australia's view.
4.117.
In order for this subsidy to fall within the terms of Article 10.1 of the Agreement on Agriculture, it had to be further established that the subsidy was an export subsidy. In this regard, Australia reiterated that C sugar was manufactured exclusively from C beet, and that C sugar must be exported (unless carried over). C beet was excluded from the fixed minimum prices required for A and B beet, conditional upon its not being used for quota sugar production. Therefore, the provision of C beet at lower cost for C sugar manufacture was conditional upon the exportation of C sugar. The regime therefore provided a subsidy contingent upon export performance.
4.118.
The European Communities replied that the EC sugar regime provided price support to A and B sugar and to A and B beet, but not to C sugar or C beet. Moreover, the price support for A and B sugar and beet was not contingent upon exports of sugar and, therefore, did not constitute an export subsidy. There was no requirement to produce C sugar and, consequently, no requirement to export C sugar in order to benefit from the price support. Furthermore, the EC regulations allowed sugar produced above the A and B quotas, up to an amount equivalent to 20 per cent of the A quota, to be "carried forward". The European Communities further submitted that the definition of "export subsidy" found in Articles XVI.1 and XVI.3 of the GATT 1994 did not purport to define the notion of export subsidy. The European Communities considered that for the purpose of the Agreement on Agriculture, Article 1(e) defined the notion of "export subsidies" as "subsidies contingent upon export performance". A system of price or income support which "operates so as to increase exports" was not "contingent upon export performance" and could not be considered as an export subsidy for the purposes of the Agreement on Agriculture, regardless of its characterization under Article XVI. According to Australia's definition, virtually any form of domestic support would then have to be considered as an export subsidy.
4.119.
Australia submitted that the European Communities' rebuttal was premised on the same, in its view, legally incorrect arguments that the European Communities had used in relation to Article 9.1(c) of the Agreement on Agriculture, i.e. that "contingency" must attach to the provision of price support, as compared to a "contingency" attached to "export." Australia underlined that Article XVI of GATT 1994 was not predicated on the subsidy being contingent on export. Rather, on the basis of a plain reading of Article XVI of GATT 1994, it was the operation of the income or price support in increasing exports that constituted a subsidy contingent on export performance.
4.120.
Australia recalled that the export subsidy definitions in the SCM Agreement provided contextual guidance on the definition of an export subsidy for the purposes of Article 10.1 of the Agreement on Agriculture, as did Article 1.1 of the SCM Agreement, for the purposes of a definition of a "subsidy". Article 1.1(a)(2) made it clear that income or price support in the sense of Article XVI of GATT 1994 came within the scope of a subsidy definition. For the purposes of those export subsidies listed in the Illustrative List, the element of subsidization provided through price or income support formed part of an export subsidy in the circumstances described in Items (b), (d) and (l). Read in the context of Article 3.1(a) of the SCM Agreement, all subsidies included in the Illustrative List constituted 'subsidies contingent on export performance' in the circumstances defined in the respective items. According to Australia, therefore, the income or price support did not need to be provided exclusively for exports.
4.121.
In this context, Australia considered that the Ad Note to Article XVI:3, paragraph 2, directly addressed the situation in regard to C sugar as arrangements involving: (a) "a system of price stabilization or of the return to domestic producers of a primary product independently of the movements of export prices"; (b) "which results in the sale of the product for export at a price lower than the price charged for the like product to buyers in the domestic market"; and (c) "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." Australia held that Article XVI:4 of GATT 1994 would also capture such forms of subsidy, in circumstances where such subsidy resulted 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.

3. Good faith

(a) Exports of C sugar were consistent with the reduction commitments

4.122.
The European Communities submitted that even if exports of C sugar were found to benefit from export subsidies, these would not exceed the reduction commitments scheduled by the European Communities, or would do so by much less than claimed by the Complainants. According to the European Communities, the Complainants' allegations failed to take into account the context provided by the Modalities Paper (see, for instance, paragraphs 4.37 and 4,143‑4,145) as well as the requirements of the principle of good faith. By disregarding that the base quantity in the EC's Schedule did not include exports of C sugar, the Complainants' interpretation led to a result which was unfair because it would require the European Communities to reduce its exports by a much larger percentage (60 per cent) than that agreed in the Modalities Paper and applied by all other Members (21 per cent). In the European Communities' view, that result was not compatible with a good faith interpretation of its commitments.
4.123.
The European Communities first recalled that its schedule of export subsidy reduction commitments was "an integral part" of the GATT 1994 and, therefore, of the WTO Agreement. As such, it had to be interpreted in accordance with the "customary rules of interpretation of public international law" embodied in Articles 31 and 32 of the Vienna Conventionon the Law of Treaties ("Vienna Convention"). Noting that the "general rule of interpretation" set out in Article 31.1 of the Vienna Convention required interpreting treaty provisions "in good faith",133 the European Communities maintained that, even if the Modalities Paper was not part of the WTO Agreement, it was an agreement reached by all the participants in the Uruguay Round in connection with the conclusion of the Agreement on Agriculture. As such, it was relevant "context" for the interpretation of the schedules of reduction commitments, in accordance with Article 31.2(a) of the Vienna Convention.
4.124.
The European Communities asserted that its schedule reflected the understanding that exports of C sugar did not benefit from export subsidies and that the Complainants were aware of this fact. The figure shown in the EC's Schedule LXXX under the heading "base quantity level" only included the exports of A and B sugar during the base period 1986-1990. The European Communities supplied statistical data showing that the total quantity of sugar exported from the European Communities during the base period was higher than the scheduled 1986-1990 base levels in EC Schedule LXXX.134 The figures that appeared under the heading "annual and final quantity commitment levels" were calculated from that "base quantity level" by applying the reduction percentage agreed in the Modalities Paper. Recalling its reasoning summarized in paragraphs 4,122 and 4,125, the European Communities concluded that the base quantity level would have been 3,188,200 tonnes instead of 1,612,000 tonnes, and the final commitment level would have been 2,514,700 tonnes (i.e. 79 per cent of 3,188,200 tonnes) instead of 1,273,500 tonnes (i.e. 79 per cent of 1,612,000 tonnes)135 if C sugar had been taken into account. Total exports of sugar during marketing year 2001/2002 were 2,443,600 tonnes (including exports of C sugar, and adjusted for ACP/India equivalent sugar which was, according to the European Communities, subject to a 1.6 million tonnes ceiling), i.e. 71,100 tonnes below the final commitment level as calculated above. 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.
4.125.
The European Communities indicated that its reasoning was equally valid with respect to its budgetary outlay commitments. In other words, if the Panel found that the C sugar regime provided export subsidies, it would follow that the European Communities would have been required to include the amount of the export subsidies provided to exports of C sugar during the base period in the base outlay level from which the annual commitment levels were calculated, in accordance with the provisions of the Modalities Paper. According to the European Communities, the determination of that amount would require the calculation of the difference between the annual average total cost of production during each year of the base period and the actual prices of the export transactions made during that year. In this context, the European Communities indicated that Supporting Table 11 accompanying the EC Schedule LXXX136 specified that the amounts used in the calculation of the base outlay level for sugar were those of the producer levies collected on the production of A and B sugar during the base period and used to finance the refunds on exports of A and B sugar. No refunds were granted on exports of C sugar. It was clear, therefore, that the base outlay level scheduled by the European Communities did not include any outlay with respect to exports of C sugar.
4.126.
The European Communities contended that, until recently, the Complainants had shared the understanding that exports of C sugar did not benefit from export subsidies and that exports of C sugar were not included in the scheduled base quantity and outlay levels. First, the C sugar regime had been in place since 1968 and was well-known to all the participants in the Uruguay Round and, in particular, to the Complainants, who were all major exporters of sugar. Before the Uruguay Round, Australia and Brazil had also challenged the European Communities' system of export subsidies for sugar137 but neither of them had raised any question. Similarly, during the Uruguay Round negotiations, no participant had made any suggestion that exports of C sugar benefited from export subsidies and should be subject to the reduction commitments, despite successive submissions, by the European Communities, of three draft schedules138, followed by the verification process, which allowed the other participants ample opportunity, in the European Communities' opinion, to check the commitments.139 After the conclusion of the Uruguay Round, the European Communities asserted, official assessments conducted by Australia140, the United States141, and ISO142, confirmed that shared understanding.
4.127.
The European Communities submitted that the interpretation made by the Appellate Body in Canada – Dairy, on which the Complainants had principally based their allegations, was a novel one, which could not have been anticipated by any participant when the commitments were scheduled. The European Communities asserted that Article 9.1(c) was meant to address so-called "producer-financed subsidies" financed from the proceeds of production levies. Nothing in the drafting history of Article 9.1(c) suggested that the negotiators had in mind the European Communities' C sugar regime or, more generally, that they regarded the export of agricultural commodities below cost of production as an export subsidy. Also, three successive rulings by the Appellate Body on the same issues had been necessary to define the test on which the Complainants had relied in the present case. The European Communities contended that the interpretation eventually adopted had not been advanced by any of the parties during the proceedings and was strongly criticised by all of them, as well as by other Members, before the DSB on the grounds that it had no basis in the text of the Agreement on Agriculture.143
4.128.
The European Communities underlined what it considered as fundamental differences between the present dispute and Canada – Dairy. First, the alleged violation of the scheduled commitments in Canada Dairy did not result from a scheduling error made during the negotiations, but rather from Canada's introduction, after the conclusion of the WTO Agreement, of a new regulatory regime. Secondly, the measures at issue in Canada – Dairy did not exist when the reduction commitments were negotiated, as they were not introduced by Canada until August 1995. Third, Canada had believed that the new regime would allow milk processors to increase their exports without breaching Canada's reduction commitments.144 Fourth, Canada did not contest that the regime in place during the base period, and up to 1995, conferred export subsidies, which was why Canada deemed it necessary to replace it.145 Fifth, Canada did not argue that the base level did not include all the subsidized exports made during the base period. For these reasons, the panel's finding in Canada Dairy that Canada had acted inconsistently with its reduction commitments did not require it to reduce its subsidized exports beyond the level agreed by the participants in the Uruguay Round. In contrast, the European Communities continued, the regime in the present case was in place at the time of the negotiations and indeed was the basis for the negotiated commitments. The European Communities, reiterating the points made in paragraphs 4,122-4.126, submitted in the alternative, that exports of C sugar should not be deemed to be in excess of the European Communities' reduction commitments, unless it was established (and, if so, only to that extent) that the quantity of subsidized exports exceeded the level of the final commitment that resulted from applying the reduction percentage agreed in the Modalities Paper to a base quantity which included exports of C sugar made during the base period.
4.129.
Alternatively, should the Panel find that the C sugar regime provided export subsidies in excess of the reduction commitments, the only course of action consistent with the requirements of good faith would be for the Complainants to agree to the correction of the European Communities' scheduling commitments so as to include the exports of C sugar in the base levels and to rectify the annual commitments accordingly. Otherwise, the European Communities would be prejudiced, because it would be effectively required to reduce the quantity of subsidized exports by a much larger percentage than the one agreed to in the negotiations, namely by 60 per cent. Furthermore, if the footnote on ACP/India sugar were found to be invalid, the overall percentage of export subsidy reduction would be 73 per cent. (See also paragraphs 4,123‑4,124) In this regard, the European Communities indicated that the possibility to correct errors in the text of a treaty was specifically envisaged in Article 79 of the Vienna Convention.
4.130.
The Complainants responded that the issue before the Panel was the treaty text, i.e. the EC Schedule, which had to be interpreted in accordance with the customary rules of interpretation of public international law. Consequently, their alleged understandings during the Uruguay Round negotiations, as well as the verification process, were irrelevant as they were not part of the "context" under Article 31, nor "supplementary means of interpretation" under Article 32, of the Vienna Convention. In relation to the European Communities' contention in paragraphs 4,123‑4,124, the Complainants submitted that Article 3.2 of the DSU made clear that recourse to the interpretative rules of the Vienna Convention were to be used to "clarify the existing provisions", and that dispute settlement must not add to or diminish rights and obligations provided in the covered agreements. Panels must follow the textual approach underlying the Vienna Convention rules and "interpretation was not a matter of revising treaties or of reading into them what they did not expressly or by necessary implication contain".146 The Complainants held that, rather than a good faith clarification, the European Communities was seeking from the Panel a revision of its Schedule, and a diversion from the ordinary meaning imparted from the Schedule's text, and ultimately changing the figures in the EC Schedule by "interpreting" them. In their view, the figures indicated in the EC Schedule in respect of its export reduction commitments for sugar were unequivocal.
4.131.
The Complainants rejected the characterization of the Modalities Paper as an "agreement" reached by all participants in the Uruguay Round. In their view, only the commitments undertaken under the Agreement on Agriculture were legally binding, which explained why that Agreementmade no reference to the Modalities Paper. Recalling that the Modalities Paper was prepared during the latter stages of the negotiation of the Agreement on Agriculture, and not "on the occasion of the conclusion of the treaty" as required by Article 31.2 of the Vienna Convention, the Complainants held that the Modalities Paper did not provide "context" for the determination of the scope of subsidy reduction commitments in these proceedings because it was not an "agreement" relating to the Agreement on Agriculture, and because it was not accepted as an "instrument" made in connection with the conclusion of the Agreement on Agriculture.
4.132.
The Complainants submitted that the intentions of the parties in the Uruguay Round should be taken into account when considering whether the Modalities Paper was context. These were explicitly reflected in the Note by the Chairman of the Negotiating Group on Market Access, which confirmed that the Modalities Paper was issued "for the purpose of completing draft Schedules of concessions and commitments in the agricultural negotiations and for facilitating the verification process leading to the establishment of formal Schedules to be annexed to the Uruguay Round Protocol" and "on the understanding of participants in the Uruguay Round that these negotiating modalities shall not beused as the basis for dispute settlement proceedings under the MTO Agreement". This meant that the Modalities Paper was not intended to provide any basis, interpretative or otherwise, for dispute settlement proceedings, and thus would not give rise to rights and obligations which could be the subject of dispute settlement proceedings, but was issued for a limited purpose, i.e. "completing draft schedules".
4.133.
The Complainants acknowledged that the sole role the Modalities Paper could play in the interpretation of the Agreement on Agriculture and the associated schedules, was as "a supplementary means of interpretation", i.e. as an element of the "preparatory work" under Article 32 of the Vienna Convention. In that context, they considered that the Panel's discretion to look at the Modalities Paper as such was limited to "confirming" the meaning resulting from the interpretation of the EC's Schedule under Article 31 of the Vienna Convention. This limitation was due to the fact that the EC's Schedule was neither "ambiguous or obscure", nor led to "a result which was manifestly absurd or unreasonable" as required by the Vienna Convention (see also paragraph 4,130). Braziladded that, should the Modalities Paper be considered as "preparatory work", it should be accorded limited probative value, in light of the Chairman's Note.
4.134.
The Complainants indicated that they became aware that exports of C sugar were made below cost of production and, therefore subsidized, only after the NEI report (see footnote 149) was issued in 2000.
4.135.
Australia submitted that it did not have access to information that would have enabled it to make a definitive assessment that C sugar exports were being subsidized in the sense of Article 9.1(c) of the Agreement on Agriculture. It contended, however, that the European Communities had access to a wide range of information sources that would have enabled Australia to make an informed assessment of the cross subsidization of C sugar exports. The European Communities itself had identified a problem with C sugar since the EC Commission had proposed prohibiting the production of such sugar in 1973147, and 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.148 Australia noted that 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. Following an accumulation of evidence from European sources (including reports published or commissioned by the EC149) and in light of the increase in C sugar exports from 1995 to 2000, Australia indicated that it was only then able to undertake independent detailed research which enabled it to challenge the European Communities' assertions that C sugar exports were not subsidized. In relation to the lack of reaction evoked by the European Communities (see paragraph 4,126), Australia referred to its letter of 10 December 1993 where it had registered its expectation that there should not be any exclusions from reduction commitments.150 The reference was not specific to C sugar and was primarily intended to register concerns about the European Communities' announced intent to exclude some sugar from its reduction commitments.
4.136.
Brazil noted that it did not carry out any independent verification of schedules and held that no developing country Member had the resources required to examine in detail every other Member's Schedule, not only in connection with the Agreement on Agriculture, but also the other agreements. Brazil had relied on the good faith of all Members to complete their Schedules in accordance with their negotiated obligations.
4.137.
The Complainants did not agree that the EC's Schedule contained a "scheduling error", that the error was shared, or excusable, as alleged by the European Communities (see paragraphs 4,124, 4,129, and 4,150). In any case, the European Communities' claim was undermined by the absence of any subsequent efforts by the European Communities to rectify this "error". In their view, theEuropean Communities had committed more than a technical oversight, as it had failed to meet fundamental obligations in relation to its reduction commitments on a scheduled agricultural product under the Agreement on Agriculture. The Complainants sustained that the European Communities was itself responsible for the scheduled levels of bindings of base period and final commitment levels and that its schedule was developed in the full knowledge that these commitment levels were irrevocable. The European Communities knew that, unlike tariff bindings, there was no WTO procedure for the deconsolidation of scheduled bindings on export subsidy reduction commitments, and that it would be accountable under the terms of Article 10.3 of the Agreement on Agriculture in relation to Articles 3.3, 9.1 and 10.1, for any exports in excess of reduction commitment levels.
4.138.
Brazil observed that it was not the first time that a WTO Member allegedly had erred in the preparation of its schedule and pointed to Hungary's case in 1996 which involved an error in establishing base period levels for export subsidy commitments. Brazil recalled that Hungary was not allowed to correct its error. However, Hungary obtained a waiver from the General Council allowing for a transitional period within which Hungary would bring its export subsidies into conformity with its reduction commitments, as originally specified in its Schedule.151 Brazil also recalled the European Communities' standpoint in those circumstances.152
4.139.
The Complainants agreed with the European Communities (see paragraph 4,129) that Article 79 of the Vienna Convention set out the process by which an error can be corrected in a treaty. However, the nature of the error addressed was clarified by Article 48.3 of the Vienna Convention which stated that Article 79 applied to an "error relating only to the wording of the text of a treaty", i.e., addressing situations where there were drafting errors in the treaty text, and only applying in situations "where the parties are agreed that it contains an error". The Complainants asserted, therefore, that Article 79 had no application to the case of a contracting State failing to meet its obligations under a treaty. Article 48 of the Vienna Convention dealt with the much more serious case of error that might be invoked by a State to invalidate its consent to be bound by a treaty. A State could not invoke an error to invalidate its consent to be bound by a treaty where the State had "contributed by its own conduct to the error or if the circumstances were such as to put that State on notice of a possible error". Further, a mistake as to (or ignorance of) the law did not constitute an error as to a fact or situation. In the present case, the requirements of Article 48 were thus not met, because, were there an error, the European Communities not only contributed to it, but made it. Brazil added 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…". The fact or situation that the European Communities assumed existed, in Thailand's understanding, was that no export subsidies were granted to C sugar, as it could not have anticipated the ruling in Canada – Dairy. However, a mistake as to (or ignorance of) the law did not constitute an error as to a fact or situation.153
4.140.
The Complainants held that all Members were obliged to abide by Article 9.1(c) of the Agreement on Agriculture, as interpreted by the Appellate Body. Australia recalled the statement it had made on adoption of the final Canada Dairy report by the DSB, supporting the compliance by all WTO Members of their export subsidy reduction commitments.154 Furthermore, Australia considered that the European Communities had not availed itself, as a matter of prudential practice, of the opportunity to undertake an assessment of the application of Article 9.1(c) to C sugar against the export subsidies identified in the Modalities Paper. Brazil pointed out that, regardless of whether it had taken the Appellate Body "no less than three successive rulings" (see paragraph 4,127) to define a precise test, the basic economic principle on which the Canada – Dairy's allegedly "novel" and "unanticipated" interpretationby the Appellate Body had been presaged by both Jacob Viner in 1923, as well as by GATT Article XVI:1. According to Brazil, Viner had recognized155 that this "dumping" could take the form of "bounty dumping" financed by governments.
4.141.
Referring to the European Communities' analysis in paragraph 4,128, the Complainants pointed out that the scope of the Agreement on Agriculture (or the other WTO agreements) was not limited to measures adopted after its entry into force and that the WTO did not allow the "grandfathering" of past practices that were inconsistent with its provisions. Many measures that existed before the WTO Agreement came into effect – including, for example, the US foreign sales corporation tax rules challenged by the European Communities itself – had since been found to be inconsistent with one or more of the WTO agreements. The European Communities, therefore, could not argue that, because of its wrong judgement, it ought to be allowed to correct its Schedule. A Panel finding to the contrary would have troubling implications for future negotiations. Thailand added that there was thus no basis in law or logic that would permit the re-interpretation of an export reduction commitment in the light of jurisprudence that emerged after the commitment was made. Thailand suggested that this could possibly be done by the membership under the procedures for interpretations set out in Article IX:2 of the MarrakeshAgreement Establishing the WTO (WTO Agreement), but certainly not by a panel in the framework of a proceeding under the DSU.
4.142.
Thailand stressed that it would not be consistent with the principle of good faith if the European Communities were the only Member of the WTO that would effectively be exempted from this obligation through a re-interpretation of its export reduction commitments in the light of the allegedly unexpected consequences of the Appellate Body's interpretation of Article 9.1(c). Thailand considered that in invoking the principle of good faith, the European Communities was actually asking the Panel to replace the export subsidy reduction commitments that it assumed in its schedule, with the export subsidy reduction commitments that it claimed it would have assumed if it had known of the Appellate Body's interpretation of Article 9.1(c) at the time when it formulated its reduction commitments. Alternatively, the European Communities was asking the Panel to deny Thailand the right to invoke Article 9.1(c) in DSU proceedings because, allegedly, Thailand too, could not have expected that interpretation. WTO Members, including the European Communities, would be extremely concerned if panels were to begin dividing the Appellate Body's rulings into "expected" and "unexpected" rulings and were to refuse to give full effect to any "unexpected" rulings.
4.143.
The European Communities, referring to the Complainants' assertions in paragraphs 4,130 and 4,133, reiterated the points made in paragraphs 4,123‑4,124. Since the "base quantity" was part of the EC's Schedule and, therefore, part of the text of the WTO Agreement, the European Communities sustained that "an examination of the ordinary meaning of the terms of a treaty must take into account all of those terms"156, and in particular, the Modalities Paper, which, although not a covered agreement, and not explicitly mentioned in the Agreement on Agriculture, was not deprived of interpretative value. If exports of C Sugar were found to benefit from export subsidies, it would follow that the figures in the EC Schedule would be inaccurate as a matter of fact, because they would include only part of the total "quantity of subsidized exports", and the same would be true for the "base quantity". Therefore, the European Communities was not pleading that its consent to the WTO Agreement was invalid because it made an error with respect to facts outside the treaty, or with respect to the interpretation of the treaty. Rather, the European Communities' contention was that the Complainants' interpretation of Article 9.1(c) would have the necessary implication that there was an obvious error in the text itself of the treaty, due to a manifest discrepancy between the meaning of the headings in the EC's Schedule and the figures shown under those headings. In the European Communities' opinion, that discrepancy could not be ignored by the Panel and needed to be resolved by way of interpretation. The interpreter's task, in turn, was to reach an interpretation which gave meaning and reconciled all the terms of the treaty.
4.144.
With respect to the Chairman's Note on the Modalities Paper, the European Communities contended that it meant that WTO Members could not bring claims under the DSU based on the violation of the Modalities Paper, but not that that text was irrelevant for the interpretation of the Agreement on Agriculture. The European Communities emphasized that the Modalities Paper was reached after protracted negotiations among participants, with a view to imposing specific obligations upon themselves, was drafted in mandatory terms, and purported to be binding, not mere "scheduling guidelines", such as those used for GATS Schedules. Despite its temporary nature, the Modalities Paper was an "agreement". It had, in fact, exhausted its legal effects upon the conclusion of the WTO Agreement, which, in the European Communities' view, explained why it had not been carried over to the Agreement on Agriculture. The European Communities also asserted that, in practice, the participants in the Uruguay Round had treated the Modalities Paper as a binding agreement, since the purpose of the "verification process" was to check the conformity of the schedules with the Modalities Paper. Citing Article 1(a) of the Vienna Convention, the European Communities held that the term "agreement" could encompass not only treaties but also informal and/or non-binding agreements. The Modalities Paper was thus "context", not "preparatory work". In accordance with the basic rule of interpretation of Article 31.1, treaty provisions must be interpreted always in their context, and, in the European Communities' view, this included also the elements falling within Article 31.2 (a).
4.145.
However, in the alternative the European Communities submitted that, if the Panel were to conclude otherwise, it would still be justified to resort to the Modalities Paper under Article 32 of the Vienna Convention as preparatory work. It was precisely because the Modalities Paper was drafted with a view to agreeing on the commitments to be scheduled subsequently in the WTO Agreement, that it must be considered as made "in connection" with that Agreement. The European Communities stressed that the preamble of a treaty, which by definition imposed no legal obligations, was classified as "context" under Article 31.2 of the Vienna Convention (see also paragraph 4,149).
4.146.
In relation to the argument presented in paragraph 4,138, the European Communities clarified that when Hungary had claimed an error, the European Communities had not taken the position that scheduling errors were irrelevant per se. Rather, the European Communities' position was that there had been no error. The European Communities also pointed out that Hungary, unlike the European Communities in this case, had not claimed in 1996 that the error had been shared by the other Members. The European Communities also explained that none of its claims involved the application of Article 48 as that provision, in its view, exclusively addressed the conditions under which error may be invoked in order to invalidate a State's consent to a treaty (see paragraph 4,139). It did not exhaust all the possible legal consequences of error. In the present dispute, the European Communities had not contended that its consent to the WTO Agreement was vitiated by error, but rather that the purpose of Article 48 was to allow the party that "made" an error to plead that such error invalidated its consent. If the State which "made" the error were precluded, for that reason alone, from invoking Article 48, that provision would become inapplicable. The issue, addressed by the exception in paragraph 2 of Article 48, was not who "made" the error, but rather whether the State that "made" the error and that pleaded the invalidity "brought the error upon itself".
4.147.
The European Communities was not convinced by Brazil's arguments in paragraph 4,136 because of the substantial difference between the quantity mentioned in the schedule (1,617 million tonnes) and the total quantity of EC exports during the base period (4,788 million tonnes). Given Brazil's "compelling interest" in the sugar sector, the European Communities considered that the Brazilian authorities would have had the time to compare European Communities' draft schedule with the ISO or other easily available statistics, during the course of a three-year period. The European Communities noted that Brazil was the world's largest exporter of sugar and that the European Communities was the world's second largest exporter and the main provider of export subsidies for sugar. For geographical reasons, the European Communities was also Brazil's most direct competitor in most export markets. Further, the European Communities asserted that LMC data were available before 2000, and that subscriptions to the LMC reports was already possible. In any case, it was totally irrelevant whether or not the Complainants were aware in 1994 that the exports of C sugar were made below total cost of production because at that time nobody thought that this could be of any relevance whatsoever for establishing the existence of a "payment". The Complainants' position summarized in paragraphs 4,140-4.141 presupposed that, in 1994, they had anticipated the interpretation of Article 9.1(c) made by the Appellate Body in Canada – Dairy.
4.148.
Responding to the European Communities' argument in paragraph 4,144, Thailand pointed out that the Modalities Paper was analogous to the GATS scheduling guidelines, which "were to assist in the preparation of … nationalschedules of initial commitments.157 From Thailand's perspective, there was consequently no reason to give the GATS scheduling guidelines an interpretative value under the Vienna Convention different from that of the Modalities Paper. Thailand noted that the interpretative value of the GATS guidelines in the Mexico-Telecommunications case was limited to that of a supplementary means of interpretation under Article 32 of the Vienna Convention. Furthermore, the Modalities Paper was established only by those Members of the WTO who participated in the Uruguay Round and Article 31.2(a) of the Vienna Convention would apply to these arrangements only if they were made by "all" Members of the WTO, including those who acceded to the WTO at a later stage. The Modalities Paper thus could not be seen to be accepted by all parties as it was not formally part of the Agreement on Agriculture, nor part of the package of obligations "accepted" by acceding Members. Thailand also pointed to the instances when the European Communities had expressed contrary views on this issue.158
4.149.
Referring to the Complainants arguments in paragraph 4,148 and to the panel's findings in EC – Tariff Preferences159, the European Communities asserted that subsequent accession to a treaty involved an implicit acceptance of all relevant contextual elements for the interpretation of that treaty. The panel had even concluded that an informally adopted UNCTAD document, established by a special negotiating group, was "context" within the meaning of Article 31.2(a), even though that document expressly stipulated that it was not legally binding. The European Communities found illogical that an agreement which was "context" when the treaty was concluded ceased to be so subsequently. What mattered was whether all the parties that concluded the treaty were parties of the agreement made in connection with the conclusion of that treaty.

(b) Good faith and estoppel

4.150.
If, despite the arguments by the European Communities summarized in Sections IV.D.1, IV.D.2 and IV.D.3(a) above, the Panel were to conclude that exports of C sugar were in excess of the European Communities' reduction commitments, the European Communities submitted, subsidiarily, that by claiming that the European Communities was in breach of those commitments, the Complainants were not exercising reasonably their rights under the DSU. The European Communities held that the Complainants were seeking to benefit from an excusable scheduling error, which would unfairly advantage the Complainants, and upset the balance of concessions. Furthermore the Complainants were estopped from bringing this claim because they had contributed to that error through their own conduct. For those reasons, the European Communities considered that the Complainants were acting inconsistently with the general principle of good faith and with their obligation under Article 3.10 of the DSU to engage in dispute settlement procedures in good faith.
4.151.
In addition to the arguments and definitions already summarized in paragraph 4,122, the European Communities submitted that the principle of good faith was "at once a general principle of law and a principle of general international law"160 that "informs"161 all covered agreements. The European Communities cited jurisprudence in support of the view that there was a basis for a dispute settlement panel to determine, in appropriate cases, whether a Member had not acted in good faith,162 and that the principle of good faith controlled not only the performance of obligations but also the exercise of Members' rights, enjoining them to exercise their WTO rights "reasonably" and prohibiting the "abusive" exercise of those rights.163 The European Communities described the principle of good faith as "pervasive" in certain cases, particularly "if post-determination evidence relating to pre-determination facts were to emerge, revealing that a determination was based on … a critical factual error."164 The European Communities also held that the exercise of the right to submit claims to a panel had to be used reasonably, and in accordance with Article 3.10 of the DSU and with the general principle of good faith.
4.152.
The European Communities also referred to estoppel as a general principle of international law165, which followed from the broader principle of good faith. The European Communities argued that it was one of the principles which Members were bound to observe when engaging in dispute settlement procedures, in accordance with Article 3.10 of the DSU.166 The European Communities referred to several descriptions of the operation of the principle of estoppel as a basis for its claims and argumentation, and held that the following features were generally accepted as essential elements of estoppel: the party invoking estoppel must have been induced to undertake legally relevant action or abstain from it; by relying in good faith upon clear and unambiguous representations by the other State; and reliance must prejudice the addressee, i.e., subsequent deviation from the original representation must cause damage to the relying State, or result in advantages for the representing State. Estoppel might arise not only from express statements, the European Communities continued, but also from various forms of conduct, including silence, where, upon a reasonable construction, such conduct implied the recognition of a certain factual or juridical situation.167
4.153.
In view of the above, the European Communities concluded that, if the Complainants held that they were already of the view, at the time of the conclusion of the WTO Agreement, that exports of C sugar benefited from export subsidies, the European Communities considered that they would not have acted in good faith because they had failed to advise the European Communities to include those exports in the base quantity. If, on the other hand, the Complainants confirmed that they believed until recently that exports of C sugar did not involve export subsidies, the European Communities submitted that they would not be acting in good faith by seeking to take advantage of an excusable and common scheduling error in order to exact from the European Communities a concession that was never negotiated with, or requested from, the European Communities during the Uruguay Round, and for which no compensation was paid nor received. Referring to its arguments concerning the awareness, lack of reaction, and shared understanding in paragraphs 4,124 and 4,126, the European Communities submitted that it legitimately should have been able to rely upon the Complainants' conduct when it decided not to include exports of C sugar in the base levels. Its position had therefore been prejudiced as outlined in paragraph 4,129. To the extent that the alleged violation resulted from the non-inclusion of the exports of C sugar in the scheduled base levels, the Complainants were thus estopped from claiming that the European Communities was in breach of its reduction commitments.
4.154.
The Complainants rejected the European Communities' arguments that they had sought to exercise their rights unreasonably, that panels had the power to determine whether a Member had not acted in good faith, and that Article 3.10 imposed a requirement on Members' rights to submit claims to a panel. Further they rejected the European Communities' argument that their conduct had given rise to an estoppel.
4.155.
Australia submitted that the jurisprudence cited by the European Communities in support of its argument summarized in paragraph 4,151 could not be relied upon, because of selective or partial quotation of the relevant sections. The Appellate Body had considered that the fact that a Member had violated its obligation, in and of itself, did not lead to a finding that the Member had not acted in good faith.168 The doctrine of "abuse of right" cited by the European Communities had been referred to in the context of Article XX of GATT 1994, the operation of which involved a balance between the rights of Members when an exception was invoked.169 That balance would be upset if a Member were permitted to "abuse or misuse its right to invoke an exception". In the present case, the Complainants were not seeking to rely on an exception which needed to be balanced against the treaty rights of other Members to ensure those rights were not devalued. Rather, the Complainants were seeking to exercise their rights to engage in dispute settlement in relation to the breach by another Member of its obligations under the WTO agreements. Finally, in another instance, the Appellate Body had expressly declined to express a view on the matter.170
4.156.
With respect to the European Communities' arguments in paragraphs 4,150-4.152, the Complainants responded that Article 3.10 dealt with the good faith observance of procedural rules171 and did not apply to the right of a WTO Member to bring a particular claim. As such, it could not provide the basis for a claim of estoppel. Moreover, Article 3.10 did not expressly refer to a principle of estoppel. Since WTO Members had a fundamental right to pursue dispute settlement proceedings they could not be estopped from exercising that right. The Complainants considered that, although the principle of estoppel was linked to the general principle of good faith172, this did not mean that a WTO Member could rely on that principle to defeat a claim brought by another Member. The principle of estoppel was not imported into the WTO agreements by the reference in Article 3.2 of the DSU to the customary rules of interpretation of public international law, and it was not a customary rule of interpretation.
4.157.
The Complainants contended that the reference to good faith in Article 3.10 applied only "if a dispute arises" and therefore was relevant not to the decision to pursue dispute settlement, but to how the parties "engage in these procedures" after the "dispute arises". Article 3.10 of the DSU could not provide the basis for a claim of estoppel. They further contended that the European Communities ignored the distinction between Article 3.7 of the DSU, which regulated the initiation of a dispute ("before bringing a case"), and Article 3.10 of the DSU, which regulated the conduct of Members engaged in dispute settlement procedures ("if a dispute arises"). The European Communities' argument that the Complainants were barred from bringing complaints as they were not acting in good faith, or were estopped from doing so, related to their obligations under Article 3.7 of the DSU, as it was that provision which addressed the launching of cases by Members, by providing in part that "[b]efore bringing a case, a Member shall exercise its judgement as to whether action under these procedures would be fruitful". According to the Complainants, the weight to be given under Article 3.7 to the judgement of a Member bringing a case was emphasized by the Appellate Body in EC – Bananas III, where it found that "a Member has broad discretion in deciding whether to bring a case against another Member under the DSU. The language of … Article 3.7 of the DSU suggests, furthermore, that a Member is expected to be largely self-regulating in deciding whether any such action would be "fruitful".173 Also, the Appellate Body had confirmed that complainants were entitled to benefit from the presumption of good faith performance of the obligations under Article 3.7 of the DSU as: "given the "largely self-regulating" nature of the requirement in the first sentence of Article 3.7, panels and the Appellate Body must presume, whenever a Member submits a request for establishment of a panel, that such Member does so in good faith, having duly exercised its judgement as to whether recourse to that panel would be "fruitful". Article 3.7 neither requires nor authorizes a panel to look behind that Member's decision and to question its exercise of judgement. Therefore, the Panel was not obliged to consider this issue on its own motion."174
4.158.
The Complainants asserted that, although the principle of estoppel had been raised by parties in earlier disputes, it had never been applied by a panel in determining a claim before it. Australia noted that the EC argumentation seemed to imply that a number of panels did not question the applicability of estoppel in disputes. Referring in particular to India – Autos175, Australia contended that the panel did not suggest that estoppel "was applicable in WTO disputes", but commented, in footnote 364 to its report, that "there may be an argument that a general principle such as estoppel may apply to WTO dispute settlement". Australia questioned whether the cited statement expressed support for the application of estoppel in the WTO.176Brazil noted that the European Communities had not pointed to one single instance in which a panel had relied on the estoppel doctrine to deny a WTO Member access to dispute settlement procedures to resolve a substantive dispute or to reject an individual claim ab initio. Brazil also recalled the standpoint the European Communities had adopted in past disputes, when it had maintained that a WTO Member's decision to pursue dispute settlement proceedings was not subject to a rule of good faith; that Members had a "fundamental right to resort to dispute resolution at any time; and that such right could be restricted only by clear and unambiguous language."177
4.159.
The Complainants further asserted that the conditions for the application of estoppel were not present in these proceedings178, and that the European Communities had not presented the facts necessary to justify the invocation of the doctrines of estoppel or good faith in this dispute. Australia submitted that if, despite its arguments to the contrary, the Panel were to find that the principle of estoppel could be applied in WTO disputes, and accepting arguendo the content of the principle put forward by the European Communities, its conduct could in no way give rise to estoppel. This content included: a "clear and unambiguous representation" by the Complainants, and that the European Communities was "induced" to act in reliance of that representation. In the Complainants' view, these conditions were without a doubt not satisfied in this case. First, the European Communities had not argued that it relied upon "clear and unambiguous representations" made by the Complainants, but rather that it relied upon their "silence" (see for instance paragraph 4,152). The Complainants recalled that, in EEC (Member States) – Bananas I, the panel had rejected a similar argument presented by the European Communities, noting that: "estoppel could only result from the express, or in exceptional cases implied, consent of such parties or of the contracting parties". Applying this standard the panel had found that "[t]he mere inaction of the contracting parties could not in good faith be interpreted as an expression of their consent to release the EEC from its obligations under Part II of the GATT".179
4.160.
Since silence could only amount to representation in "exceptional circumstances" such as where there was a duty or obligation to object, Thailand noted that the European Communities had pointed to no legal authority, as there was none in its view, to support a lower threshold of "reasonable expectations to speak". Moreover, the Complainants were under no "duty to object"180 during the bilateral meetings or the verification process and furthermore could not reasonably be expected to do so. In this respect, Thailand recalled that the purpose of the verification process, referred to by the European Communities in these proceedings as giving an opportunity to the Complainants to object (see paragraph 4,126), was to give each participant in the Uruguay Round the opportunity to verify whether the export subsidy reduction commitments assumed by the other participants were consistent with the guidelines for negotiations set out in the Modalities Paper. The purpose of the verification process was not, in Thailand's view, to alert participants to instances in which they had not retained options open to them under the Modalities Paper or to settle disputes about the consistency of the commitments assumed with the Agreement on Agriculture. Therefore, the Complainants' silencecould not be deemed to have constituted an implicit agreement, seemingly because they failed to object during the verification process.
4.161.
Transposing the reasoning of the Appellate Body in EC – Computer Equipment181, Thailand also contended that the Complainants only had the duty to ensure that their export interests were safeguarded. Thailand had not therefore "acted in bad faith by not advising the EC" to include C sugar exports in the base period levels. It was for the European Communities to define its export subsidy reduction commitments in terms which suited its needs. The European Communities could not, for these reasons, legitimately expect that other WTO Members advise it to raise its base period levels so that it could grant more export subsidies. There were many reasons why a participant in a multilateral trade negotiation might not wish to maintain measures affording protection to domestic producers even though such measures were specifically provided for by the negotiating modalities. Many participants had used such negotiations as a means to overcome domestic interests opposed to trade liberalization or had simply agreed to liberalize beyond the agreed modalities in an effort to advance their national economic interests. Furthermore, even if its silence were held to constitute a representation, the European Communities would need to demonstrate that it in fact relied on Thailand's silence, and its own decision not to assume export subsidy reduction commitments for sugar, when determining the scope of the European Communities' own export subsidy commitments for sugar.182 Yet, in Thailand's knowledge, there was no record to suggest that the European Communities had relied on the Complainants' silence when the European Communities scheduled its base quantity levels and that it would have acted differently if the Complainants had raised objections. Thailandthereforedid not believe that the assumption that the European Communities would have increased the base period levels if advised of its "scheduling error", and that the Complainants were aware of this, could be advanced.
4.162.
The Complainants contested the premises upon which the European Communities had based its argumentation on estoppel. Recallingthe situation with regard to the availability and access to the relevant sources of information during the Uruguay Round (see paragraph 4,135), Australia contended that the European Communities provided substantial manufacturing and export subsidies to sugar processors but did not consider it appropriate to conduct a survey of the EC sugar companies to establish how their loss-making activities were being financed. Consequently, any expectation by the European Communities that Australia was in a position to speak, or had a "duty to speak", was not reasonable. Furthermore, as this dispute involved claims that the European Communities was not complying with its WTO treaty obligations, it was the European Communities' performance of its treaty obligations that was at issue. In particular, those treaty obligations which could allegedly be extinguished by the European Communities' assertion that, prior to the conclusion of the WTO treaty, the Complainants had a responsibility to draw certain matters to its attention.
4.163.
In Brazil's view, the implications of the European Communities' argumentation were that any WTO Members that were initiating dispute settlement proceedings regarding measures in effect before the WTO agreements entered into force were acting in bad faith, in that they should be treated as having accepted the measure by their "silence" both before and since the WTO agreements entered into force. This suggested that WTO Members could initiate dispute settlement proceedings against the European Communities only when the European Communities itself knew during the Uruguay Round that its measures would be inconsistent with the WTO agreements.
4.164.
Thailand also argued that the obligations of a WTO Member were obligations towards all other WTO Members. A Member of the WTO invoking estoppel would therefore have to establish that it was induced to act in reliance of the representations of all the other WTO Members. If not, the doctrine of estoppel would lead to a complex and incongruous web of the rights and obligations among WTO Members inconsistent with the multilateral character of WTO law. For instance, the rights and obligations of Members that acceded to the WTO and those of the original Members of the WTO might differ. It was therefore not surprising that no panel to date had applied the principle of estoppel in the GATT or WTO context.
4.165.
The European Communities replied that the rights and obligations under the DSU were expressly provided in Article 3.10 of the DSU as clarified by the Appellate Body in US – FSC, and were, inter alia, that Members must exercise their right to institute dispute settlement proceedings "in good faith". The general principle of good faith and Article 3.10 of the DSU imposed additional requirements upon Members to prevent them, in particular, from exercising their right to request a panel in an abusive manner so as to exact a manifestly unfair advantage, or in circumstances where a Member was estopped from doing so by virtue of its previous conduct. The suggestion that the exercise of this right should be subject exclusively to Article 3.7 of the DSU found no support in the language of Article 3.10, which, according to the European Communities, covered any action regulated by the DSU, including that taken by Members under Article 6 of the DSU. The European Communities recognized however that Article 3.7 of the DSU was an expression of the principle of good faith. But that provision did not exhaust all the requirements imposed by that principle with respect to the initiation of dispute settlement proceedings because it exclusively concerned the issue of whether such action would be "fruitful", i.e. the necessity or opportunity of bringing a case, with a view to prevent frivolous complaints. According to the European Communities, this argument found support in the Appellate Body statement in US – Corrosion-Resistant Steel Sunset Review.183
4.166.
With respect to the Complainants' analysis in paragraph 4,158, the European Communities considered that a "dispute "arises" from the moment that two Members disagreed on the interpretation of the WTO Agreement, whether or not they had taken any formal action under the DSU, as evident in Article 4.7 of the DSU. The term "dispute settlement procedures" used in Article 3.10 comprised all the "procedures" regulated by the DSU and not just the panel phase, including, inter alia, the provisions of Article 6. It was also incorrect that the exercise of the right to request a panel was subject exclusively to Article 3.7 of the DSU. That provision was but one of the expressions of the principle of good faith.184
4.167.
Responding to the argument summarized in paragraph 4,164, the European Communities considered that the principle of estoppel did not operate by derogating or amending tacitly the treaty rights and obligations of the parties concerned but was a procedural defence which precluded one party from exercising a right vis-à-vis another party but without modifying the substantive obligations of that party.185 In the present case, the European Communities' contention was that the Complainants were precluded from bringing a claim under Article 9.1(c) and therefore that the Panel should reject their claims, even if it upheld them in substance. Since estoppel did not alter the substantive rights of Members under the WTO Agreement but only the exercise of those rights, the European Communities was of the view that it could operate exclusively between two Members.
4.168.
Further, the European Communities underlined that estoppel was a matter of adjectival, rather than substantive, law and accordingly the effect of a true estoppel was confined to the parties.186 The contention that estoppel amounted to "consent" (see paragraph 4,160) was wrong and without foundation in public international law. Referring to recent panels' interpretation of that notion187, the European Communities sustained that the existence of estoppel must be established from the perspective of the party who claimed it. The issue was whether that party could rely legitimately on the representations made by the other party, regardless of whether such representations amounted to "consent", as in, for example, circumstances where representations made by error or inadvertence could be legitimately relied upon and give rise to estoppel. The European Communities considered that assimilating estoppel to "consent" would render largely superfluous the institution of estoppel. In the European Communities' view, if a party "consented" to something, it gave up its substantive rights, and there was no need for the other party to invoke a procedural defence, such as estoppel, against the exercise of such rights.
4.169.
The European Communities submitted that from the fact that the Complainants were aware that exports of C sugar were not included in the base quantity, and from the fact that they did not raise any question, it could reasonably infer that the Complainants shared, at the time of the conclusion of the WTO Agreement, its view that exports of C sugar did not benefit from export subsidies. In this regard, the European Communities also considered that silence could be legitimately construed as a representation of lack of objections, not only where there was a "duty to speak", but also in circumstances where it was reasonable to expect that the other parties would speak. The European Communities asserted that the existence of estoppel required that the party relying on the representations made by the other party suffered a "prejudice" as a result of such reliance. In the present case, the European Communities sustained that upholding the Complainants' allegations would unfairly penalize the European Communities, as outlined in paragraph 4,129, for an unanticipated and until recently, shared, scheduling error. This would upset the balance of concessions.
4.170.
As further proof of the existence of a shared understanding among WTO Members, the European Communities recalled its reasoning in paragraph 4.69. The fact that, for example, Brazil or Thailand, considered that their measures, and therefore also the European Communities' measures, did not provide export subsidies, amounted to a "clear representation" in the European Communities' view. Additionally, the Complainants' lack of reaction during the Uruguay Round clearly indicated to the European Communities that they shared the understanding that the C sugar regime did not provide export subsidies.
4.171.
The Complainants responded that the sugar policies applied by other WTO Members referred to by the European Communities were irrelevant in these Panel proceedings.
4.172.
Thailand, in turn, submitted that it was precisely because the doctrine of estoppel was a procedural defence precluding a party from exercising its rights vis-à-vis another party, that it would create discrepancies between the rights that different WTO Members might assert under the DSU. The European Communities' argumentation implied that in future multilateral trade negotiations Members would be forced to make objections against another Member's attempts to qualify obligations under WTO law through notes in schedules, lest they would risk losing their rights under the WTO. This would create an onerous negotiating environment, where the better resourced WTO Members would have an advantage over the smaller and poorer countries. WTO law would not provide an efficient, secure and fair framework for multilateral trade negotiations if WTO Members were allowed to use the silence of other Members during the negotiations as an excuse for not performing their commitments.

E. ACP/INDIA "EQUIVALENT" SUGAR

4.173.
The Complainants claimed that the European Communities had exceeded its export subsidy reduction commitments, inter alia, by according export subsidies to ACP/India equivalent sugar188. They recalled that the European Communities had the burden of proof under Article 10.3 of the Agreement on Agriculture to establish that it had not exceeded its export subsidy reduction commitments.
4.174.
The Complainants asserted that they were not questioning the preferential access of ACP/India sugar to the EC market and were not asking for a change in the requirement that ACP/India sugar be purchased at intervention prices. Rather, the Complainants were seeking to address the measures which, in their view, did not conform to the WTO disciplines, notably by asking the European Communities to cease exporting sugar in excess of its reduction commitments.

1. Article 9.1(a) of the Agreement on Agriculture

4.175.
The Complainants submitted that the European Communities granted export subsidies listed in Article 9.1(a) of the Agreement on Agriculture to exports of ACP/India equivalent sugar. By virtue of Article 2 of the Agreement on Agriculture, the European Communities' budgetary outlay and export quantity reduction commitments covered this category of sugar notwithstanding the footnote inserted in the European Communities' Schedule of Concessions. Consequently the European Communities acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture.
4.176.
The Complainants further submitted that a quantity of sugar that the European Communities considered to be "equivalent" to the amount of sugar imported under preferential trade arrangements was exported from the European Communities to third countries using export refunds. The export refunds granted to ACP/India equivalent sugar were the same as the export refunds granted to A and B quota sugar and thus these payments clearly constituted "direct subsidies" provided by government, to firms, to the exporting industry and to producers of sugar, "an agricultural product", and were "contingent on export performance", within the meaning of Article 9.1(a) of the Agreement on Agriculture. As the export refund system was identical to the system of export refunds for quota sugar, which the European Communities recognized to be covered by its export subsidy reduction commitments189, Article 9.1(a) brought within its scope such subsidies, which had to be, accordingly, subject to reduction commitments.
4.177.
The Complainants pointed out that, as the European Communities had exported 1,725,100 tonnes of this sugar category alone during marketing year 2001-2002, such subsidized exports were in excess of the European Communities' scheduled commitment levels for that year.190 The Complainants submitted statistical data which suggested that most of the "preferential" sugar imported by the European Communities (principally into the UK) was actually consumed in the European Communities.191 The European Communities had also admitted that the export subsidies on "preferential" sugar were subsidies on EC quota sugar, up to a quantity limit of 1.6 million tonnes.192
4.178.
The European Communities responded that the Complainants had failed to properly interpret the European Communities' scheduled commitments. The allegations that the European Communities had exceeded its export subsidy commitments should therefore be rejected. The European Communities explained that it had provided export refunds to an amount of exports equivalent to the sugar it imported under preferential import arrangements and that such exports were eligible to receive export refunds. The European Communities noted that its export statistics did not distinguish between refined sugar obtained from ACP/India equivalent sugar and other sugar.
4.179.
According to the Complainants, the figures supplied by the European Communities in its submissions to the Panel, as well as its notifications to the Committee on Agriculture clearly indicated that it had exceeded its quantity commitment levels in marketing year 2001-2002.193 These figures constituted an admission on the part of the European Communities that, in that marketing year, it had granted export refunds to 2,651,900 tonnes of sugar amounting to €1,217,247,000. The Complainants also took note of the European Communities' categorization of quantity of sugar that benefited from these refunds into "ACP/India equivalent sugar" and "notified A+B sugar". The European Communities had also confirmed that it was applying export subsidies to ACP/India equivalent sugar within the meaning of Article 9.1(a) of the Agriculture Agreement, in line with the historical record.194 The Complainants recalled that, if the European Communities claimed that the exports of ACP/India equivalent sugar were not subsidized, it had the burden of proof, under Article 10.3 of the Agreement on Agriculture, to establish that no export subsidies applied to such exports.
4.180.
The Complainants reiterated that their claim was based on the following premises: the export refunds were export subsidies within the meaning of Article 9.1(a) of the Agreement on Agriculture; the export refunds granted to ACP/India equivalent sugar and "notified A+B sugar" should be counted against the European Communities' reduction commitments; and, for marketing year 2001-2002, the European Communities' quantity commitment level was 1,273 million tonnes and budgetary outlay commitment level was €499.1 million. In their view, the European Communities' reduction commitments covered the exports of ACP and India equivalent sugar, given the European Communities' own admission that all the export refunds granted to sugar were export subsidies, and that the export refunds granted to all categories of sugar were subject to reduction commitments. The European Communities' contention that its export subsidy commitment levels were significantly higher than the level cited by the Complainants found no basis in the EC's Schedule, when considering the figures under the headings "annual and final outlay commitment levels" and "annual and final quantity commitment levels".

2. Exemptions through unilateral insertions in Schedules

4.181.
Referring to the European Communities' assertion before the WTO Committee on Agriculture that it had not assumed reduction commitments in respect of ACP/India equivalent sugar195, the Complainants considered that such a position was legally untenable. They submitted that Members could not exempt themselves from their obligations under the Agreement on Agriculture by including reservations in their Schedule of Concessions that must be subsequently accorded the same, or greater weight, than any provision of a WTO Agreement with which the schedule text might directly conflict. To the extent that the European Communities purported to diminish its obligations under the Agreement on Agriculture, the footnote, in their view, constituted an impermissible reservation under international law.
4.182.
The Complainants considered that, if Members could validly modify their obligations under the Agreement on Agriculture through entries in their Schedule, the purpose of Article XVI:5 of the WTO Agreement would be frustrated. The WTO Agreement foreclosed the possibility of making any reservation to the obligations under these Agreements. If Members were permitted to qualify their obligations under the Agreement on Agriculture or Article II of GATT through notes to their Schedules, the WTO Agreement would effectively be reopened by interpretation. The Complainants sustained that the Agreement on Agriculture did not provide for reservations of any kind, and in this respect, was different from GATS, which expressly permitted Members to impose "conditions and qualifications" on certain types of scheduled obligations.196 This principle was reinforced by Article 3.1 of the Agreement on Agriculture.
4.183.
With respect to the Agreement on Agriculture, the Complainants submitted that a Member could not grant export subsidies without a corresponding reduction commitment. First, Article 3.1 made clear that export subsidy commitments expressed in a Schedule "constitute commitments limiting subsidization and are hereby made an integral part of GATT 1994." A Member may not use a footnote to negate "an integral part of GATT 1994."
4.184.
The Complainants submitted further that Article 3.3 prohibited Members from providing export subsidies in respect of agricultural products specified in their Schedules "in excess of the budgetary outlay and quantity commitment levels specified therein". Further, Members "shall not provide such subsidies in respect of any agricultural product not specified in that Section of its Schedule". Thus, any subsidy provided to a scheduled agricultural product, such as sugar, was subject to the reduction commitments "specified" in a Member's Schedule. In the Complainants' view, export subsidies granted to an agricultural product were therefore either subject to reduction commitments in accordance with Article 9.2(b)(iv), or they were inconsistent with the requirements of the Agreement on Agriculture. There was no alternative category. The Complainants reasoned that, as sugar was a product "specified" in the EC's Schedule, the European Communities was under the obligation to reduce its budgetary outlays and export quantities of subsidized sugar in accordance with its scheduled commitments. In this context, the Complainants asserted that the reduction commitments under the first clause of Article 3.3 represented narrower commitments than the export subsidy commitments on unscheduled products mandated by the second clause of Article 3.3.197
4.185.
Having recalled the substance of Article 3.3, the Complainants held that, under Article 8, each WTO Member undertook not to provide export subsidies otherwise than in conformity with the Agreement on Agriculture andwith the "commitments as specified" in the Member's Schedule. The Complainants submitted that the footnote was not a "commitment" "specified" "in" a schedule because it did not provide "specific binding commitments" regarding "export competition". Article 8 specifically stated that all export subsidies must be "in conformity with this Agreement and with the commitments" set out in the Schedule of Concessions. By adding the conjunctive "and", the drafters left no doubt that it was not sufficient for a Member to act consistently with its reduction commitments; it must also act consistently with the Agreement on Agriculture and that Agreement permitted only those export subsidies that the Member agreed to reduce to specified levels. Further, neither Article 3, nor Article 8, could be given a meaning which was contrary to the letter and the spirit of those provisions. The Complainants emphasized that the provision of "specific binding commitments" regarding "export competition" was one of the objects and purposes of the Agreement on Agriculture, as reflected in its Preamble. The footnote therefore conflicted with both provisions.
4.186.
Article 9.1 of the Agreement on Agriculture confirmed that Members were not entitled to select unilaterally the export subsidies in respect of which they made reduction commitments. In the chapeau of Article 9.1, the words "are subject to reduction commitments" left no choice to WTO Members, requiring that all export subsidies listed be subject to reduction commitments. The Complainants reasoned that, as long as an export subsidy fell within the terms of any of the subparagraphs of Article 9.1, it was subject to reduction commitments.
4.187.
Lastly, Article 10.1 of the Agreement on Agriculture obliged Members to refrain from applying export subsidies not listed in Article 9.1 in a manner which circumvented their export subsidy commitments. In the Complainants' view, that provision also expressed the intent to confine the right of a Member to accord subsidies, to the subsidies that it was committed to reducing. Consequently, a footnote to a Schedule could not be used to create a category of scheduled agricultural products that were not subject to a Member's reduction commitments. The European Communities had therefore an unqualified obligation to subject those direct export subsidies to its reduction commitments, and the footnote could not override or invalidate the treaty text.
4.188.
The Complainants submitted that GATT and WTO jurisprudence endorsed by the Appellate Body established that WTO Members could incorporate in their Schedule of Concessions only acts yielding rights, not acts diminishing obligations. The GATT and the Agreement on Agriculture did not permit reservations. In EC – Bananas III, the Appellate Body found that the ordinary meaning of the term "concessions" suggested that a Member may yield rights and grant benefits, but it cannot diminish its obligations198, a principle further confirmed in EC – Poultry199, and reaffirmed in Chile – Price Band System.200
4.189.
Any exception to the European Communities' commitments under the Agreement on Agriculture, in their view, would have had to be provided through a formal WTO waiver, in accordance with the provisions of Article IX:3 of the WTO Agreement. They noted that a waiver could only be granted in exceptional circumstances. The European Communities would also have needed to seek a waiver for any recalculation of base level outlays and quantities, given that it had bound the base levels in its Schedule. The Complainants noted that the European Communities had neither sought nor received a waiver for the exclusion of ACP/India equivalent sugar from its WTO commitments.
4.190.
The European Communities responded that a waiver was only necessary if the underlying situation was inconsistent with a Member's obligation. The European Communities pointed out that, while a waiver may be obtained with the support of only three quarters of the membership of the WTO, inserting a footnote into a Member's schedule required the agreement of all WTO Members.201 In this context, the European Communities considered that, by virtue of Article 16 of the Vienna Convention, the Complainants had consented to be bound by the terms of the treaty footnote contained in the EC's Schedule, by ratifying the WTO Agreement. Thus, they had agreed to it. Denying any legal effect to the footnote would amount to finding that part of the WTO Agreement was inconsistent with another part of that Agreement, ultimately undermining the balance of concessions. According to the European Communities, this would also be contrary to Article 3.2 of the DSU which stated that dispute settlement "cannot add to or diminish the rights and obligations provided in the covered agreements."
4.191.
The European Communities contended that schedules were an integral part of the WTO Agreement by virtue of Article 3.1 of the Agreement on Agriculture, and were therefore subject to the rules of interpretation of the Vienna Convention. The European Communities' export subsidy commitments were articulated in two components. The first component served to set the limits which were subject to reduction, while the second component (the footnote) set a fixed ceiling. The European Communities contended that, overall, it had reduced its export subsidies on sugar. The first sentence of the footnote confirmed that exports of an "equivalent" amount of ACP/Indian sugar were not included in the quantities and outlays reported by the European Communities for the base period level (1986-1990) which served as a basis for the figures set out in the table. Since the footnote applied to the entire entry, the European Communities continued, it applied to both the base outlays and base quantities, thus indicating the basis for the base quantity and outlay levels, in line with the supporting tables which all participants in the negotiations were required to submit.202 The first sentence also served to clarify that exports of the quantity of ACP/India sugar imported should not be counted against the commitments made on the base period levels. The second sentence expressed the "average of export" of ACP/India equivalent sugar in the period 1986-1990, which was the base period for the reduction commitments, and was not a simple statement of fact or a narration of particular circumstances.203 It indicated that the European Communities was committing itself, as it had done for the other component of its exports of sugar, to limit its exports to a level established on the basis of the exports made in the base period. The European Communities contended that the second sentence, therefore, operated in precisely the same way as the other component of the European Communities' commitments, as it was a limited authorization to provide export subsidies.
4.192.
The European Communities further clarified that the first component comprised the commitment levels expressed in the table on export subsidies (which had decreased during the implementation period of the Agreement on Agriculture and had remained fixed since 2001). The second component was the commitment level expressed in the Footnote to the EC's Schedule in respect of ACP/India equivalent sugar, which imposed a ceiling of 1.6 million tonnes (less if the import entitlement was less than 1.6 million tonnes) and a de facto budgetary limit of 1.6 million multiplied by the average export refund which could be granted within the first component of the European Communities' commitments. The European Communities argued that the combined operation of these two components meant that, overall, the European Communities had reduced its export subsidies on sugar, over the implementation period. The European Communities asserted that it had respected these limits and provided statistical data in support of that argument.204
4.193.
Consequently, when properly interpreted, the footnote was consistent with the Agreement on Agriculture and the European Communities had respected the commitments set out in its Schedule. According to the European Communities, the Complainants had misconceived the footnote and their arguments were premised on the notion that the footnote operated to exclude export subsidies on ACP/India equivalent sugar from any commitments. The Complainants' arguments on the consistency of an exclusion from the Agreement on Agriculture were consequently irrelevant. The European Communities submitted that the articulation of its export subsidy commitments in two components was consistent with each of the provisions of the Agreement on Agriculture cited by the Complainants. Notably, the export subsidies which the European Communities provided to sugar had been subject to reduction commitments in accordance with Article 9.1 (see paragraph 4,186). The European Communities had acted consistently with Article 8 since it had provided subsidies only in conformity with the Agreement (see paragraph 4,185). Furthermore, the European Communities had also provided those subsidies within the limits authorized in its schedule and had thus acted in conformity with Article 8 and Article 3.3 (see paragraphs 4,182 and 4,185).
4.194.
The Complainants submitted that the European Communities' interpretation of the footnote was inconsistent, and could not be reconciled, with its ordinary meaning. The words "the Community is not making any reduction commitments" on sugar of ACP or Indian origin, communicated clearly and unambiguously, in their opinion, that the European Communities had not assumed any commitment to reduce export subsidies granted in respect of sugar of ACP or Indian origin. The meaning that the European Communities attributed to the footnote was thus in direct contradiction to its text and indeed rendered the words "not making any reduction commitment" ineffective. They reiterated that, independently of how it was interpreted, the footnote did not constitute a reduction commitment, nor a commitment limiting subsidization, notably with regard to budgetary outlays. In their view, the alleged budget ceiling did not constitute a ceiling commitment as the second sentence simply contained no normative term expressing a commitment, or a term reflecting the idea of a ceiling. Australia, in this context, contended that the reference to an average of 1.6 million tonnes during the base period was not even a factual statement.205 First, under its own regime, the EC limited subsidies on exports of sugar of ACP and India origin to a quantity of 1.3 million tonnes of sugar derived from cane or beet harvested in those countries. Secondly, the EC had not disputed that the grater proportion of imports from the ACP countries and India were actually consumed within one EC member State, and were not exported. Third, in response to Australia's question for clarification of statistical data, the EC had acknowledged that it had imported less than 1.6 million tonnes from ACP countries and India during the base period.206 The Complainants thus held that, if the European Communities had intended to set out in the footnote one component of a reduction commitment, it would not have used merely descriptive language. Referring to their analysis summarized in paragraphs 4,182-4.186, they sustained that there was no basis in the Agreement on Agriculture for the European Communities' claim that it had the right to make "commitments" to retain export subsidies on a certain quantity of exports, at a ceiling level. As provided for in Article 8 and 3 of the Agreement on Agriculture, and as indicated in the title of Section II of Part IV of a Member's WTO Schedules, export subsidy commitments must be reduction commitments on both quantity and budgetary outlays on scheduled products. The Complainants asserted that Article 9.2(b)(iv) provided further context for the nature of the commitments as reduction commitments.
4.195.
Even if it were accepted that the footnote indicated the basis for quantity levels for subsidized exports of ACP/India equivalent sugar, the Complainants underlined that the footnote was silent about what values would be multiplied by those quantity levels to arrive at the putative ceiling for budgetary outlays on subsidies on these exports. Further, the alleged "ceiling" had several flaws. First, it could not be found in the text of the footnote or elsewhere in the EC's Schedule of reduction commitments. Second, it did not establish a "ceiling" on these outlays. Third, despite the European Communities' explanations regarding the determination of such ceiling on the basis of the difference between the world market price and the EC intervention price, that difference was not a constant factor. Indeed, to the extent that world market prices have declined over recent years, the average export refund could increase commensurately. Thus, the "ceiling" supposedly imposed by the footnote on the European Communities' budgetary outlays on ACP/India equivalent sugar was not a ceiling at all, but a flexible cap that could increase or decrease based on factors outside the European Communities' control. Thus, far from acting as a ceiling, the budgetary outlays on ACP/India equivalent sugar could be in excess of the levels of budgetary outlays on such sugar during the base period. In this respect, the Complainants found that it was no defence for the European Communities to argue that it "carefully managed" the alleged ceiling (see paragraph 4,222).
4.196.
The Complainants sustained that the principle of effectiveness did not require the Panel to endorse an interpretation of the footnote that was devoid of any textual basis.207 The limits to the principle of effectiveness had been observed in GATT and WTO jurisprudence208: insertions in schedules had repeatedly been declared invalid even though they could have been "interpreted" in a way that gave them legal effect. The Complainants considered that the available jurisprudence was sound because panels and the Appellate Body could not second-guess negotiators and correct their omissions. By contrast, there was nothing in the ruling of the Appellate Body cited by the European Communities to suggest that the principle of effectiveness required panels to go beyond the treaty language.209 Further, an acceptance of the European Communities' effectiveness argument would produce, in the Complainants' view, a completely one-sided result bearing no relationship with the result that reciprocity negotiations would have produced, as the European Communities would achieve unilaterally in its Schedule what could have been achieved only through a negotiated amendment of the Agreement on Agriculture. The Complainants drew an analogy with Annex 5 of the Agreement on Agriculture, as in paragraph 4,211, and argued that, if the European Communities had really wanted to negotiate a similar exemption for ACP/India equivalent sugar from its export subsidy reductions commitments, it could have endeavoured to negotiate with the WTO membership for a framework210 that could accommodate such a result, making counter-concessions, accepting time bound limitations, and any conditions safeguarding the interests of other sugar exporters. For reasons of its own, the European Communities had chosen not to negotiate such an exemption, but had inserted unilaterally a statement in its Schedule purporting to exempt it from its obligations under the Agreement on Agriculture. The Complainants contended that the European Communities was now requesting the Panel to rule that this unilateral exemption had the same legal effect as the negotiated exemptions in the Agreement on Agriculture.
4.197.
Thailand also referred to the principle of "contra proferentem" to argue that the European Communities prepared, and inserted, the footnote in its Schedule for its own benefit.211 Thailand explained that, unlike tariff concessions which were inserted in the schedules after a negotiated and reciprocal exchange of concessions, the export subsidy reductions commitments were inserted in the schedules unilaterally and their consistency with the guidelines set out in the Modalities Paper was checked in the verification process. Thus, even if the factual statement about the amount of past subsidized exports were "interpreted" to constitute a commitment to observe a ceiling on the future subsidization of those exports, that meaning would not be the preferred meaning according to the "contra proferentem" principle. Thailand held that this principle was a fortiori applicable if the meaning that was least to the advantage of the party which prepared or proposed the provision was the meaning which that party had consistently acknowledged in the past. In this regard, the European Communities' present position was inconsistent with its prior statements as well as its prior practice.
4.198.
The Complainants took issue with the inconsistency between the interpretation now advanced by the European Communities and its prior statements before the Committee on Agriculture.212 Before this Panel, the European Communities had stated that "[t]he EC has subjected all subsidies on sugar to reduction commitments"213, "[i]t is quite clear that export subsidies which the EC provides to sugar have been subject to reduction commitments in accordance with Article 9.1", and in paragraph 4,222, the European Communities asserted that it could not distinguish between different types of sugar. However, the European Communities also argued that its commitment with respect to the ACP/India "equivalent" sugar was a "ceiling", not a "reduction commitment." To the extent that the European Communities argued that the 1.6 million tons of ACP/India "equivalent" sugar must be added to the European Communities' actual reduction commitments, then the European Communities' overall reduction of sugar subsidies was inconsistent with Article 9.2(b)(iv).
4.199.
The European Communities' present position was also inconsistent with its practice of not notifying export subsidies of ACP/India equivalent sugar. If the European Communities had been of the view that it had assumed export reduction commitments in respect of sugar of ACP and Indian origin, it would have provided statistics on the export of such sugar in its notifications.214 Assuming that the interpretation submitted by the European Communities were correct, and that, as stated, it had sought to ensure compliance with its commitments under the WTO, the Complainants sustained that the European Communities had in fact failed to respect those commitments when it invoked the flexibility of Article 9.2(b) in marketing years 1997-1998 and 1998-1999. The Complainants noted that the European Communities had not attempted to reconcile its assertions before the Committee on Agriculture with the claims it now submitted to the Panel, explaining why it did not notify the exports of sugar that it claimed to be covered by its reduction commitments, clarifying how it could have observed the requirements of Article 9.2(b) during the implementation period even if its re-interpretation were correct. The Complainants noted that the European Communities had not submitted any notifications to the Committee on Agriculture relating to the export of ACP/India equivalent sugar and indeed had refused to provide this information, notably when requested by Australia.
4.200.
In this context, the Complainants underlined the approach adopted by the Appellate Body in Korea – Various Measures on Beef in reaching a conclusion on the interpretation of Korea's Schedule, "after examining Korea's subsequent statements before the Committee on Agriculture and Korea's annual notifications to that Committee."215 In their view, this implied that, in interpreting a commitment assumed by a Member under the Agreement on Agriculture, a panel could also take into account the interpretation of that commitment advanced by the Member in statements before the Committee on Agriculture or implied in its notifications to that Committee. The Complainants suggested that the Panel rely also, in the present case, on the European Communities' statements before the Committee on Agriculture, and its annual notifications, as a supplementary means of interpretation.
4.201.
The Complainants thus considered that the Panel needed to determine the proper interpretation of the footnote and its implications for the resolution of the present dispute. However, independently of how it was interpreted, the footnote could not have the legal effect of exempting export refunds granted to ACP and India equivalent sugar from reduction commitments. Any interpretations would ultimately lead to the same legal result, namely that the export refunds granted to ACP/India equivalent sugar were inconsistent with the Agreement on Agriculture and the SCM Agreement. The Complainants sustained that, if the Panel concluded that the footnote purported to exempt exports of sugar of ACP or Indian origin from the European Communities' export subsidy reduction commitments, then the Panel would have to declare the footnote without legal effect because it diminished the European Communities' obligations under Articles 3.3 and 9 of the Agreement on Agriculture.
4.202.
Thailand noted that, in the alternative, the Panel may conclude that the footnote indicates that "sugar of ACP or Indian origin" was not to be considered a scheduled product for the purposes of analysing the European Communities' commitments. This interpretation could be based on the fact that the footnote qualified the entry "sugar" in the EC's Schedule. As such it indicated that the term "sugar" "does not include" the quantity of sugar specified in the footnote. If this included "sugar of EC origin of a quantity equivalent to the sugar imported from the ACP countries or India" then it followed that this ACP/India equivalent sugar was not included in the EC's Schedule (assuming such a division could be made under the Agreement on Agriculture. For these reasons, the footnote could also be interpreted to remove this sugar from the EC's Schedule altogether. Thailand noted that this interpretation would be based on the terms of the footnote and would give legal effect to it. Under Article 3.3 of the Agreement on Agriculture, export subsides listed in Article 9.1 of the Agreement may not be granted to an unscheduled agricultural product. If the footnote was interpreted to remove ACP/India equivalent sugar from the EC's Schedule, export subsidies could not be granted on that sugar at all. Therefore even on this interpretation, Thailand contended that the European Communities would be exceeding its export subsidy reduction commitments for sugar.
4.203.
Recalling their reasoning in paragraphs 4,181–4,186, the Complainants countered that the European Communities' interpretation of the footnote conflicted with the distinct requirements under the Agreement on Agriculture. Also, there should be no conflict between Article 3.3 and Article 8. If the "commitments as specified" in a Member's Schedule did not conform to the Agreement on Agriculture, then the Member was not in compliance with the first prong of Article 8. Thus, Article 8 incorporated, in their view, the principle of the US – Sugar Waiver216 and EC – Bananas III217 into the Agreement on Agriculture, in that it required that Schedules and any footnotes therein conform to the Agreement, and did not diminish the European Communities' obligations under that Agreement. If the conflict could not be resolved by way of interpretation through Articles 31 and 32 of the Vienna Convention, a choice had to be made in such a way that the fundamental, multilaterally negotiated provisions prevailed over a unilaterally inserted footnote to a Member's Schedule. The approach taken by the Appellate Body and panels, as outlined in paragraph 4,188, served to support this principle. This principle was equally valid for the market access concessions and commitments for agricultural products contained in the Schedules annexed to the GATT 1994, and was confirmed by paragraph 3 of the Marrakesh Protocol.218 In the Complainants' view, the footnote clearly sought to diminish specific obligations placed upon the European Communities by Article 9.1 of the Agreement on Agriculture.Australia underlined that the Uruguay Round schedules were prepared with the full knowledge of the US – Sugar panel report, which was adopted in June 1989. Thailand noted that under Article 3.1 of the Agreement on Agriculture the "domestic support and export subsidy commitments" contained in Part IV of a Member's Schedule of Commitments are made an integral part of the GATT 1994. Therefore, the footnote becomes an integral part of the GATT 1994 only to the extent that it constitutes an "export subsidy commitment". For the reasons given above, however, the footnote does not express an export subsidy reduction commitment.
4.204.
The European Communities sustained that its interpretation of the footnote was consistent with its wording. Further, the European Communities had consistently interpreted the footnote in the same manner since 1995, based on the application of the Vienna Convention rules of interpretation. The legal effect of the first sentence was to announce that the European Communities had not included, in the base data on which it would apply the percentage reductions set out in the Modalities Paper, ACP/India equivalent sugar. In so doing, the European Communities had transferred this portion of its exports from the part of its commitments articulated in the table219, to the part of its commitments articulated in the footnote. The first sentence stated that the European Communities was not taking reduction commitments on ACP/India equivalent sugar, meaning that the European Communities did not reduce, in annual instalments, the level of export subsidies on that portion of its exports. The first sentence therefore had legal effect, in the European Communities' view. However, this did not mean that the European Communities had not undertaken to limit subsidization, or that the European Communities did not make reduction commitments, or that the European Communities had not reduced the maximum scheduled export subsidies on an annual basis in its schedule.
4.205.
While the European Communities agreed that the second sentence was a factual statement, it disagreed with the view that it contained no normative term expressing a commitment. Rather, it needed to be interpreted in its context. In this regard, the European Communities regarded two elements as being relevant context: the EC's Schedule of export subsidy commitments, to which the footnote was attached, and which contained several factual statements with, what the European Communities held was normative effect; and the first sentence of the footnote. Because the European Communities was not subjecting that portion of its exports to the coefficients set out in the Modalities Paper, the European Communities considered that it did not have to schedule the diminishing commitment levels, but rather that it was enough to set out the commitment level within which the European Communities was to limit the volume of exports subsidized. The European Communities sustained that the second sentence set a limit in the same way as base periods for all other products. However, while other base periods were the starting point from which the maximum level of subsidized exports was reduced, this base was not to be reduced, and was therefore to act as a fixed ceiling.
4.206.
Turning to the Complainants' contentions regarding the absence of budgetary outlay commitment in the footnote, the European Communities sustained that Article 3.3 incorporated the export subsidy commitments into the GATT, but did not prescribe any form for such commitments. Since the European Communities considered that it had respected the commitments it had undertaken to limit subsidization on A/B sugar and ACP/India equivalent sugar, it had acted consistently with Article 3.1. Moreover, since the European Communities had not provided export subsidies in excess of the commitment levels set out in its schedule, it had acted consistently with Article 3.3. Here, the European Communities recalled the operation of its commitments on exports of A/B sugar as imposing a de facto budgetary limit. Moreover, in the European Communities' opinion, Article 3.3 did not impose an obligation to have both a budgetary outlay and a quantity commitment level, but merely referred to the "commitment levels specified therein". Article 3.3 only set out the obligation to provide Article 9.1 listed subsidies in conformity with the commitments specified in a Member's schedule. The obligation to schedule both types of commitments was only set out in the paragraph 11 of the Modalities Paper, of which, the European Communities recalled, the footnote was a negotiated departure.
4.207.
The European Communities also submitted that participants in the Uruguay Round could negotiate departures from the reduction formulae agreed in the Modalities Paper, and that the footnote constituted one such departure. The European Communities contended that in the absence of any express indication to that effect, such departures could not be presumed. Consequently, it could not be assumed that, without having being requested to do so by any other Member, the European Communities undertook voluntarily reduction commitments well in excess of those agreed as part of the Modalities Paper. In this context, the European Communities argued that it was not alone in negotiating such departures. New Zealand did not specify any quantitative limits in its schedule, and only scheduled reductions in budgetary outlays.220 Australia had sub-divided the category "other milk products" into two categories, fats and solid non-fats (which were not listed in the Modalities Paper), specifying separate quantity commitments, while indicating a budgetary outlay commitment only on the general product.221 The European Communities alleged that there was nothing to distinguish such commitments from the footnote. The European Communities also submitted that the Modalities Paper explicitly foresaw that it might not be possible to schedule quantitative limitations, particularly in respect of incorporated products. As for the footnote, only one set of commitments was scheduled for these products. Since, in the European Communities' view, the Complainants had failed to establish that the footnote was inconsistent with the Agreement on Agriculture, consequently, the footnote itself could not be regarded as inconsistent with Article 8. With respect to Article 9.1, the European Communities recalled that, because it did not wish to reduce its commitment levels for sugar, it had negotiated a departure from the Modalities Paper in its Schedule, in the form of the footnote. The European Communities considered, however, that it had subjected the maximum amount of export subsidies it granted to exports of sugar to reduction commitments over the implementation period, and that, consequently, it had also acted consistently with Article 9.1. Concerning Article 9.2(b), the European Communities submitted that it was not before the Panel, and had lapsed (see Section B.1, Terms of reference). It was therefore irrelevant to the matter before the Panel.
4.208.
The European Communities challenged Thailand's invocation of the principle of contra proferentem, arguing that this principle had seldom been referred to in international law instances since the early 1930s222, due to its imprecise nature and scope. That principle could not be used in the present case since, in particular, doubts had been cast on it.223 The European Communities raised questions as to the applicability of this principle to a multilateral treaty, and as to how it fitted into the Vienna Convention, which was, in the European Communities' opinion, based on the principle of good faith. The European Communities regarded the principle of in dubio mitius as more appropriate, since it applied to treaties, had been recognized by the Appellate Body, and required that an interpretation be preferred which impinged as little as possible on the sovereignty of Members.224 According to the European Communities, in the present case, this would imply interpreting the footnote as setting a ceiling in order to allow the European Communities to continue to provide export subsidies on this portion of its exports.
4.209.
The Complainants contended that the European Communities had drawn a number of false analogies in support of its contention that an export subsidy commitment needed not contain a budgetary outlay commitment level. First, Australia's scheduling of milk products involved both budgetary outlay and quantity reduction commitments, with specific quantity limits set for two sub-groups of milk product, a form of scheduling which was expressly envisaged by paragraph 8 of Annex 8 of the Modalities Paper. On the other hand, a form of scheduling based on a quantity of the same product was never envisaged. The specific quantity limits for the product sub-groups served to impose tighter disciplines on quantities of "particular products" which might be exported than an overall reduction limit for a group of products. Secondly, New Zealand had scheduled the elimination of all export subsidies on all covered products by the end of the implementation period, and actually eliminated the export subsidies in question in 1994/1995. New Zealand had clarified to the Committee on Agriculture, in response to a question from the European Communities, that it had not been possible to identify the product-specific quantities of subsidized exports for the base period, as the historical taxation arrangements were non-product specific.225 Thirdly, the European Communities had also drawn a false analogy with the incorporated products category, which comprised a diverse range of highly processed agricultural products and basic products incorporated into the processed products. Again, paragraph 9 of Annex 8 of the Modalities Paper specifically envisaged that the reduction commitment for incorporated products could be expressed in terms of aggregate budgetary outlays. Moreover, the present case did not concern export subsides granted to incorporated products, accordingly the form of export subsidy commitment envisaged under the Modalities Paper for this type of subsidy was irrelevant. The Complainants considered that the European Communities' novel proposition found no support in the Agreement on Agriculture. Article 3.3 prohibited granting subsidies in excess of budgetary outlay and quantity commitment levels. Similarly, Articles 9.2(a) and 9.2(b) had been drafted on the assumption that there were both a budgetary outlay commitment and a quantity commitment for all scheduled agricultural products. The Complainants submitted that, if an export subsidy commitment could take any form, these provisions would have been drafted differently.
4.210.
The Complainants held that the European Communities' contention that the footnote represented a negotiated departure from the Modalities Paper, lacked any foundation. There was no bargaining over the footnote, and no compensation elsewhere in the WTO agreements for the departure from the European Communities' commitments under the Agreement on Agriculture allegedly contained in the footnote. Citing Korea – Various Measures on Beef, the Complainants held that there was no official record that the terms of the footnote were specifically "agreed" to by the Complainants, or any other WTO Member, prior to the completion of the Uruguay Round, and there was no record of the nature of the compensation received. Also, by contrast with Korea – Various Measures on Beef, there was no ambiguity over the ordinary meaning of the European Communities' footnote. Resorting to negotiating history, or to the Modalities Paper, as suggested by the European Communities in paragraph 4,193 would therefore serve no purpose.