1.1 In a communication dated 10 November 1978 and which was circulated to contracting parties in document L/4722, the Government of Brazil requested the CONTRACTING PARTIES to establish a panel to examine a dispute between Brazil and the European Communities over Community export refunds for sugar.
1.2 The Council had a first discussion of the matter at its meeting on 14 November 1978 when Australia, Cuba, India and Peru supported the setting up of a panel (C/M/130, page 7).
1.3 The matter was discussed again at the Thirty-Fourth Session of the CONTRACTING PARTIES, when it was agreed to establish a panel with the following terms of reference:
The representative of Cuba expressed the hope that all interested contracting parties would have an opportunity to be heard by such a panel, but no delegation declared that it intended to submit representations to the Panel. The CONTRACTING PARTIES authorized the Chairman of the Council to nominate the chairman and the members of the Panel in consultation with the parties concerned (SR.34/1, pages 7 and 8).
1.4 Accordingly, the Chairman informed the Council, at the meeting on 29 January 1979, that the Panel had been established with the following composition:
(C/M/132, pages 9 and 10).
1.5 However, as Mr. Parman was unable to participate in the work of the Panel until the completion of its work, he was replaced by:
(C/M/135, pages 18 and 19).
2.1 In presenting its complaint to the Council of Representatives, the delegate of Brazil claimed that the sharp increase in Community sugar exports had been made possible by the use of substantial subsidies which in recent years had consistently exceeded the international prices of sugar. The subsidies thus granted had allowed the European Communities to obtain a more than equitable share of the world sugar trade, to the detriment of Brazil and all other contracting parties which were exporters of sugar. The European Communities had thereby caused serious prejudice to the interests of such contracting parties and hampered efforts being made to stabilize the world market by means of the International Sugar Agreement, 1977.
2.2 The representative of Brazil focused his argumentation on the following points, namely that the application of the Community system of refunds on exports of sugar had resulted in:
2.3 During meetings with the Panel, the representative of Brazil expressed the opinion that this Panel should proceed from the general findings and conclusions arrived at by a previous Panel established to examine a similar complaint by the Government of Australia, as contained in the report adopted by the Council on 6 November 1979 (document L/4833) and where it was stated that:
2.4 In respect of the findings and conclusions put forward in the report concerning Australia's recourse (document L/4833) the representative of the European Communities pointed out that the Panel reached the following conclusions on the main points concerning Australia's complaint:
In his view the final, general conclusion which could objectively be drawn from that Panel's report (L/4833) was that the European Communities had not infringed the provisions of the General Agreement in any way.
2.5 The Panel heard the specific arguments of the parties with respect to the various points of the complaint as listed in paragraph 1.3 above. A summary of the arguments presented by the parties on each of these points is given below. (Paragraphs 2.6 to 2.28.)
2.7 Corresponding figures for Brazil were 12, 8.8, 7.8 and 8 per cent, respectively, and the representative of Brazil argued that a comparison of quantities exported and individual shares of the world export market for major sugar exporting countries demonstrated that the European Communities was practically the only leading sugar exporter who had made significant gains both in terms of absolute increases and in terms of market shares. Although other countries, such as Cuba and Thailand had indeed improved their positions in the world market in recent years, this could not be considered as being directly prejudicial to the interests of Brazil in terms of market displacement or reduced sales opportunities (Annex Tables IX and X).
2.8 He furthermore argued that between the two periods, 1973-75 and 1976-78, a complete reversal in the relative positions of Brazil and the European Communities had taken place as regards total exports to the world market (Table 1). With respect to particular groups of markets, Community exporters had absorbed all import growth registered in their traditional markets (Group A) and 54 per cent of import growth in the most dynamic sector of the world market for sugar (Group B). The decline in Brazilian exports to other markets was partly due to diminished exports to the European Communities, and he drew the attention of the Panel to the fact that the European Communities had changed from a substantial net importer to a substantial net exporter during the period under consideration.
a Group A: Countries which on average imported from the European Communities more than 10,000 tons, raw value, in the period 1973-1975.
b Group B: Countries which on average imported from the European Communities less than 10,000 tons, raw value, in the period 1973-1975, but on average exceeded that amount in the period 1976-1978.
Source: The representative of Brazil.
2.9 The representative of the European Communities argued that the trend in Community sugar exports was consistent with Article XVI, as there had been no substantial variations in the Community share of world export trade, 8.8 per cent in 1972 and 9.6 per cent in 1977. Even taking into consideration developments in the year 1978 it did not seem to affect this argument. He furthermore argued that a general conclusion which could be drawn from the report of the Panel examining a similar complaint by Australia (L/4833) was that the European Communities had not infringed the provisions of the General Agreement in any way. He also stated that the arguments presented by Brazil, related to a change in the Community position from a net importer to a net exporter were irrelevant as the appropriate chapters of the General Agreement contained no reference to this concept.
2.10 The representative of the European Communities had no major objections to following Brazilian suggestions concerning the grouping of countries (A,B and others) but said that figures for 1972 should also be taken into account in any calculation. He proposed that the two reference averages be those for 1972-74 and 1975-77 (Table 2). The year 1978 would be considered separately.
TABLE 2
EUROPEAN COMMUNITIES
Average Sugar Exports 1972-74 and 1975-77
by Groups of Countries of Destination
(Thousand tons, raw value and percentages)
| |
1972-74 |
1975-77 |
| |
tons |
% |
tons |
% |
| Total: |
1655 |
100 |
1757 |
100 |
| Group A |
1462 |
88 |
1141 |
65 |
| Group B |
103 |
6 |
533 |
30 |
| Other |
90 |
6 |
83 |
5 |
Source: The Commission of the European Communities.
2.11 With respect to the comparison of market shares for a number of exporting countries presented by the Brazilian representative, the representative of the European Communities argued that it was not possible to come to any serious appreciation without a detailed examination by the Panel of all the international sugar trade, case by case for all exporting countries.
(ii) Displacement
2.12 The representative of Brazil argued that, taking 1972-1974 as a reference period, the market displacement suffered by Brazil in the years 1976-1978 as a result of the Community sugar subsidy system amounted to 3,402 thousand tons - a volume of sugar that Brazil would have been able to export given the accumulation of stocks and the substantial diversion of cane to the production of alcohol which took place during this period. In all countries importing Community sugar, Brazilian sugar exports had been directly affected and Brazilian exports had furthermore been indirectly affected in other markets due to increased competition from exports having been displaced elsewhere by Community exports.
2.13 The representative of Brazil presented to the Panel detailed statistical information on imports of sugar into selected countries for the years 1972 to 1979. Imports from Brazil into Algeria, Iraq, Israel, Kuwait, Lebanon, Nigeria, Spain, Sudan, Syria and Tunisia had declined from an annual average in 1972-75 of 193,900 tons to 78,700 tons on average for the years 1976-78, and Brazil's share of these markets had fallen from 17.2 to 5.7 per cent over the same period. Community exports had, however, expanded from an annual average of 270,400 tons in 1972-75 to 798,900 tons in 1976-78, and the European Communities had increased its share of these markets from 24.8 to 56.4 per cent. For another group of selected countries (Chile, China, Egypt, Iran, Jordan, Morocco, Portugal, Sri Lanka and the USSR) average annual imports from Brazil which in 1972-75 had totalled 729,400 tons had in 1976-78 fallen to 549,100 tons, while imports from the European Communities at the same time had expanded from an average of 35,600 tons in 1972-75 to 725,800 tons in 1976-78. Brazil's share of these markets had fallen from 16.7 per cent to 7 per cent while that of the European Communities had risen from 0.8 to 9.4 per cent.
2.14 He furthermore argued that in seventeen of these markets Community exports of white sugar had directly displaced Brazilian supplies of both white and raw sugar, and that in other markets, Brazilian exports had suffered from increased competition from raw sugar of other origin but which had been displaced elsewhere by increased Community exports of white sugar. One result of these developments was that the number of outlets for Brazilian sugar was strongly reduced. In 1972-75, Brazilian sugar had been exported to fifty-two destinations (of which white sugar went to thirty-four). In 1977, the number of outlets had fallen to thirty and in 1979 to twenty, with Brazilian white sugar being sold in only fourteen markets.
2.15 The representative of the European Communities considered that it was inadmissible that country A (Brazil) could claim an exclusive right over country B (EEC) to export a specific product (sugar) to any importing country. There is no provision in the General Agreement upholding such a right. Consequently the calculations put forward by Brazil concerning direct or indirect losses of markets caused by exports from the European Communities appear to be unfounded. The representative of European Communities argued that between 1972 and 1977 on its principal export markets, Brazil had maintained or increased its sugar exports, while on those same markets, Community exports remained negligible or showed only insignificant changes (Annex Table IX). Furthermore he argued that there was no possible relationship between the decline in the Brazilian share and the slight increase in the Community share over the same period. In 1978 Brazilian exports declined in relation to average exports to the Group A countries in 1975-1977; almost the entire decrease in Brazilian exports in 1978 in relation to the 1975-1977 average is accounted for by two countries, Algeria and Iraq. It is interesting to note that between 1975-1977 and 1978, the Communities relatively insignificant exports to these two countries also fell.
2.16 With respect to the evolution in exports to markets in strong expansion (Group B), the Community representative argued that although Community exports to this Group of countries as a whole increased from 1972-1974 to 1975-1977, while Brazilian exports to the same group of markets at the same time declined, there was no connection between the two different developments. The conclusion world be the same both for the group of countries as a whole and for each individual country in the group. The degree to which Brazilian sugar exports dropped could not be attributed to increased Community exports because of the substantial difference in quantities involved. For 1978, Brazilian exports to the same group of countries were higher than in 1975-1977. There was therefore no reason for Brazil to complain about a loss of markets due to increased Community exports since there was no evidence to support such a claim.
2.17 Commenting upon the detailed statistics for selected markets presented by the Brazilian representative, the representative of the European Communities argued that there was no clear evidence that Community exports had displaced Brazilian supplies of sugar on the majority of these markets. Developments for instance in the markets of Algeria, Iraq, Sudan and Syria had been influenced by competition from sugar of other origin. In other cases, Brazil had always been an only marginal or occasional supplier. Developments in the Tunisian and other markets ought to be seen in connection with existing special commercial relations between the European Communities and these countries. Still in other cases (e.g. Chile, Cyprus, Iran, Morocco, United States, USSR and Sri Lanka) there was no evidence of any possible relation between Brazilian sales and Community exports. It was therefore not possible to establish a link between developments in Brazilian and Community sugar exports.
(iii) Reduced sales opportunities
2.18 The representative of Brazil argued that its exports of sugar had suffered the loss of sales opportunities in a number of markets in which the demand for sugar had shown a rapid expansion. Several importing countries (e.g. Iran, Kuwait and Nigeria) had declined to enter into long-term contracts with Brazil concerning supplies of sugar, in view of readily available supplies of white sugar offered by the European Communities. Community sugar exports at depressed prices also resulted in reduced sales opportunities for Brazilian exports in other countries (e.g. China, Jordan and the USSR).
2.19 He furthermore argued that the penetration of Community white sugar into the markets in Chile and Venezuela in the years 1977 to 1979 had resulted in market displacement and reduced sales opportunities for Brazil, thus adversely affecting the special commercial ties Brazil enjoyed with these two LAFTA countries. In his opinion the fact that import limitations imposed by Venezuela in 1979 according to its obligations under the International Sugar Agreement, 1977, resulted in only negligible imports from the European Communities and a strong increase in imports from Brazil was evidence of unfair competition from Community exporters in the Venezuelan market in the years prior to 1979.
2.20 The representative of the European Communities argued that EEC was one of Nigeria's traditional suppliers and there were no possible grounds to suppose that Brazilian exports were replaced at any time. As to Iran, he argued that it did not seem necessary for EEC to put forward any special arguments, since Brazil clearly stated that its efforts to conclude a long-term contract with Iran failed owing to the existence of trade links between Iran and the EEC. Concerning China, Jordan and the USSR, the representative of the European Communities stated that the Brazilian complaint appeared completely arbitrary and he referred to statistics.
2.21 In the case of Chile and Venezuela, the representative of the European Communities argued that trade statistics did not show that Community sugar exports had adversely affected Brazilian sales in these markets in recent years. He wished to draw the attention of the Panel to inconsistencies in the lines of reasoning of the representative of Brazil on this point.
(c) "The application of the Community system of refunds on exports of sugar had resulted in that serious prejudice, and threat thereof, had been caused directly and indirectly to Brazilian interests in terms of Article XVI:1, through market displacement, reduced sales opportunities and diminished export earnings"1
(i) Diminished export earnings
2.22 The representative of Brazil argued that, taking 1972-1974 as a reference period, the losses in export revenues resulting from market displacement and reduced sales opportunities amounted to US$707 million in the years 1976-1978, at the prices then prevailing. However, taking into account the dominant position of the European Communities as a world supplier of white sugar, the substantial volume of the Community export surpluses, the knowledge on the part of the trade that the amounts available to cover Community export refunds were not subject to prior limitations, the refusal of the European Communities to accept any form of discipline under the International Sugar Agreement of 1977, he assessed the depressing effect caused by the Community's sugar export practices on world prices to have represented, on average, $0.01-2 per pound over the three-year period 1976-1978. This meant a reduction in export earnings to Brazil of US$125-250 million on the volume of sugar actually sold abroad and a loss through market displacement of US$782 to 856 million. Consequently, he estimated the total prejudice suffered by Brazil, either directly or indirectly, as a result of the Community sugar subsidy system in the period 1976-1978 to have amounted to between US$907 and US$1,106 million. For comparison, he mentioned that total Brazilian export earnings of sugar amounted to US$1,095 million for this three-year period.
2.23 The representative of the European Communities argued that the level of the world price for sugar was affected by certain factors whose number, nature or possible impact were difficult to circumscribe. All participants in world trade had a joint responsibility and the European Communities could not accept the idea that it had a special responsibility of its own for world market price formation. He felt that the calculations of loss of earnings and financial prejudice presented by the representative of Brazil appeared to be unfounded or even irrelevant. Even to replace 1972 by 1971 as a reference year would suffice to change the result of the calculations. Apart from the fact that there is nothing to prove that the reduction in Brazil's share was attributable to other countries such as the EEC, for example.
(d) "... as a result of the failure of the European Community to carry out its obligations under the General Agreement, benefits accruing to Brazil, directly or indirectly, under the General Agreement had been impaired, and the objectives of the General Agreement, including Part IV thereof, had been impeded, in terms of Article XXIII"
2.24 The representative of Brazil argued that the application of the Community system of export subsidies for sugar was inconsistent with Article XVI:3 of the General Agreement. Constituting a form of export subsidy on primary products, the system as applied had not led to any reduction or limitation of exportable surpluses of the amount of export refunds. The increase in Community exports from 1977 onwards had resulted in the European Communities having more than an equitable share of world export trade in sugar.
2.25 He furthermore argued that the Community system for granting refunds on exports of sugar and its application were inconsistent with commitments under Part IV of the General Agreement. The increased Community sugar exports effected through the use of subsidies, had severely depressed world market prices, and had displaced Brazilian exports and led to reduced sales opportunities and to reduced export earnings for Brazil, contrary to the provisions of Article XXXVI:2. By enlarging its market share, the European Communities had failed to make positive efforts as indicated in Article XXXVI:3, thus impeding that Brazil could be secured a share of the growth in international sugar trade compatible with its needs of economic developments. By refusing to participate in the International Sugar Agreement, 1977, and restricting its exports accordingly, the European Communities had seriously jeopardized the attainment of the objectives of that Agreement, contrary to the provisions of Article XXXVI:4. Furthermore, concerning sugar, the European Communities had not acted in a manner as to give effect to the implementation of the relevant principles and objectives contained in Article XXXVI, as stipulated in Article XXXVI:9. Finally, the Brazilian representative argued that by maintaining its sugar subsidy system, resulting in increased exports and reduced imports, and by refusing to participate in the International Sugar Agreement, 1977, the European Communities had disregarded the undertakings set forth in Article XXXVIII:2(a) and (e).
2.26 Referring to document L/4833 ("European Communities - Refunds on Exports of Sugar - Complaint by Australia - Report of the Panel"), the representative of the European Communities argued that there was no reference to any infringement by the European Communities of the provisions of Article XVI:3.
2.27 With respect to the opinion expressed by the representative of Brazil that the Community system of export refunds for sugar was inconsistent with Part IV and in particular Article XXXVI:2, 3, 4 and 9 and Article XXXVIII:1, 2, 2(a) and 2(e), the Community representative recalled the very considerable Community efforts made in favour of developing countries. These efforts comprised an innovative aid policy which through the STABEX system guaranteed export receipts for a number of least developed countries. In the field of primary commodities, the European Communities had always pursued an active and constructive policy towards the setting up of international agreements. With regard to Community participation in the International Sugar Agreement, 1977, there was no use in recalling the reasons for the present state of affairs.
2.28 He furthermore argued that the provisions of Article XXXVI constituted principles and objectives and could not be understood to establish precise, specific obligations. It was therefore not possible by definition to ascertain that these principles had been infringed through the application of any specific measure. He also argued that it was not possible to imagine that the Community system of export refunds for sugar could have objectives contrary to those of Article XXXVI. Given the legal analogy between the provisions of Articles XXXVI and XXXVIII, the comments made in connection with the former are also valid for the latter.
III. Factual aspects
(a) The sugar market system of the European Communities2
3.1 The common organization of the market in sugar was originally established by Regulation (EEC) No. 1009/67 of the Council, of 18 December 1967. The single market in sugar came into force on 1 July 1968. Regulation (EEC) No. 1009/67 remained applicable until the end of the 1974/75 sugar year, when it was replaced by a new basic regulation (Regulation (EEC) No. 3330/74 of the Council of 19 December 1974) applicable to the sugar years 1975/76 to 1979/80.
3.2 The Panel's examination of the Community system was, inter alia, focused on Regulation (EEC) No. 3330/74 of the Council of 19 December 1974 on the common organization of the market in sugar as last amended by Regulation (EEC) No. 1396/78 of 20 June 1978; Regulation (EEC) No. 766/68 of the Council of 18 June 1968 laying down general rules for granting export refunds on sugar, as last amended by Regulation (EEC) No. 1489/76; and Regulation (EEC) No. 394/70 of the Commission of 2 March 1970 on detailed rules for granting export refunds on sugar, as last amended by Regulation (EEC) No. 1467/77. A description of some major provisions is given below, which is however not exclusive with respect to the elements taken into consideration by the Panel.
3.3 The common agricultural policy on sugar has two main objectives: to ensure that the necessary guarantees in respect of employment and standards of living in a stable market are maintained for Community growers of sugar beet and sugar cane; and to help guarantee sugar supplies to the entire Community or to one of its regions. In order to achieve those objectives, the common organization of the market in sugar introduces a single system of internal prices and a common trading system at the external frontiers of the Community (Regulation No. 3330/74, preamble).
3.4 Within the Community, the price level is established each year and is linked to a "target price" for white sugar (standard quality, unpacked, ex-factory, etc.) which is determined for the Community area having the largest surplus (Article 2), i.e. for the area in which the price is usually lowest.
3.5 At the operational level, the "intervention price" - lower than the target price (see Article 11) - is the price at which the intervention agencies of the member States are required to buy in sugar offered to them which has been manufactured in the Community (Article 9). This price is fixed at the same time as the target price and covers the same period, the same product and the same area. For other areas, however, derived intervention prices are fixed in the light of the regional variations which, given a normal harvest and free movement of sugar, might be expected to occur in the price of sugar under natural conditions of price formation (Article 3). In fact, the earnings of the sugar industry are determined by prices at, or very near to, the intervention price.
3.6 Lastly, by the same procedure, a minimum price is fixed for each producing area, payable by the manufacturer to beet producers at a specified delivery stage and for a specified quality. The minimum price is derived from the intervention price for white sugar in the area in question, i.e. it is adjusted by fixed values identical for the entire Community representing such factors as the processing margin, the yield, and certain additional costs and receipts (Articles 4 and 5). Conditions for purchasing sugar cane are fixed only in the absence of agreements within the trade between producers and manufacturers.
3.7 Different minimum prices are established depending on whether the beet delivered is or is not within the basic quota (Articles 4 and 28). For, since the price system is designed to influence the production of sugar beet and sugar cane (see preamble), there is a system of sugar quotas. A basic sugar quota is allotted to each undertaking within the basic quantities of sugar assigned to each member State or area of the Community (Article 24). This basic quota (quantity A) may be increased by a quantity B, which has a linear annually determined relationship to quantity A; the sum of these two quantities (A and B) constitute the maximum quota in any given marketing year. The determination of this quantity takes into account the trends in production and marketing opportunities (Article 25). Quantity C is the quantity produced in excess of the maximum quota (see Article 26).
3.8 These quotas are of decisive importance for the application of the system of internal prices, since for quantity A (basic quotas), the beet producer receives not less than the minimum beet price and the manufacturer receives not less than the intervention price. For quantity B, the minimum price of the producer is lower and the manufacturer is required to pay the State a production levy (Table 3) which in part is born by the beet grower. This levy is designed to cover or, as the case may be, to limit any costs incurred by the Community in marketing the quantity of quota sugar produced beyond the so-called guaranteed quantity.3 The production levy may not, however, exceed 30 per cent of the intervention price (Article 27). For quantities of beet exceeding the maximum quota, manufacturers, if not otherwise required by the regulations, determine prices to beet producers in the light of conditions on the world sugar market. Subject to certain conditions, an undertaking may carry forward that part of its production which is outside the basic quota, up to a maximum of 10 per cent of the basic quota, to the following marketing year (Article 31).
3.9 The quotas also have a function in the common trading system, in that the quantity C must be exported (unless there is a shortage within the Community) and does not entitle the exporter to a refund (Articles 19 and 26).
3.10 The trading system with third countries is designed to prevent price fluctuations on the world market from affecting prices ruling within the Community. It does so by a system of import levies and export refunds designed to cover the difference between the prices prevailing outside and inside the Community when transactions - imports or exports - take place with third countries (preamble).
3.11 As regards imports, the system operates on the basis of a "threshold price" for white sugar, raw sugar and molasses fixed each year for the entire Community. It is based on the target price for the Community area having the largest surplus plus charges for transport from that area to the most distant deficit area (Article 13).
3.12 In the case of imports, a levy is charged which is equal to the threshold price less the import price (Article 15). This import price is either a c.i.f. price fixed in advance or, if it is less, the offer price in the case in question (Article 14). Where, on the other hand, the import price (c.i.f. price) is higher than the threshold price and the supply situation so requires, a subsidy for imports may be granted (Article 17).
3.13 Contrariwise, to the extent necessary to enable sugar to be exported, a refund may be granted to cover the difference between the world market price and prices within the Community (Article 19), i.e. in practice, the intervention price plus all the costs and charges involved in transporting the sugar from the factory and putting it in the f.o.b position ready for export (see for example Article 3 of Regulation (EEC) No. 766/68).
3.14 These refunds are granted only for sugar obtained from beet or cane harvested within the Community or imported under the Lomé Convention, the Cane-Sugar Agreement concluded with India and the preferential arrangements with the Overseas Countries and Territories (Regulation (EEC) No. 766/68).
3.15 Depending on the methods of application, export refunds are granted either under a general procedure, or by way of competitive tender.
3.16 According to the general rules, periodic refunds are to be fixed every two weeks. The fixing takes into account such elements as the situation on the Community and world markets in sugar, in particular the intervention price, transport costs, trade expenses and packing charges, quotations on the world market, and the economic aspect of the proposed exports (Regulation (EEC) No. 766/68, Article 3).
3.17 The amount of the refund may also be fixed by tender. As a matter of fact, most exports of sugar with an export refund are authorized under the tender procedure (Table 3). In that case a maximum amount of the refund is fixed, taking account of the situation within the Community with regard to the supply situation and prices, prices and potential outlets in the world market and costs incurred in exporting sugar. Any application for a refund which exceeds the maximum fixed is to be rejected. For other applications, the amount of the refund will be that appearing in the respective application (Regulation (EEC) No. 766/68, Article 4). The maximum amount determines also, indirectly, the quantity assigned for each tender.
TO CONTINUE WITH REFUNDS ON EXPORTS OF SUGAR COMPLAINT BY BRAZIL
1 With respect to quantitative aspects related to "displacement" and "reduced sales opportunities", see under (b) above.
2 Annex Tables V to IX graph 1 and Table 3 give further details on Community sugar prices, export refunds, exports, production and consumption.
3 The guaranteed quantity is equal to the human consumption in the Community less the quantity imported on preferential terms (e.g. Lomé) but may in no case be less than quantity A.
