31 March 1992

Production Subsidies and the Decoupled Nature of the Direct Payments

44. The Community submitted that the production subsidies which had been found to impair the oilseeds tariff concessions by protecting producers completely from the movement of prices of imports have been replaced with a new system of decoupled income support payments to individual producers who sow oilseeds with the intention of harvesting. In the view of the Community it would have been in compliance with the original Panel's conclusions on impairment if producers had only been minimally exposed to the movement of prices of imported oilseeds. Instead, the Community had gone much further by abolishing the elements which gave rise to the original Panel's conclusions and by introducing an income support system in place of the price support system. Thus each of the following elements had been abolished:

45. The Community explained that the following features of the new system of partial income support involved payments made directly to individual producers that are:

In this connection the Community stressed that the main points of the new system of direct payments are: firstly, that payments are made directly to individual producers for an allocation of land, since the producer is not obliged to market a commercial crop of oilseeds in order to receive payments; secondly, the amount of the payment is not related to the production, yield or price obtained by individual producers; and thirdly, at the time of sowing individual producers have no certainty about the yield, production, price or direct payment they will receive, nor do producers have any assurance of a guaranteed minimum return per tonne.

46. The United States considered that the direct payments under the new support system could in no way be treated as "decoupled" because they are linked to production and distort trade. The United States also noted that these payments would fail to meet the more detailed tests set out in the Draft Final Act under negotiation in the Uruguay Round. In the view of the United States the direct payments are fundamentally linked to the "type or volume of production" undertaken by the producer. In order to qualify for payments a producer has to be engaged in the production of oilseeds. Under the new support system a producer also has to file a "detailed cultivation plan for his holding showing the land to be used for cultivating oilseeds", or else the producer must have a "cultivation contract with an approved first buyer" and have actually sown the seed on the designated acreage with the intent to harvest. Moreover, under Article 4 of Regulation 3766/91 eligibility for final payment is conditioned on actual harvest of the crop. The Community payments are therefore related to, and based on, the prices applying to current production, with the observed reference price being adjusted for actual market prices. The payments are also related to the factors of production currently employed, since payments are tied, among other things, to the use of land for oilseeds.

47. In the view of the United States the production subsidies provided under the new support system distort producers' production decisions and the incentives for the use of the producers' land. They therefore provide artificial incentives to devote land to the production of oilseeds. Producers would therefore continue to make production decisions on the basis of the artificially high returns guaranteed at approximately twice the world price, rather than on the basis of expected market returns.

48. The Community considered the arguments of the United States regarding the decoupled nature of the new system of direct payments to be incorrect and irrelevant. The Community could not be expected to implement a new support system in advance of the outcome of the Uruguay Round and at the same time be expected to comply with a draft Uruguay Round definition of decoupling that had not been approved. The new system nevertheless represented a substantial move in the direction of what was proposed for the future, notably the lack of any direct link with current production, yields, or individual performance and the absence of any guarantee with respect to prices or returns. In the Community's view the irrelevancy of the United States arguments on the decoupled nature of the payments derived from the fact that, in any event, all that the Community was required to do in terms of the Conclusions of the original Panel was to avoid protecting producers "completely" from the movement of prices of imports. However, in the view of the Community, it had done more than simply follow a literal interpretation of the recommendations and rulings of the original Panel and had done so earlier than originally undertaken.

Exposure to the Movement of Import Prices

49. The United States submitted that Community producers would not be exposed to the movement of import prices in any economically meaningful way under the new system of support, because producers were guaranteed a minimum level of return on average of about Ecu 313 per tonne, or approximately twice the Ecu 163 medium term world market reference price calculated by the Community, regardless of the trend of world market prices. In the view of the United States the 8 per cent franchise was essentially meaningless since the total level of returns (market price plus direct payments) would not vary by more than 4 per cent and within a relatively narrow fixed range of, on average, between Ecu 313 and Ecu 339 per tonne, which would be well above the Community's medium term projection of world market prices. Moreover, whatever undercompensation occurs where observed market prices are less than 8 per cent below the Ecu 163 reference price would be counterbalanced by the overcompensation that would occur where observed market prices are less than 8 per cent above the reference price. Thus, in the view of the United States, while returns might vary marginally from year to year, Community producers could be expected, on average, to obtain returns equivalent to approximately twice the world price and would, in practice, not be exposed to the movement of world market prices. In these circumstances the United States did not consider that the 8 per cent franchise would diminish the impairment of the tariff concessions resulting from the high level of subsidy. The effective adjustment of direct payments in response to market prices would therefore prevent the tariff concessions having any impact on the competitive relationship between domestic and imported oilseeds.

50. The Community considered that these arguments were false because under the new support system domestic oilseeds would have to be marketed without the benefit of market price support instruments in a market dominated by imports and by extremely volatile world market prices. The price at which a producer sells his harvest would depend on prices ruling on the day of sale, which would generally be no more than half, or even less, of what he obtained under the former support system. The direct payments received by producers would only be adjusted if average market prices deviated by more than 8 per cent of the reference price. Since the observed reference price is calculated at the end of January of the marketing year and therefore does not cover prices ruling after that date, and because only the net average is taken into account, individual producers may well sell at prices outside the Ecu 150176 franchise band (Ecu 163 plus or minus 8 per cent) without this leading to an adjustment of the level of direct payments and without there being any question of a minimum return to producers of at least Ecu 313 per tonne, or any 4 per cent limit to variations in total returns, as asserted by the United States.

51. In support of this argument the Community cited the example of a producer with an output of 4 tonnes per hectare, which would be above the designated yield for the production region concerned. After taking account of transport and conditioning costs, the net price received would be Ecu 123 per tonne (ruling market price Ecu 148 per tonne less Ecu 25 costs to port area). The producer's gross return per tonne ex post, consisting of Ecu 492 realized from sale (net market price Ecu 123 x 4) plus Ecu 521 from the direct payment (corrected for 1 per cent net deviation of Ecu 148 market price from Ecu 163 reference price), would be Ecu 253 per tonne rather than Ecu 313 as submitted by the United States. The Community also pointed out that if the price fluctuations which characterized the 1987/88 to 1990/91 period were to recur, producers could be exposed to price reductions for merchandise delivered to port areas of between 25 and 75 per cent, depending on the particular oilseed concerned, without there being any adjustment of direct per hectare payments.

52. In the view of the Community the foregoing was sufficient to illustrate that under the new system there is no assured return per tonne for an individual producer who sows oilseeds and that producers returns are determined largely by market prices resulting from competition with other Community producers and imported oilseeds. In this new situation the mechanism for adjustments to direct payments is designed to act as a safetynet and to respond to sustained deviations in market prices. The Community concluded that any assertion that producers would not be exposed to the impact of market prices in any economically meaningful way was therefore at variance with market realities, unless there had been a sudden conversion of the United States to an economic theory under which price levels and price volatility are irrelevant to production decisions.

53. The United States observed that in examining the new support system, it is necessary to consider total returns to the producer, which consist of the direct government payment as well as returns from the market, and that it is misleading to ignore the returns to the producer from the direct payment. The United States further contended that the operation of the provisions for adjustments to the per hectare payments as described by the Community was misleading, since average world market price fluctuations in seven of the last ten years had exceeded the 8 per cent franchise. In the view of the United States the new system effectively creates an income floor involving a return, on average, of at least Ecu 313 per tonne, since even if prices are driven down to close to zero levels Community producers would receive a return of, on average, at least Ecu 313 per tonne. In the case of the example given by the Community and on the basis of its reply to the related Panel question, the producer would receive a total return (subsidy payment plus farm gate price) of 195 per cent of the Rotterdam price and 234 per cent of the farm gate price. In all these circumstances the United States considered that Community producers would continue to be completely protected from the movement of import prices under the new system.

54. The Community considered that the United States analysis of the new support system was simplistic in that it was based on averages which bore little, if any, relation to the new situation in which individual producers would be exposed to and influenced by world market prices. Individual producers would not be compensated for any or all low prices received but only partially for sustained and substantial average price changes. In the view of the Community the new support system would lead many producers to reassess the value of oilseeds cultivation in their crop rotation.

55. The United States maintained that the use of averages in this context was an accurate means of analysis since for every example of a producer receiving less than the average, there must be countervailing examples of producers receiving more than the average in order for the figures to be true averages. The United States queried whether the fact that direct payments are to be adjusted annually rather than on a continual basis, that payments to individual producers are not determined by the actual size of harvest, and that there were no incentives to strive for higher yields, are supposed to indicate that the new system could have been constructed in an even more trade distortive manner. However, in the view of the United States, none of this altered the conclusion that the new system as promulgated will continue to guarantee returns that are substantially higher than world market levels, will continue to artificially induce production and will continue to impair the tariff concessions.

Production Incentives and Maximum Guaranteed Areas

56. Moreover, in the view of the United States the system of Maximum Guaranteed areas and the related prorata penalties, which involves an increase of 700,000 hectares in the total area eligible for direct payments in 1992/93 compared to actual 198991 levels, would not affect the production distorting effect of the subsidies.

57. The Community submitted that the net impact of the changes in support could be a significant reduction in production resulting from a combination of reduced plantings and reduced yields, as illustrated by its latest estimates of current rapeseed plantings. Moreover, if plantings of any oilseed increase, the direct payments to each individual producer would be decreased as a result of the prorata Maximum Guaranteed Area penalties. It was neither expected nor assumed that plantings of oilseeds would increase. Nor was it expected that plantings would remain at the levels of recent years. While the new system could have no production targets as such, the changes taken overall including the arrangements relating to Maximum Guaranteed Areas would be likely, in the view of the Community, to remove any undue stimulus to high yields and hence to damp down production levels. Community expenditure on the oilseeds programme was also projected to decline by about 25 per cent compared to recent levels.

58. The Community also noted that as the original Panel considered that data on production and trade flows are not relevant considerations, it would be inconsistent to expect assurances on the volume of future production. As regards the increase in Maximum Guaranteed Areas relative to actual plantings, the Community pointed out that, after allowing for specific commitments or situations (Spain, Portugal for sunflower seed, and the integration of plantings in the former East Germany), the guaranteed areas approximate actual plantings for harvest in 1991/92.

59. The United States submitted that the Community's assertion that the new support system has no production-inducing intent could not be seriously credited having regard to public statements by the Community that the new system was designed to maintain returns for oilseed producers at levels that would prevent a shift from oilseeds to cereals production. In this regard the United States noted that in response to a question posed by the Reconvened Panel Members the Community stated that an underlying justification was the avoidance of the reallocation of 5 million hectares of arable land (currently devoted to oilseed production) to cereals production. In the view of the United States the new system is designed to ensure that oilseeds, a crop for which the Community is a net importer, are not replaced by a product in surplus such as cereals. Moreover, the United States considered that, in effect, the new oilseed support system is designed to ensure a high level of return that, as was evident from the Community's reply to a question put by the Panel members, will provide the same protection and incentives for Community oilseed production that the variable levy and intervention systems provide for cereals.

60. The Community explained, in response to the Panel question referred to above, that, as cereals were widely cultivated throughout the Community, it was necessary in order to avoid stimulating interest in the cultivation of oilseeds, to take a realistic and reliable basis as a point of departure for estimating the return per hectare in Europe which would be comprehensible throughout Europe. As cereals were the most common crop in Europe, the return per hectare of cereals was chosen as the basic historic reference for a per hectare oilseeds return. However, this point of departure did not purport to establish a relationship between returns to producers of cereals and returns to producers of oilseeds, as both will be treated differently and will evolve in a totally disconnected manner. Community oilseed producers would thus be able to appreciate that the average benefits to be expected are: less than in the past; less than for growing cereals; and are dependent on import prices, because all market price support instruments have been abolished.

61. Finally, the Community drew attention to the fact that since 1979, imports of soyabeans and soyameal had increased by 5.2 million tonnes, from 15.4 to 20.6 million tonnes (expressed in soyameal equivalent) and that over the same period imports from the United States had declined by 4.5 million tonnes, whereas imports from other sources had increased by more than 9 million tonnes. The Community submitted that, in view of these developments, the erosion of the United States position as a supplier to the Community market was not due to Community policies but to other factors.

Submissions by Other Contracting Parties

Argentina

62. Argentina, noting that oilseeds accounted for 20 per cent of its export revenue, submitted that the impairment of tariff concessions had not been eliminated because: (i) production subsidies are maintained and the provisions of Regulation 3766/91 tend to ensure that the level of production is maintained; (ii) both production and areas eligible for subsidies are increased (by 27 per cent compared to the year immediately prior to the adoption of the Oilseeds Panel Report); and (iii) the relationship between domestic subsidies and the world price had not been reduced and, moreover, the arrangements for adjusting direct payments in response to world market prices ensures that domestic production of oilseeds continues to be insulated from the movement of import prices.

63. With regard to compliance with the original Panel's findings under Article III, Argentina noted that products such as linseed would continue to be governed by the provisions of the former support system that had been found to be inconsistent with Article III:4. Argentina also noted that in the system established by Regulation 3766/91, the reference to the contract with the first approved buyer and the proof of sale for the producer to receive additional payments, might signify that bargaining leverage is given to such buyer from which he can derive economic benefits; this would therefore give rise to a preference for processing domestic raw materials rather than imported products. In other words, the inconsistency with Article III:4 of the General Agreement could persist.

Australia

64. Australia considered that the issue for the Panel members was whether the revised system will allow the tariff concessions to have any impact on the competitive relationship between domestic and imported goods, and that this issue should not be decided solely on the basis that one form of producer subsidy is more GATT consistent than other forms of producer subsidy. In the view of Australia a support scheme reasonably expected by the United States at the time the concession was granted could also be expected to apply evenly at all points of world price between zero and infinity. The arrangements in the new Regulation ensure that this will not be the case, causing producers to be protected completely from the movement of prices for imports that take place below 8 per cent of the national reference price. At these points the concession has no value and is therefore impaired. With reference of the orderly marketing bonus provided for in Article 4:6, Australia noted that experience with similar private storage aids in the EEC beef sector demonstrated that producers can secure significantly higher payments than by selling into public intervention (which was available to Community oilseeds producers under the former system). Australia submitted that the European Community subsidy scheme does not conform to the criteria set by the Panel established to consider the United States initial complaint. Australia therefore concluded that the impairment of the United States zero tariff concessions will continue under the new Community arrangements.

Brazil

65. Brazil, noting that oilseeds provide one of its major sources of export revenue, considered that the new Community support system would not effectively expose Community producers to world price movements since final regional reference amounts will be maintained for fluctuations in world prices outside the 8 per cent predicted margin (upwards or downwards) in relation to the projected reference price of Ecu 163 per tonne. Brazil considered that the new Community support system for oilseeds, although modified in relation to the previous one, continues to be a means of powerful protection and that there remains a case of impairment in the light of the relevant GATT provisions.

Canada

66. Canada noted that whereas the Community market for rapeseed (for which Canada was granted Initial Negotiating Rights at a zero bound rate) had increased by 600 per cent over the last twenty years, Canadian exports of rapeseed to the Community had fallen from a peak of 514,000 tonnes in 1970/71 to 5,000 tonnes in 1990/91. Canada considered that the new direct payments were production based; that the Community market would continue to be isolated from the world market as a result of the arrangements for adjusting direct payments in relation to changes in world market prices; that the new support system does not limit production; that the provision relating to maximum guaranteed areas, which only affect part of the producers returns would not constitute an effective penalty and that, consequently, Community rapeseed production will continue to increase.

67. Canada concluded that Community producers will continue to expand output beyond current EC rapeseed crushing capacity and that the Community support programme does not restore the competitive relationship between domestic and imported oilseeds and thus does not alter the nullification or impairment found to exist under the previous oilseeds support programme. Until such time as real steps were taken to address the imbalance in the competitive relationship caused by the Community's oilseed support programmes, the tariff concession negotiated in 1962 would continue to have no effect. 68. The Community recalled that it had complied with the letter and the spirit of the recommendations and rulings on oilseeds in paragraphs 155 and 156 by the abolition of the elements which gave rise to these conclusions: viz

Moreover, the Community had gone further than the recommendations and rulings of the Panel in that the new direct payment system to individual producers is per hectare sown and is not based on current production, individual production, neither current or future yields nor individual yields and not based on the price per tonne received by an individual producer. In particular an individual producer was not compensated for price movements. The Community also considered for the reasons earlier outlined that the direct payments are as decoupled from current production as it is reasonable to expect and in consequence disagreed with the assertions to the contrary by Argentina, Australia, Brazil and Canada.

Introduction

69. The legal issues before the present Panel arise essentially from the following facts. In June 1988, the Council agreed to establish a panel (the "original Panel") to examine the dispute referred to the CONTRACTING PARTIES by the United States concerning EEC payments and subsidies paid to processors and producers of oilseeds and related animalfeed proteins. The Report of that Panel (the "Oilseeds Panel Report") was adopted on 25 January 1990. The recommendations and rulings in that Report concerned: a request made to the Community by the CONTRACTING PARTIES to bring the Community Regulations providing for payments to seed processors conditional on the purchase of oilseeds originating in the Community into conformity with Article III:4 of the General Agreement; a finding that the Community's system of support for oilseeds impaired the tariff concessions on oilseeds accorded by the EEC in 1962; a suggestion by the CONTRACTING PARTIES that the Community consider ways and means to eliminate the impairment of its oilseed tariff concessions; and a recommendation by the original Panel that the CONTRACTING PARTIES take no further action under Article XXIII:2 in relation to the impairment of the tariff concessions until the Community had had a reasonable opportunity to adjust its Regulations to conform to Article III:4.

70. Since the Oilseeds Panel Report was adopted, the Community has enacted a changed subsidy régime for producers of oilseeds, in Council Regulation (EEC) N°3766/91 of 12 December 1991. The principal differences between the system of support that was the subject of the Oilseeds Panel Report (the "former system") and the new system of support introduced under Regulation 3766/91 (the "new system") are as follows:

71. The present Panel, comprising the Members of the original Oilseeds Panel, was called upon to examine whether the measures taken by the Community in Council Regulation (EEC) N°3766/91 comply with the recommendations and rulings, as expressed in the Conclusions (paragraphs 155157) of the Oilseeds Panel Report as adopted on 25 January 1990, and to provide such findings as will assist the CONTRACTING PARTIES (paragraphs 3 and 4 above, and Annex B hereto refer).

72. The Panel considered that its task was therefore: to examine whether the Community had brought the regulations examined in the prior case into conformity with Article III:4 of the General Agreement: to examine whether the impairment of the Community's tariff concessions on oilseeds had been eliminated; to review whether the Community's measures had responded satisfactorily to the recommendation in Paragraph 157; and to provide such findings as will assist the CONTRACTING PARTIES. The Panel examined the measures taken by the Community in the light of the submissions and explanations made by the parties, and in reaching its findings was guided by established practice under the GATT dispute settlement procedures.

Paragraph 155: National Treatment: Article III

73. The original Panel found, in paragraph 155 of its Report, that "the Community Regulations providing for payments to seed processors conditional on the purchase of oilseeds originating in the Community are inconsistent with Article III:4 of the General Agreement, according to which imported products shall be given treatment no less favourable than that accorded to like domestic products in respect of all regulations affecting their internal purchase. The Panel recommends that the CONTRACTING PARTIES request the Community to bring these Regulations into conformity with the General Agreement."

74. The facts before the Panel, which were not challenged by the United States, indicated that in respect of the products covered by Regulation 3766/91 (soya beans, rape seed, colza seed and sunflower seed), Article 1(2) of that Regulation provided that the new system would be applied with effect from those plantings intended for harvest in 1992, thereby superseding the provisions relating to oilseeds aids contained in Regulation No. 136/66/EEC and Regulation (EEC) No. 1491/85. The Panel noted that Regulation 3766/91 did not provide for any subsidy payments to processors, and that the Community had stated that this Regulation had abolished intervention purchases and aids to processors for oilseeds harvested from and after 1 July 1992. Thus, these facts indicated that the payments to processors conditional on the purchase of domestic oilseeds that had given rise to the inconsistency found by the original Panel had been superseded, there being no provision for such payments under the new support system other than in the transitional arrangements provided for in Article 10.

75. The Panel noted that Argentina had raised the possibility that the provisions of Regulation 3766/91 relating to approved first buyers (Article 4:4(b)) in combination with the provisions relating to proof of sale as a condition for the receipt of additional payments (Article 4:6) might confer bargaining leverage on such buyers, thus reviving the possibility of a preference for processing domestic raw materials rather than imported products. The Panel noted, however, that the United States, which had not submitted any arguments in relation to paragraph 155 of the Oilseeds Panel Report, had confirmed that it did not claim that the measures taken by the Community were inconsistent with Article III. In these circumstances the Panel suggests that the CONTRACTING PARTIES take note of the Community's statement that the new support system for oilseeds under Regulation No. 3766/91 was intended to eliminate any inconsistency with Article III:4 by the discontinuation of payments to processors conditional on the purchase of domestic oilseeds.

Paragraph 156: Nullification or Impairment of Tariff Concessions

76. The Panel then turned to paragraph 156 of the Oilseeds Panel Report, in which the original Panel concluded that "benefits accruing to the United States under Article II of the General Agreement in respect of the zero tariff bindings for oilseeds in the Community Schedule of Concessions were impaired as a result of the introduction of production subsidy schemes which operate to protect Community producers completely from the movement of prices of imports and thereby prevent the tariff concessions from having any impact on the competitive relationship between domestic and imported oilseeds. The Panel recommends that the CONTRACTING PARTIES suggest that the Community consider ways and means to eliminate the impairment of its tariff concessions for oilseeds."

77. The Panel would note at the outset that the Conclusions of the original Panel cannot be severed from the reasoning underlying those Conclusions. The Panel recalled that even if subsidies are permitted under the General Agreement they are nevertheless recognized as being capable of distorting international trade and impairing the benefits accruing to contracting parties under the General Agreement in unacceptable ways. Thus the CONTRACTING PARTIES recognized as early as March 1955 that, for the purposes of Article XXIII, a contracting party which has negotiated a concession under Article II is presumed, failing evidence to the contrary, to have a reasonable expectation that the value of the concession will not be nullified or impaired by the subsequent introduction or increase of a domestic subsidy on the product concerned (1955 Review Session BISD 3S/222, 224, as reconfirmed in 1961, BISD 10S/201, 209). The original Panel therefore found:

TO CONTINUE WITH "EUROPEAN ECONOMIC COMMUNITY PAYMENTS AND SUBSIDIES PAID TO PROCESSORS AND PRODUCERS OF OILSEEDS AND RELATED ANIMALFEED PROTEINS"

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