 
  WORLD TRADE  
ORGANIZATION  WT/DS265/R 
15 October 2004 
 (04-4209) 
 Original:  English 
  
 
     
 
 
EUROPEAN COMMUNITIES – EXPORT SUBSIDIES 
ON SUGAR 
 
COMPLAINT BY AUSTRALIA 
 
 
Report of the Panel  
 
 
  WT/DS265/R 
 Page i 
 
 
 TABLE OF CONTENTS 
Page  
I. INTRODUCTION ................................................................................................................... ....................1  
1. Terms of reference ............................................................................................................. ........1  
2. Panel composition.............................................................................................................. .........1  
3. Third pa rties.................................................................................................................. .............2  
4. Organization al meet ing......................................................................................................... .....2 
5. Meetings with the partie s and third parties.............................................................................2  
6. Reports ........................................................................................................................ ................2  
II. PRELIMINARY RULINGS BY THE PANEL AND OTHER ISSUES .................................................3  
1. Notification of thir d parties' interest........................................................................................ 3 
2. Third parties e nhanced rights.................................................................................................. .3 
3. Request for additional working procedur es for the protection of proprietary 
information .................................................................................................................... ............4  
4. Amicus curiae .............................................................................................................................6  
5. Breach of conf identiality...................................................................................................... ......6 
III. FACTUAL ASPECTS ................................................................................................................ .................7  
1. Product coverage............................................................................................................... .........7  
2. Quotas ......................................................................................................................... ................7  
3. Intervention price............................................................................................................. ..........8  
4. Basic and mini mum pr ices ....................................................................................................... .8 
5. Basic production levy and B levy ..............................................................................................9  
6. Import and ex port li cences..................................................................................................... ...9 
7. Export refunds................................................................................................................. ...........9  
8. Management Committee for Sugar ..........................................................................................9  
9. Commitments .................................................................................................................... .........9  
10. Preferential import  arrangements..........................................................................................10  
11. Review ......................................................................................................................... ..............10  
IV. MAIN ARGUMENTS ................................................................................................................. ..............10  
A. PARTIES ' REQUESTS FOR FINDINGS ......................................................................................................10  
B. TERMS OF REFERENCE ..........................................................................................................................14  
1. Provisions and meas ures at issue ............................................................................................14  
2. Procedural matters............................................................................................................. ......17  
C. BURDEN OF PROOF ..............................................................................................................................1 7 
1. Quantitative  aspect............................................................................................................ .......18  
2. Export subsidization aspect.................................................................................................... .19 
D. C SUGAR ............................................................................................................................... ...............20  
1. Article 9.1(c) of the Ag reement on Agriculture .....................................................................20  
(a) "Payment" ...................................................................................................................... ...................20  
(b) "Financed by virtue of  governmental  action".................................................................................... 31 
(c) "payment on the e xport"........................................................................................................ ............35  
2. In the alternative, Article 10.1 of the Agreement on Agriculture ........................................39  
(a) Item (d) of the Illustrative List of Expor t Subsid ies .......................................................................... 39 
(b) Article 1.1 of the SCM Agreement ....................................................................................................42  
3. Good faith ..................................................................................................................... ............45  
(a) Exports of C sugar were consistent  with the reduc tion commitm ents ...............................................45  
(b) Good faith an d estoppel........................................................................................................ .............53  
E. ACP/INDIA "EQUIVALENT " SUGAR ........................................................................................................60  
1. Article 9.1(a) of the Agreement on Agriculture .....................................................................60  
2. Exemptions through unilateral insertions in Schedules........................................................62  
3. Application of the footnote to "ACP/India equivalent sugar" .............................................73  
4. Good faith and estoppel ........................................................................................................ ...76 
F. ARTICLE  3 OF THE SCM A GREEMENT ...................................................................................................78  
G. NULLIFICATION OR IMPAIRMENT .........................................................................................................85  WT/DS265/R 
Page ii  
 
 V. ARGUMENTS BY THIRD PARTIES..................................................................................................... 89 
VI. INTERIM REVIEW................................................................................................................. ...............111  
A. EDITORIAL AND OTHER CHANGES .......................................................................................................111  
B. TERMS OF REFERENCE ........................................................................................................................111  
C. THERE ARE NO "C SUGAR PRODUCERS " AND NO "C BEET GROWERS " AS SUCH ....................................112  
D. A REFERENCE TO THE EUROPEAN COMMUNITIES ' COMMITMENTS FOR BUDGETARY OUTLAYS ...........113  
E. PANEL 'S EXERCISE OF JUDICIAL ECONOMY OVER THE SCM CLAIMS ....................................................113  
VII. FINDINGS....................................................................................................................... .........................114  
A. MAIN CLAIMS AND GENERAL ARGUMENTS OF THE PARTIES ................................................................114  
B. PROCEDURAL ISSUES IN THIS DISPUTE ................................................................................................114  
1. The European Communities' challenges of the Panel's jurisdiction under its terms 
of ref erence ................................................................................................................... .........114  
(a) The timing of objections to the Panel's ju risdiction.........................................................................11 5 
(b) The Complainants' requests for establishment of  a panel................................................................116  
(c) Alleged lack of proper identification of the "measures" covered by the claims under 
Article 10.1 of the Agreement on Agriculture .................................................................................119  
(d) Alleged lack of proper identification of "payment s" as distinct measures or distinct claims 
under  Articles 3, 8 (and 9.1(c)) of the Agreement on Agriculture ..................................................119  
(i) Arguments of the parties ....................................................................................................... .119 
(ii) Assessment by the Panel ........................................................................................................ 121 
(e) Alleged lack of proper identification of "claims" under Article 9.2(b)(iv) of the Agreement 
on Agriculture ............................................................................................................................... ..124 
(i) Arguments of the parties ....................................................................................................... .124 
(ii) Assessment by the Panel ........................................................................................................ 124 
(f) Alleged lack of proper identification of claims in relation to Footnote 1 to the EC's Schedule 
(ACP/India sugar).............................................................................................................. .............125  
(i) Arguments of the parties ....................................................................................................... .125 
(ii) Assessment by the Panel ........................................................................................................ 126 
2. European Communities' allegation that the Complainants are "estopped" from 
pursuing this  dispute.......................................................................................................... ...127  
(a) Arguments of the parties ....................................................................................................... ..........127  
(b) Assessment by the Panel ........................................................................................................ .........128  
3. The amicus curiae  of WVZ....................................................................................................131  
(a) Factual ba ckgro und ............................................................................................................. ............131  
(b) Assessment by the Panel ........................................................................................................ .........132  
4. Breach of conf identiality...................................................................................................... ..133 
(a) Factual ba ckgro und ............................................................................................................. ............133  
(b) Assessment by the Panel ........................................................................................................ .........134  
C. ORDER OF ANALYSIS BY THE PANEL ...................................................................................................135  
D. THE EUROPEAN COMMUNITIES ' EXPORT SUBSIDY COMMITMENT LEVELS FOR SUBSIDIZED 
EXPORTS OF SUGAR ............................................................................................................................136  
1. Introduction................................................................................................................... .........136  
2. What is the European Communities' commit ment level in light of  the ACP/India 
sugar Footnote? ................................................................................................................ .....137  
(a) Arguments of the parties ....................................................................................................... ..........137  
(b) Assessment by the Panel ........................................................................................................ .........139  
(i) Introduc tion ................................................................................................................... ........139  
(ii) The obligations of the Agreement on Agricu lture with respect to export subsidies – 
Articles 3, 8 and 9 of the Agreement on Agriculture..............................................................140  
(iii) The interpretation of terms includ ed in WTO Membe rs' Schedules .......................................144  
Provisions of a Member's Schedule shoul d be interpreted as  treaty pr ovisions .....................144  
Effective treaty interpretation ................................................................................................ 146 
(iv) The issue of "conflict" between provisions of a Member's Schedule and provisions of 
the Agreement on  Agriculture................................................................................................147  
(v) Interpretation of the European Communitie s' Footnote 1 on AC P/India s ugar:....................150  
Footnote 1 does not contain any "limitation" on export subsidies of ACP/India sugar..........151  
Footnote 1 does not provide for any commitment for sugar "equivalent" from ACP/India ...154  
Conclu sion ..................................................................................................................... ........155   WT/DS265/R 
 Page iii 
 
 
 Can the ACP/India Footnote be regarded as a second component of the European 
Communities' commitment level that would not be  subject to reduction per se  but that would 
form part of the overall European Communities' commitment level which has been reduced?
............................................................................................................................... ................155  
The ACP/India Footnote does not contain any b udgetary outlays so it cannot consist of an 
export subsidy cons istent with the Agreement on Agriculture ...............................................157  
(vi) Conclusion on the legal value and effect  of the ACP/India sugar Foot note...........................158  
3. Was the European Communities authorized to deviate from the Agreement on 
Agriculture 's basic obligations through a negoti ated departure from the Modalities 
Paper? ......................................................................................................................... ...........158  
(a) Arguments of the parties ....................................................................................................... ..........158  
(b) Assessment by the Panel ........................................................................................................ .........159  
4. Conclusion on the European Communiti es' commitment level for exports of 
subsidized  sugar............................................................................................................... ......163  
E. IS THE EUROPEAN COMMUNITIES EXPORTING SUBSIDIZED SUGAR IN QUANTITIES EXCEEDING ITS 
LEVEL OF COMMITMENT CONTRARY TO ARTICLES 3, 8 AND 9 OF THE AGREEMENT ON 
AGRICULTURE  ?.............................................................................................................................. ....163  
1. The burden of proof of Article 10.3 of the Agreement on Agriculture..............................163  
2. The application of the special rule on th e burden of proof to this dispute........................165  
(a) The quantitati ve aspect........................................................................................................ ............165  
(b) The subsidization aspe cts of the claim ......................................................................................... ...165 
3. Has the European Communities demonstr ated that its exports of ACP/India 
equivalent sugar are not subsidized?...................................................................................165  
(a) Arguments of the parties ....................................................................................................... ..........165  
(b) Assessment by the Panel ........................................................................................................ .........166  
4. Has the European Communities demonstrated  that its exports of C sugar are not 
subsidiz ed?.................................................................................................................... .........166  
(a) Introduc tion................................................................................................................... ..................166  
(b) Arguments of the parties ....................................................................................................... ..........167  
(c) Assessment by the Panel ........................................................................................................ .........168  
(i) The Panel's understanding of the EC sugar  regime...............................................................168  
(ii) Article 9.1(c) of the Ag reement on Ag riculture......................................................................169  
(iii) Does the sale of C beet to C sugar producers constitute a payment on export financed 
by virtue of gove rnmental action? .........................................................................................170  
Is there a payment? ............................................................................................................ ....170  
Is such payment-in-kind through sales of be low-costs C beet made  "on the export"? ...........174  
Is the payment-in-kind through sales of below-cost-C beet " financed by virtue of governmental 
action"  ?............................................................................................................................. ....175  
Conclu sion ..................................................................................................................... ........179  
(iv) Does the cross-subsidization resulting from the EC sugar regime constitute a payment 
on exports by virtue of  governmenta l acti on?........................................................................ 179 
Does the cross-subsidization fro m the EC regime constitute a payment ? ..............................179  
Is the payment on export ? ......................................................................................................184  
Is this cross-subsidization payment financed by virtue of  governmental action ?...................186  
5. Overall co nclusion............................................................................................................. .....188  
6. The interpretation and corr ection of the European Comm unities' Schedule in light 
of the Modalit ies Paper........................................................................................................ .189 
(a) Arguments of the parties ....................................................................................................... ..........189  
(b) Assessment by the Panel ........................................................................................................ .........190  
F. ARTICLE  10.1  OF THE AGREEMENT ON AGRICULTURE .......................................................................191  
1. Arguments of the parties ....................................................................................................... 191 
2. Assessment by the Panel ........................................................................................................ 192 
G. NULLIFICATION OR IMPAIRMENT ........................................................................................................192  
1. Arguments of the parties ....................................................................................................... 192 
2. Assessment by the Panel ........................................................................................................ 193 
H. ARTICLE  3 OF THE SCM A GREEMENT .................................................................................................196  
1. Arguments of the parties ....................................................................................................... 196 
2. Assessment by the Panel ........................................................................................................ 197 
VIII. CONCLUSIONS, RECOMMENDATION AND SUGGESTION.......................................................199  
A. CONCLUSIONS ............................................................................................................................... .....199  WT/DS265/R 
Page iv  
 
 B. RECOMMENDATION ............................................................................................................................200  
C. SUGGESTION BY THE PANEL ...............................................................................................................200  
 
Annex A: List of Exhibits Submitted by the Parties...........................................................................20 1 
Annex B: Scheduled Export Subsidy Commitmen t Levels (Quantities) and Notified Total 
Exports ........................................................................................................................ ..........206 
Annex C: Schedule CXL:  European Communities ...........................................................................207 
Annex D: Requests for the Esta blishment of a Panel .........................................................................208 
  WT/DS265/R 
 Page v 
 
 
 TABLE OF CASES CITED IN THIS REPORT 
 
Short Title Full 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 WT/DS265/R 
Page vi  
 
 Short Title Full Case Title and Citation 
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  WT/DS265/R 
 Page vii 
 
 
 Short Title Full Case Title and Citation 
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 DSU  by 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 DSU  
by 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 Import s 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 WT/DS265/R 
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 Short Title Full Case Title and Citation 
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. 
 
  WT/DS265/R 
 Page 1 
 
 
 I. INTRODUCTION 
1.1 This proceeding was initiated by three complain ing parties, Australia, Brazil and Thailand. 
1.2 In communications dated 27 September 2002, Au stralia and Brazil requested consultations 
with the European Communities pursu ant 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 Europ ean Communities to its sugar industry1.  Australia and Brazil 
held consultations with the European Communiti es 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 XXIII  of 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 Communiti es with respect to certain subsidies provided by 
the European Communities in the sugar sector.2  Consultations were held in Geneva on 8 April 2003 
but failed to resolve the dispute. 
1.4 On 21 July 2003, Australia, Brazil and Thaila nd 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 Di spute 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 Th ailand requested the Director-General to 
determine the composition of the panel, pursu ant 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 com position of the panel by appointing the 
panellists whom the Director-General cons iders most appropriate in accordance with 
                                                     
 
1 WT/DS265/1, G/L/569, G/AG/GEN/52, G/SCM/D47/1 and WT/DS266/1, G/L/570, G/AG/GEN/53, 
G/SCM/D48/1, respectively. 
2 WT/DS283/1, G/L/613, G/AG/GEN/58, G/SCM/D53/1. WT/DS265/R 
Page 2  
 
 any relevant special or additional rules or  procedures of the covered agreement or 
covered agreements which are at issue in th e dispute, after consulting with the parties 
to the dispute.  The Chairman of th e 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, Ca nada, 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 pa nel 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 pa ragraphs 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 (tenta tive) 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 al so 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 m eetings (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 fo r 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 Augus t 2004.  The Panel issued its Final Reports 
to the parties on 8 September 2004.  WT/DS265/R 
 Page 3 
 
 
 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 Novemb er, 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 pa rties to compose the Panel pursuant to Article 8.7 
of the DSU .  The parties agreed to accept Kenya as a thir d party but the Complainants objected to the 
participation of Côte d'Ivoire. 
2.2 Article 10 of the DSU  is silent on when Members need to notify to the DSB their interest in 
participating in any specific dispute as third par ties.  All parties referred to the GATT Council 
Chairman's Statement of June 1994, providing for a ten-day notification period.3  The status of that 
Chairman's Statement had been discussed on sever al occasions at the DSB and the timing of third-
party notifications was the subject of proposals in the context of the DSU  negotiations. 
2.3 The Panel recalled, inter alia,  the Appellate Body's decision in EC – Hormones , which stated 
that "the DSU leaves panels a margin of discreti on to deal, always in accordance with due process, 
with specific situations that may arise in a par ticular case and that are not explicitly regulated."4  In 
addition, with regard to the two requests at issue, the Panel noted that in this particular dispute:  
(a) the selection and composition of the Panel did not appear to have been adversely 
affected;  and 
(b) the Panel process had not been hampered.  
2.4 On the basis of these considerations, the Pa nel 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 doi ng so, the Panel emphasized that its decision was 
specific to this dispute and was not intended to offe r a legal interpretation of  the ten-day notification 
period referred to in the GATT Council Chairman's Statement.  
2. Third parties enhanced rights 
2.5 Prior to the Panel starting work, Mauritius, on behalf of 14 ACP sugar producing countries5, 
requested that the Panel provide the ACP countries w ith extended third-party rights in the proceedings 
of the Panel.  At the preliminary stage of the disput e, i.e. before any submissions had been made to the 
Panel, the Panel was not in a position to assess wh ether the economic situation of any third party 
would be specifically affected by the outcome of this  dispute.  However, in light of the importance of 
trade in sugar for many third parties, the Panel d ecided, in a ruling dated 16 January 2004, as follows:  
"After hearing the parties' views and considering the third parties' written 
communications on this issue, the Panel invited all third parties to attend the entirety of the first substantive meeting as observers ;  to make a written submission to the 
Panel and receive the submissions of the par ties and third parties for that meeting;  
and to present their views orally at a session of that meeting, set aside for that 
purpose." 
                                                     
 
3 GATT Council C/COM/3. 
4 Appellate Body Report  on EC – Hormones , footnote 138. 
5 Barbados, Belize, Côte d'Ivoire, Fiji, Guyana, Jamaica, Kenya, Madagascar, Malawi, Mauritius, 
St. Kitts and Nevis, Swaziland, Ta nzania and Trinidad and Tobago.  WT/DS265/R 
Page 4  
 
 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 co mments 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 da ted 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 substa ntive 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." 
2.7 In considering whether to grant any additional ri ghts to third parties, the Panel believed that it 
was important to guard against an inappropria te blurring of the distinction drawn in the DSU  between 
the rights of parties and those of third parties.  Fu rthermore, the Panel considered that, as a matter of 
due process, it was appropriate to provi de the same procedural rights to all third parties."   
2.8 On behalf of the sugar-exporting ACP countries,  Guyana, on 22 April 2004, requested that 
ACP sugar-producing countries be allowed to "pr esent arguments, including oral statements and 
observations " at the second substantive m eeting of the Panel with the parties. 
2.9 After consideration of Guyana's request on behalf of ACP sugar-p roducing countries, the 
Panel did not see any need to change its decision of  14 April 2004 (see para graphs 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 procedur es 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 proprieta ry information purchased from LMC International 
(LMC) relating to data on EC costs of sugar prod uction 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 confidentia l information to "view-only" prescriptions.   
                                                      
6 On this question, Australia and Thailand jointly sent a written communication to the Panel on 
13 January 2004 and Australia, with the support of Th ailand, sent another written communication to the Panel 
on 19 January 2004.  Finally, Australia, Brazil and Thailand also sent a written communication to the Panel on 
23 January 2004.  WT/DS265/R 
 Page 5 
 
 
 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 th at 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' argumen ts, the Panel decided, in a ruling dated 
27 January 2004, to reject the re quest 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 i ssue 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 th e parties to the dispute.  Nothing in this 
Understanding shall preclude a party to a di spute from disclosing statements of its 
own positions to the public.  Members shall treat as co nfidential 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 disclos ed 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 summa ry 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 out side 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 argum entation 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 
                                                     
 
7 The Panel received written communications from th e European Communities on 3 January 2004 and 
15 January 2004.  A lthough not solicited, the Pane l also received written comm unications from three third 
parties:  Fiji on 16 January 2004;  Mauritius on 16 January 2004;  and Jamaica on 20 January 2004. WT/DS265/R 
Page 6  
 
 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 informatio n 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 parti es 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 statisti cal 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 Conduct
8, it was bound not to disclose, 
in the panel reports, or in any other way, any in formation 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 inform ation if circumstances changed and so warranted 
such exceptional working procedures af ter 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 re presenting 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 re ject the document submitted by WVZ on the grounds, 
inter alia , of due process as well as the late submissi on 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 th e Panel's attention, and requested that the Panel 
"investigate how the breach occurred".  Thailand suppor ted 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 submitte d by the end of the day on 8 June 2004.   
2.23 The European Communities noted that it attached the utmo st 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 con cerns expressed by Brazil.  It noted further that it had 
treated as strictly confidential all informati on 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 reme dy, if such a breach has in fact occurred." 
                                                     
 
8 With regard to the obligation of the Panel (and memb ers of the Secretariat) to respect confidentiality, 
Articles III:2, IV:1 and VII:1 of the Rules of Conduct for the Settlement of Disputes confirm that members of 
the Panel and Secretariat staff assisting the Panel shal l at all times maintain the confidentiality of dispute 
settlement deliberations and proceedings together with any information identified by a party as confidential.  No 
covered person shall at any time use such informati on acquired during such deliberations and proceedings to 
gain personal advantage or advantage for others.  WT/DS265/R 
 Page 7 
 
 
 2.25 The Panel received responses, dated 8 June 2004, from Australia, the European Communities 
(parties), and from India (third party).  All thr ee Members supported the request made by Brazil (see 
paragraph 2.21 above). 
2.26 On 10 June 2004, the Panel requested, in a lette r, 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 orig inal currency nominations if different from the 
nominations in Euros used" in the document. 
2.27 The Panel received a response from WVZ on 15 Ju ne 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 documen t 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 receive d 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 "m ake a full report of this incident to the Dispute 
Settlement Body." 
III. FACTUAL ASPECTS 
3.1 The European Communities established, in 19 68, 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" (t he Regulation), dated 19 June 2001.  The Regulation 
is valid for marketing years 2001/2002 to 2005/2006 a nd 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 pri ce and the minimum price for beet;  A and B quotas as 
well as C sugar; import and export licences; le vies; 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 ar e 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 subsid ies (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 quan tities, 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 
                                                      
9 Article 1 of the Regulation. 
10 Article 10.5 of the Regulation. WT/DS265/R 
Page 8  
 
 proof has been supplied that the C sugar has been e xported within the required time limits, a charge is 
levied on that sugar.
11 
3.5 Sugar production quotas are allocated in the fi rst 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 act ual production during a particular reference 
period.
12 
3.6 The Regulation fixes a basic quota for the en tire 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 produ cer 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 ca rry 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 agri cultural 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 inte rvention 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.  Th e minimum price of A beet has been set at €46.72 
                                                      
11 Article 13 of the Regulation. 
12 Paragraph 11 of the Recital of the Regulation. 
13 Article 11.1 of the Regulation. 
14 Article 11.2 of the Regulation. 
15 Article 12 of the Regulation. 
16 Commission Regulation (EEC) No. 65/82, Article 2. 
17 Article 14 of the Regulation. 
18 Recital 2 of the Regulation.  
19 "Such standard qualities should be average qualities representative of sugar produced in the 
Community and should be determined on the basis of criteria used by the sugar trade."  Recital, 3of the 
Regulation. 
20 Article 2 of the Regulation. 
21 For the definition of "standard quality" of beet, see Annex II of the Regulation. 
22 Article 3 of the Regulation.  WT/DS265/R 
 Page 9 
 
 
 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 pr ice 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 productio n 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 maximu m 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 im port 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 para graph 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 re funds.  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 co st 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 Mana gement 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."   
                                                     
 
23 Article 4 and Article 5 of the Regulation. 
24 Article 21 of the Regulation. 
25 Paras. 1 and 2 of Article 15 of the Regulation. 
26  See paragraph 3 of Article 15 of the Regulation. 
27 Article 27 of the Regulation. WT/DS265/R 
Page 10  
 
 According to the European Comm unities' latest notification (marketing year 2001/2002) to the 
Committee on Agriculture, total exports of sugar am ounted to 4.097 million tonnes (product weight). 
 
10. Preferential import arrangements 
3.14 The European Communities is required to im port 1,294,700 tonnes (white sugar equivalent) 
of cane sugar, called "preferentia l sugar" under Protocol 3 to Anne x 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 amount ed 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 ba lance 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 relate d to the European Communities' measures with 
respect to the common organization of its markets in sugar. 
4.2 Australia requests, for the reasons set out in its subm ission, that the Panel make the following 
rulings: 
• C sugar produced under the EC regime is pr ovided 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 provi sions of Article 9.1 of that 
Agreement 
 
• as C sugar exports – which are provide d with export subsidies defined under 
Article 9.1(c) – are in excess of the quantit y 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 ; 
 
                                                      
28 As referred to in Chapter 2 of Title II of the Regulation. 
29 Commission Regulation (EC) No. 1159/2003 sets out detailed rules of application for the importation 
of cane sugar under certain tariff quotas and preferential arrangements. 
30 Article 39 of the Regulation. 
31 Note by the Panel:  Note that this section summ arizes the parties argume nts and evidence as the 
Panel understood them.  Note also that the individual factual and legal arguments by each of the complaining 
parties were endorsed by the other complaining parties.  No te finally that footnotes in this and the section that 
summarizes the arguments of third parties are th ose of the parties if not indicated otherwise.  WT/DS265/R 
 Page 11 
 
 
 • alternatively, if the Panel finds that th e 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 s ugar 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 subject ed 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 incons istently 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 a nd 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 s ubmission, 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;   WT/DS265/R 
Page 12  
 
  
• 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 in consistently 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 th e 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 delay  the export subsidies for sugar inconsistent with the Agreement on 
Agriculture . 
4.6 In view of the remedy to which Br azil is entitled under Article 4.7 of the SCM Agreement , 
Brazil requests that the Panel make a finding an d recommendation with regard to its claim under 
Article 3 of that Agreement.  Brazil further requ ests 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 su bmission, that the Panel make the following 
rulings:   
• the EC accords subsidies within the meaning of Article 9.1(c) of the Agreement on 
Agricultur e to its exports of C sugar; 
 
• exports of ACP/India equivalent suga r 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 ; 
 
                                                      
32 Panel Report on Canada – Aircraft Credits and Guarantees ;  Panel Report on Canada – Autos ;  
Panel Report on Canada – Aircraft ; Panel Report on Brazil – Aircraft ;  Panel Report on Australia – Automotive 
Leather II .  WT/DS265/R 
 Page 13 
 
 
 • 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 s ubsidies 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 th e subsidies granted by the EC to its exports 
of sugar are inconsistent w ith 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 inconsiste nt with Article 10.1 of that Agreement; 
 
• the EC's export subsidies for quota sugar a nd ACP/India equivalent sugar are granted 
inconsistently with Article s 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 Eur opean Communities to bring its 
export subsidies for sugar into confor mity with its obligations under the Agreement on Agriculture  by 
withdrawing within 90 days the export subsidies for s ugar 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 Co mplainants 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 Co mplainants were acting inconsistently with 
the general principle of good faith and Article 3.10 of the DSU ; WT/DS265/R 
Page 14  
 
  
• subsidiarily, the alleged inc onsistency did not nullify or im pair 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. T
ERMS OF REFERENCE  
1. Provisions and measures at issue 
4.10 The European Communities  submitted that certain issu es brought by the Complainants 
constituted separate "claims" and thus fell out side the Panel's terms of reference.  
4.11 The European Communities contended that, wh ile 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 th e measure which was allegedly inconsistent with 
that provision.  In the European Co mmunities' 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, th e European Communities 
continued, exports of sugar were not a "measu re" within the meaning of Article 6.2 of the DSU .  They 
were private transactions which could not, as su ch, 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 consis ted of 51 articles, with  numerous paragraphs 
and subparagraphs, as well as 6 annex es, and covered 45 pages of the Official Journal of the European 
Communities) was not sufficiently "specific".  Rath er, the Complainants should have identified the 
specific elements of the EC's sugar regime whic h, 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.  Fo r 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 Comm unities 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 Commun ities, was not made in their panel requests.  
Consequently, the European Communities contende d 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 clai ms involving separate lega l provisions or measures  WT/DS265/R 
 Page 15 
 
 
 different from those presented in their respective panel requests.  In their view, the European 
Communities was confusing "claims", which must be stat ed 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' cont entions 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 Commun ities 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 provi sions 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 lis ted 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, th e export subsidy defin itions 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 ha d 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 Regulati on 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 al ternative in relation to their basic claim regarding 
exports in excess of export subsidy reduction commitment s.  To allege subsidized exports in excess of 
reduction commitments as well as an incons istency 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 requireme nt on the Complainants to identify all "other" 
export subsidies individually would have the eff ect 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 tr eaty interpretation.   
4.17 Australia  added that the European Communities woul d 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 possibl e that some subsections of EC Regulation No. 
1260/2001 played no role in the provision of the ch allenged 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 meas ure 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 sugg ested 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 measu res 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 
                                                      
33 Appellate Body Report on  EC – Bananas III , para. 143. WT/DS265/R 
Page 16  
 
 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 th eir first written submissions or in their rebuttal 
submissions.  Article 9.2(b)(iv), for example, wa s 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 we re 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 reductio ns 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 argument s needed not be mentioned in the panel requests, 
and that, in the present case, their assertions regard ing the scope of application of the footnote were 
thus subsidiary arguments supporting their basic legal claim that the Eu ropean 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 Europ ean Communities contended that any suggestion that 
the European Communities was acting inconsis tently with Article 9.2(b)(iv) of the Agreement on 
Agriculture  had appeared for the first time during the firs t substantive meeting of the Panel, not in the 
requests for panel establishment, nor in the first wr itten submissions of the Complainants, but only in 
the first oral statements of Brazil and Thailand.  Si nce that provision was not mentioned in the Panel's 
terms of reference, it could not fo rm the basis for a finding of incons istency 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 no t, in fact, re-export ACP/India sugar but rather 
exported an equivalent amount.  Th is would have required a referen ce to, and identification of, the 
footnote, because that was the legal provision alle gedly infringed.  The Eu ropean 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 Eu ropean Communities exceeding its commitments, but 
that the footnote did not sanction an excess in resp ect 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 th at 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 acknowledg ed 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 id entifying, in their panel requests, the relevant 
measures that provided the alleged export subsid ies, in accordance with Article 6.2 of the DSU  (see 
also paragraph 4.12).  Moreover, the European Co mmunities observed that Article 10.3 was not listed 
among the special or additional rules and proce dures on dispute settlement in Appendix 2 to the DSU  
and thus did not derogate from the requi rements 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  WT/DS265/R 
 Page 17 
 
 
 confused with the distinct issue of who must stat e the claims.  The Complainants' interpretation of 
Article 10.3 would be incompatible with the b asic 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 subsidi zed, 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 pr ove that the excess was not subsidized, 
no other provisions of the agreemen ts were relevant.  But if the European Communities claimed that 
the excess was not subsidized, or that reduction co mmitments 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 di d not raise any concerns in regard to 
alleged deficiencies in its panel request until six m onths 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 di d it seek a preliminary ruling at an early stage of 
the Panel process, actions it had taken in recent di sputes in which it was a respondent.  Instead, the 
European Communities had waited until its first wri tten 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 re ference.  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 br inging 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 Comm unities 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 Br azil, 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.  Sec ondly, although it had suffered a prejudice, the 
European Communities did not agree that it was requi red 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 Comm unities 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.   
                                                      
34 Appellate Body Report on Thailand – H-Beams , para. 88. WT/DS265/R 
Page 18  
 
 4.26 Drawing attention to the analyses by the Appellate Body in a number of cases
35, 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 Co mmunities 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 pr operly 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 reduc tion commitment level of 1.273 million tonnes, and  
underlined that in every marketing year since 1995,  the European Communities had exported sugar in 
amounts three to four times the level of its reducti on 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 r espect of the quantitative aspect of their claim, the 
Complainants noted that the European Communiti es 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 AC P/India equivalent sugar categories.  With 
particular reference to AC P/India "equivalent" sugar, Australia  and Thailand  observed that, during 
the marketing year 2001-2002, the European Comm unities notified export subsidies amounting to 
€482.8 million against a scheduled budgetary ou tlay reduction commitment of €499.1 million but 
excluded from its reduction commitments some €800 m illion in direct export subsidies on 1.6 million 
tonnes of sugar from its reduction commitments.  Si milarly, 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.  
                                                      
35 Panel Report on US – FSC , para. 7.136;  Panel Report on Canada – Dairy , paras. 7.33-7.34;  Panel 
Report on Canada – Dairy  (Article 21.5 – New Zealand and US ), paras. 6.3-6.6;  Appellate Body Report on 
Canada –Dairy (Article 21.5 – New Zealand and US II) , para. 73. 
36 Appellate Body Report on Canada – Dairy , paras. 69-72.  
37 Exhibit COMP-17.  WT/DS265/R 
 Page 19 
 
 
 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 ex ports would not be in excess of the reduction 
commitments when those were interpreted in good fa ith 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 Co mplainants because they had also mi sinterpreted the footnote.  In 
the European Communities' view  therefore, exports of ACP/India equivalent sugar were not in excess 
of its scheduled commitments, when th ese 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 obliga tion 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 re gard, 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 part y of this fundamental 
procedural right.  Referring to th e 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 Comp lainants 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 c ould 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 Comm unities had failed to discharge its 
burden of proof in its submissions and in panel he arings.  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 s ubsidization 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 submissi ons, but only in anticipat ion of arguments that 
they expected the European Communities to submit. 
                                                     
 
38 The parties' arguments in respect  to these claims are presented in  Section IV.D with respect to 
C sugar, and in Section IV.E with respect to ACP/India equivalent sugar. 
39  Appellate Body Report on Thailand – H Beams , para. 88. 
40 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 70-71.  
41 See Section IV.B, Terms of reference. WT/DS265/R 
Page 20  
 
 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 in consistently 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 fro m 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 subpa ragraphs (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 t hus 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.  More over, even if exports of C sugar were found to 
benefit from export subsidies, the European Comm unities 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 th at, in order to determine whether a payment had 
been made, an examination was needed of a ll monetary and non-moneta ry economic costs of 
production, i.e. whether the price of the exported agri cultural 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 pr ocessing or export of C sugar.  They  recalled that a 
"payment" within the meaning of Article 9.1(c) de noted 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 comparin g 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 st andard against which to assess whether the 
                                                      
42 Exhibit COMP-17. 
43 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 110 
and 119. 
44 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 76. 
45 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 87 and 
132. 
46 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 73. 
47 Ibid., paras. 71, 76, 86-87 and 114.  WT/DS265/R 
 Page 21 
 
 
 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 th e world market.  Australia defined "producer" as a 
collective term for all enterprises engaged in the pr oduction 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 r eceived an advantage b ecause 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 b eet, 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 export er: in most cases that Australia was aware 
of, that sugar was sold onto the world mark et via an exporter. The exporter purchased 
the sugar from the sugar processor and then so ld 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 subm itted 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 se ll the sugar onto the world market.   
4.40 Brazil  noted that there may be multiple "payment s" 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 bei ng sold for export below th e average total cost of 
production, but that it went further and identified th ree examples of "payments" within the meaning of 
Article 9.1(c) that occurred in the process of produc tion and export sale of C sugar, and which gave 
"an advantage" to "export production" of C s ugar.  These "payments" were as follows:  
                                                      
48 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , panel report, para. 5.28. 
49 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 96-97. 
50 Australia's first written submission, paras. 11 1-113; see also Australia's replies to Panel 
questions 46-48. 
51 Exhibit ALA-1, pp 10-11; Australia's reply to Panel question 62. 
52 Brazil's first written submission paras. 42-49; Br azil's replies to Panel questions 46-48 and 62. WT/DS265/R 
Page 22  
 
 (a) high internal prices paid by EC consumer s, 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 m oney from the consumers and taxpayers (the 
"payers") to the processors and exporters (t he "payees").  Through these "payments",  
the export of C sugar at prices below the av erage total cost of production of C sugar 
was facilitated; 
(b) a "payment" was found in the EC sugar regi me's requirement for minimum prices for 
A and B quota beet, which enabled beet grower s 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 b eet 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 ev idence 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 "pay ers"), who transferred resources provided 
by the European Communities to the world market buyers of this sugar (the "payees").  The world market buyers gain ed 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, a nd C beet sold to processors, or to identify the 
individual transactions through which the payments we re 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 opera tors involved in the production of C sugar and the average price at 
which C sugar was sold for export.  Thailand noneth eless stated that it would have no objection if the 
Panel were to examine separately the payments, in cluding those made by beet farmers and those made 
by sugar processors.
56   
4.42 The Complainants contended that the existe nce of "payments" within the meaning of 
Article 9.1(c) of the Agreement on Agriculture  could be established from data on costs of production 
                                                      
53 Exhibit COMP-1, para. 81.  In particular, the Court of Auditors reported that the annual cost to the 
budget of surplus sugar was approximately €1,500 million, some €800 million of which were obtained from 
production levies on A and B quota sugar, with the balance paid for by European taxpayers. 
54 Exhibit COMP-1, C 50/11, para. 16. 
55 Exhibit BRA-1, Table 5. 
56 Thailand's replies to Panel question 62.  WT/DS265/R 
 Page 23 
 
 
 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.  Duri ng 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 th e world market, C sugar continued to be exported 
in what the Complainants considered to be signif icant 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 suga r confirmed that C sugar could not be produced 
absent a payment.   
4.43 Citing various studies60, the Complainants  contended 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, whic h 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 marketi ng 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 aver age cost of production. The EC considered that 
each of the other "payments" alleged by the Compla inants 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" an d 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 Comp lainants 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 
                                                     
 
57 Exhibit ALA-1, pp 9; Exhibit COMP-2, Table 2.1, pp. 8-9; Exhibit BRA-1, Table 5, p. 29; 
Diagram 2, para. 18. 
58 Exhibit ALA-1, p. 9. 
59 Including official EC and member State documentati on, OECD papers, studies of research institutes, 
information available from the private suga r sector as well as confidential LMC data. 
60 Exhibit BRA-1, Annex B, Table B.15, and Table 5, p. 29; Exhibit COMP-2, para. 3.9, p. 43. 
61 Exhibit COMP-1, C 50/16, para. 96. 
62 Exhibit BRA-1, para. 18; Diagram 2. 
63 Ibid., para. 43(a); Diagram 11. WT/DS265/R 
Page 24  
 
 average total cost of production which constituted a "p ayment" to the processor of that input.  If that 
payment was "financed by virtue of government act ion", and if it was contingent on the subsequent 
exportation of the processed product, only then w as the processed product deemed to benefit from an 
"export subsidy" subject to reduction commitments.  
4.46 The European Communities considered th at 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 sa me time the subsidized 
product and the product which conf erred 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 forei gn 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 Comm unities 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 rega rd, the European Communitie s considered that the 
Complainants had overlooked some important differe nces between the production of milk at issue in 
Canada – Dairy, and the production of C beet.  The availab ility 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.  Al so, 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 Communiti es, 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 whethe r export sales of C sugar involved "payments".  
Instead, the relevant benchmark was the world mark et price for sugar.  The European Communities 
held that the Appellate Body had resorted to a co st of production benchmark in view of the specific 
circumstances of Canada – Dairy .  That benchmark could not be m echanically 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 we re made in the world market, the only relevant 
benchmark for determining the existence of "payme nts" was the price prevailing in that market.
 66  
The use of a cost of production benchmark in case s 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 c oncerned with the export of goods below cost of 
production, but instead with the granting of subs idies to exported goods through the provision of 
                                                      
64 Exhibit EC-10, paras. 46-49; Exhibit EC-11, paras. 16-17. Since, according to the European 
Communities, the alleged payments would not, in any ev ent, provide an export subsidy to C sugar according to 
the Appellate Body's interpretation, the European Commun ities did not consider it necessary to revisit these two 
issues, but reserved the right to raise them in the event of an appeal. 
65 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 76. 
66 Ibid. para. 93.   WT/DS265/R 
 Page 25 
 
 
 certain financial services (export credits, guarantees a nd 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 an y 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 Canadi an 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 th e 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 Eu ropean 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 th at the alleged payments conferred no 
"benefit" to C sugar and that the Complainants' inte rpretation 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 recipien t of the subsidy was in fact making a financial 
contribution and providing a benefit to anothe r 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 pa rt 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 i nvolve 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 othe r constituent element of the notion 
of subsidy, i.e. the requirement that the me asure 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) w ould then become a form of anti-dumping instrument, 
which was not even found in the Anti-Dumping Ag reement.  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 discip lines against the dumping of agricultural products 
through Article 9.1 (c). 
4.52 Responding to the European Communities' argume nt 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 fo r processing, and that the citations mentioned were 
                                                     
 
67 Ibid. para. 76. 
68 Ibid. para. 81. 
69 Ibid, para. 83. 
70 Ibid, para. 84. WT/DS265/R 
Page 26  
 
 not only intended to explain the factual situatio n 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 Appella te 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 Bo dy 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 Commun ities, 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 tota l 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 deliv ering 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 marke t;  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 Ca nada-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.  Th erefore 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 provisi on, 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 compelling  given the emphasis by the Appellate Body 
on the importance of maintaining the distinction between the domestic suppor t 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 presen t.  Since, unlike in the Canadian milk regime, 
there were no independent producers of either C be et or C sugar in the European Communities, he 
cross-subsidization was total.  Moreover, all C s ugar was exported at prices below cost of production 
with the losses financed from the sales of quota s ugar in the domestic and export market with the 
benefit of EC price support.  The level of C s ugar 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, im plying a higher level of cross-subsidization. 
4.56 The Complainants maintained that the cro ss-subsidies provided from price support were 
captured by WTO definitions of subsidies continge nt on export performance.  They considered that 
the European Communities' arguments c onflicted with the jurisprudence of Canada – Dairy as they 
rested on the proposition that domestic price suppor t could never form part of an export subsidy 
                                                     
 
71 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 92.  WT/DS265/R 
 Page 27 
 
 
 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 pr ice support constituted a s ubsidy contingent on export 
performance was irrelevant.  The real issue, a ccording to the Complainants, was whether such 
support, in whole or in part, came within the de finitional 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' argu ments summarized in paragraph 4.46, the 
Complainants submitted that the provider of the e xport subsidy was the European Communities itself, 
because there were "payments on the export of an agri cultural product that are financed by virtue of 
governmental action" within the meaning of Article 9.1(c).  The European Co mmunities itself, not its 
sugar producers, took the governmental action that fi nanced 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 belo w 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 broa der 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 interpre tation thereof, suggested that the recipient of the 
payment was, or needed to be, the same person th at 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 producer s 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 be nefit on the entity making the payment.  However, 
for there to be a "payment" by the entity bene fiting 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 recipien t 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 s ubsidy."  Because Article 9.1 stipul ated that a payment within the 
meaning of Article 9.1(c) constitu ted an export subsidy, once the el ements 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).   
                                                      
72 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 87. 
73 Panel Report on Canada – Aircraft Credits and Guarantees , para. 7.229. 
74 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 93.  
75 Ibid, para. 84. 
76 Appellate Body Report on Canada – Dairy , para. 90. WT/DS265/R 
Page 28  
 
 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 th e importation of a notion into Article 9.1(c) that 
could not logically be applied to payments by pr ivate parties.  While a government may decide for 
non-economic reasons to sell a produc t on non-commercial terms, a private party would, in the normal 
course of business, make sales on conditions prevaili ng in the market, thus in a manner that did not 
confer a "benefit" on the recipient of the payment.   If the European Comm unities 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 woul d in practice not apply to payments by private 
parties. Therefore, yet again its purpose would be defeated.   
4.61 In the Complainants' view, th e European Communities' interp retation 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 Communi ties' 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 th is 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 Agri culture but to define the word "payment".  This 
ruling was held to demonstrate that the Appellate Bo dy did not consider the concept of benefit to be 
relevant for determining the existence of paym ents. 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 Artic le 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 worl d market and the sale therefore did not confer on 
the purchaser a "benefit".  As the Appellate B ody pointed out, the crucial question for a panel 
applying Article 9.1(c) was whethe r export production had been given an advantage.  If the losses that 
producers incurred as a result of export sales at pr ices below the average cost of production were 
financed by virtue of government action, then ex port production had been given an advantage.  For 
the Complainants, it was obvious that a payment coul d 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 "payme nt".  In this connection, the Complainants 
underlined that there was no need to adopt a "recipien t-oriented" approach to the determination of the 
payments, and thus no need to show a "benefit".  The Complainants argued that, even though private  WT/DS265/R 
 Page 29 
 
 
 parties could make the payments, it was the Memb er which was "responsible for ensuring that it 
respects its export subsidy commitmen ts 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' cont ention regarding the appr opriate 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 ma rket price did not provide a suitable benchmark 
because C sugar could only be sold at prices competi tive 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 provisi on would be those designed to undercut the world 
market price. The Complainants noted that th e European Communities provided no substantive 
reasons in support of its arguments and did not expl ain, 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 ma de 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" wa s 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 ther efore 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.  Th e "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, su ch "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 de scribed as "export subsidies" in the chapeau of 
that provision.  They had, therefore, to be interp reted in the context of the notion of "subsidy".  The 
                                                     
 
77 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 95. 
78 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II), para. 95. 
79 Appellate Body Report on Canada – Aircraft , para. 153. WT/DS265/R 
Page 30  
 
 existence of a "benefit" was inherent in the notion of "subsidy".  Consequently, if the exports of a 
given agricultural product received no benefit fro m 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 Body
80, 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 privat e 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 circumst ances 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 c onditions 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 ha d 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 a pplicable rules of the SCM Agreement  with respect to input 
subsidies, except that the Appellate Body took the vi ew that, in certain circum stances, 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 producti on.  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 Complainan ts themselves, and would have, if upheld, far-
reaching and unintended implications, including fo r developing countries.  In support of this 
argument, the European Communities referred to  documentation suggesting that a number of 
                                                     
 
80 Appellate Body Report on US – FSC (Article 21.5 – EC) , para. 141. 
81 Article 1.1(a)(2) of the SCM Agreement . 
82 Ibid., Article 1.1(a)(1)(iv). 
83 Ibid., Article 1.1(b). 
84 Article 14(d) of the SCM Agreement . 
85 Item (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.  WT/DS265/R 
 Page 31 
 
 
 countries, including Australia, Brazil, and Thailand, ha d been exporting sugar at a loss for years, and 
applying measures to keep domestic prices above world market prices.86 87 
(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 thir d 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 suga r production and exports 
through Council Regulation No. 1260/2001.  The f unding of the payments that C sugar producers 
were making was the direct consequence of the extr emely 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 Commissi on 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 regi me 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 su rplus 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 subsid ies and domestic supply 
restrictions.  The intervention price provided a gua ranteed price some three times greater than the 
world price, but due to the domestic supply rest rictions, 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. 
                                                      
86 Exhibit EC-21. See also Exhibit EC-17, pp. 27-30; Exhibit EC-18, p. 2; Exhibit EC-20, pp. 1-4; 
Exhibits EC-22 and EC-23;  Exhibit EC-19. 
87 At the interim review, Australia recalled that the Complainants strongly rebutted the European 
Communities' position, arguing that to assert an equivalence between the EC regime and the sugar policies of 
other exporters ignored the elements of the EC regi me which made it WTO-inconsistent.  Specifically, the 
exceptionally high level of EC support, the delivery of that support through quotas for sales on the domestic market, the restrictions on carryover of C sugar and the requirement that C sugar not carried over be exported.  
These elements of the EC regime drove the production and export of subsidized C sugar and distinguished it 
from other regimes.  The Complainants noted that the European Communities had failed to respond to the other arguments on "payments" raised by the Complainants and hence the European Communities had not met its 
burden of proof on these issues under Article 10.3 of the Agreement on Agriculture . 
88 Exhibit COMP-6, p. 33. 
89 Exhibit COMP-6, p. 34. 
90 EC Council Regulation No. 1260/2001, chapeau para. 2. WT/DS265/R 
Page 32  
 
 4.73 The Complainants sustained that beneficiari es of sugar production quotas were protected from 
virtually all foreign sources of competition, thro ugh 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 c ountries and India.  They were also protected 
from potential competition from new domestic supplie rs 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 in tervention 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 descr ibed 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 fro m 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 suppl y beet for C sugar to processors at prices that 
did not reflect the average total co st 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 co sts 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 wo rld market price was higher than the marginal 
cost of producing C sugar.93  The Complainants argued that alloca tion 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 prod uce 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 Complainants  continued, 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, fo r 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 s ubsidies, price support mechanisms and related 
mechanisms for quota sugar, all of which were re gulatory instruments of the EC sugar regime.  The 
sales of C sugar were profitable at prices that me rely exceeded marginal costs because the higher 
revenue sales in the internal market "effectively 'f inanced' part of the lower revenue sales by funding 
the portion of the shared fixed costs attr ibutable 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 acti on 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  T h e  
Complainants asserted that, if the producer had a c hoice to either sell on the EC domestic market or 
on the world market, the former would be more at tractive, 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.   
                                                      
91 Exhibit COMP-6, p. 12. 
92 Appellate Body Report on  Canada – Dairy, para. 120. 
93 Exhibit COMP-2, p. 121.  
94 Exhibit ALA-1, p. 31.  See also Exhibit COMP-2, p. 117. 
95 Appellate Body Report on  Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 139-140. 
96 Exhibit ALA-1, pp. 25-27.  WT/DS265/R 
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 4.76 The Complainants considered that the dis tinction 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 subs idy commitments would thus be undermined.97  This 
rationale applied to the EC sugar industry, incl uding both growers and processors who disposed of C 
beet and C sugar at prices that did not recover th eir 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 im posed 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 w as 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 guara nteed 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 absen ce of controls in the EC regime to prevent 
cross-subsidization.  Australia  noted that, with respect to subsid ies 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 financ ed "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 e xports 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 allege d, 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 exis tence" 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 instan ce 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 alread y 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 suga r 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 export ed C sugar or indeed any sugar at all.   
                                                      
97 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), paras. 90-92. 
98 Exhibit ALA-1, p. 5. 
99 Appellate Body Report on Canada – Aircraft , para. 172;  Appellate Body Report on Canada – 
Aircraft (Article 21.5 – Brazil) , para. 48. WT/DS265/R 
Page 34  
 
 4.80 In relation to the Complainants' assertions in paragraph 4.77, the European Communities 
observed that the volume of C sugar production fluctu ated 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 regul ations 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 Communitie s' arguments in paragraphs 4.78 
and 4.79 disregarded the fact that any type of go vernmental action financing payments on exports of 
agricultural products was covered by Article 9.1(c) .102  There could be no doubts therefore that the 
governmental action financing the pa yments could take the form of import tariffs, safeguard actions 
and other measures that would not constitute subs idies within the meaning of Article 1 of the 
SCM Agreement .   
4.82 The European Communities also in correctly ascribed a test to Article 9.1(c) requiring that the 
financing it provided to C sugar e xports be contingent on such exports.  In doing so, the European 
Communities was shrinking the export subsidy definiti on 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 govern mental 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 th is 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 subsidiz ation defined in Article 9.1(c) from the kind of 
price discrimination by private actors with whic h 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 onl y 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 Appella te Body stated that that the government "must 
play a sufficiently important part in the process by which a private party fund s '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 expo rt", the Canada – Dairy panel correctly concluded 
that there was a payment "on the export" only if th e 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 pr oduction was consequently not sufficient to establish 
export contingency.  Finally, not any "financing"  was covered by Article 9.1(c) but only financing 
                                                     
 
100 Exhibit COMP–2, pp. 117-121. 
101 Article 14 of Regulation No. 1260/2001; and Article 2(1) of Commission Regulation (EEC) 
No. 65/82. 
102 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , paras. 91, 102 
and 112. 
103 Panel Report on  Canada – Dairy, para. 7.90. 
104 Appellate Body Report on  Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 131-133.  WT/DS265/R 
 Page 35 
 
 
 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 pr esent 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, th e 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 th e 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 "gov ernmental action" by virtue of which they were 
financed;  and, fourth, the European Communities ha d decided to require producers to sell the excess 
amount of sugar on the world market, thereby ensuri ng that all payments were "on the export" of 
C sugar.  The presence of all three elements cons tituting an export subsidy within the meaning of 
Article 9.1(c) was thus the direct and foreseeab le consequence of actions by the European 
Communities, not merely the decisions of private su gar 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 defin ition of a "subsidy" in the SCM Agreement , which required that the 
"benefit" had to be conferred by the "financial c ontribution".  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 government al 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 "p ayment".  Rather, they should have demonstrated 
first that there was a "payment".   
4.86 The European Communities subm itted 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 "t ransfer 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 produ cers 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 Co mplainants' 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 whic h might have the incidental effect of "financing" 
sales at a loss.  According to the European Communiti es, 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 WT/DS265/R 
Page 36  
 
 the meaning of that Agreement.  Further, C suga r 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 proc essed only into C sugar, a product that had to be 
exported, payments to growers of C beet were al so 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 requi rement 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 r ecipient of the payments or by a third party.  
By ignoring this difference, the Complainants' interp retation 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.  Combin ing the two requirements made it possible to 
characterize as "export subsidies" payments whic h were not conditional upon exports.  In the 
European Communities' view, this amounted to sayi ng that the alleged "payments" were contingent 
upon themselves, which would render the second le gal requirement, "on exports", redundant. Such 
interpretation also confused the distinction between the disciplines on domestic support, export 
subsidies and market access, a distinction whic h was, in the European Communities' opinion, a 
fundamental feature of the Agreement on Agriculture .   
4.89 From the domestic support perspective, th e European Communities continued, the 
Complainants' interpretation would imply that, whenev er a system of price support had the incidental 
effect of financing exports below average total co st of production, the Member concerned would be 
required, in order to avoid a breach of its export s ubsidy 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 possibl e, at least in theory, to remove the condition 
which made it export contingent, wh ile 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 Eur opean Communities, it was not contingent "on exports".   
4.90 With respect to market access, the Eur opean Communities recalled that the terms 
"governmental action" in Article 9.1(c) enco mpassed a broad range of government measures
107, 
including import tariffs.108 The Complainants' interpretation would imply that, if high import duties 
had the incidental effect of "cross-financing" expor ts below the average total cost of production, the 
Member concerned would have no alte rnative 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 e xports 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 Communiti es 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 suppor t could not form part of export subsidization.  
                                                     
 
105  Article 13.1 of Regulation No. 1260/2001. 
106 Appellate Body Report on US – FSC , para. 141. 
107 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 112. 
108 Appellate Body Report on  Canada – Dairy (Article 21.5 – New Zealand and US II), para. 144.   WT/DS265/R 
 Page 37 
 
 
 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, si nce C sugar had to be exported, 
all sales of C sugar constituted sales for export.  C onversely, 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 r ecall that that provision defined the obligations of 
Members, not those of private persons acting inde pendently 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 decide d to export products below the average cost of 
production was consequently not sufficient to establi sh 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 signi ficant structural component of EC sugar 
production, with C sugar exports fluctuating aro und 17 per cent of the combined A and B quota for 
the European Communities during th e 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 pr ofits made on the marginal production costs of 
C sugar.109  In Australia's view, beet and sugar producer s did not decide to produce and export C sugar 
through market based decisions.   
4.94 The Complainants  concurred with the EC Commission's re ference 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 government al 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 de pendent on C sugar being exported.   
4.95 The Complainants disagreed that their inte rpretation 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 to tal cost of production.  Such an effect, by itself, 
did not give rise to an export subsidy within the mean ing of Article 9.1(c).  The payments financed by 
such programmes had also to be contingent upon ex port performance.  The Co mplainants recalled that 
in Canada – Dairy , the panel had noted that the mere exis tence of parallel markets for domestic use 
and for export with different prices did not n ecessarily 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, th at 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 subs idy.  In the present case, the Complainants  suggested 
                                                      
109 Exhibit ALA-1, p. 5. 
110 Panel Report on  Canada – Dairy,  para. 7.62. WT/DS265/R 
Page 38  
 
 that the European Communities could repeal the requirement that C suga r be exported and permit 
C sugar to be sold in the domestic market or in troduce 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 s ugar 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 polici es 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 Comm unities was fully capable of devising means to provide permissible 
domestic support without allowing this  support, in the words of the A ppellate 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 Artic le 9.1(c) should respect the separation between 
export subsidy and domestic support disciplines.  Th e Appellate Body had stated that if domestic 
support could be used, without limit, to provide su pport to exports, it would undermine the benefits 
intended to accrue through a Memb er'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 Comm unities 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 mainta ined that the Complainants' interpretation 
would introduce an unjustified difference in trea tment between two equally legitimate forms of 
domestic support: price support (including price suppor t resulting from tariff protection) and income 
support linked to production (e.g. through "deficienc y 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 belo w 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 we re "financed" by deficiency payments or a similar 
system.  Any Member providing domestic price suppor t or tariff protection would be required to put 
in place mechanisms to ensure that it made no e xports 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 pa rticipant in the Uruguay Round negotiations could 
have anticipated. And it would introduce a totally unj ustified difference in treat ment between different 
forms of domestic support and, ultimately, between Members. 
                                                     
 
111 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 90.  WT/DS265/R 
 Page 39 
 
 
 2. In the alternative, Article 10.1 of the Agreement on Agriculture  
4.99 Should the Panel decide that the exports of C s ugar 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 Eur opean 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 suga r 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 s ubsidy was contingent on export;  and (c) the subsidy 
resulted in, or threatened to lead to, circumven tion 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 . The  Complainants 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 commitm ents, 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 pr esent case.  They specifically referred 
to the analysis of the panel in Canada – Dairy setting out  the 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 indir ectly through government mandated schemes;  
and  
(c) on terms more favourable than those co mmercially available on world markets.114 
4.103  With respect to the first element115, the Complainants 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 
                                                      
112 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 5.142.  
113 Appellate Body Report on US – FSC , paras. 135-154.  
114 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 5.157;  Panel Report 
on Canada – Dairy, para. 7.128. 
115 Panel Report on  Canada – Dairy, para. 7.129;  Panel Report on Canada  – Dairy (Article 21.5 – New 
Zealand and US II) , para. 5.158. WT/DS265/R 
Page 40  
 
 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. Se cond, 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, we re 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 ensure d 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 Co mplainants 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 government al involvement in the subsidiza tion of export products.  However, 
the Complainants pointed out that the residual natu re 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, accord ing 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 elem ent, 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 mi nimum price requirement under Article 5 of the 
Regulation, while Article 13 of the Regulation operate d to ensure that C beet could not be used to 
produce products that would obtain the higher regulat ed 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 coul d 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 Complainan ts 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 mark et, rather than specifical ly on the regulation of 
access to the world market.  If the domestic mark et was a more attractive source than the world 
market, this element was established.  Furtherm ore, 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) 
                                                      
116 Except for C sugar carried forward or for us e in the manufacture of alcohol and ethanol. 
117 Article 1 of Regulation No. 1260/2001.  
118 Ibid., Article 5. 
119 Panel Report on  Canada – Dairy, paras. 2.51, 7.129. 
120 Ibid., para. 7.125. 
121 Panel Report on  Canada – Dairy, para. 7.130;  Panel Report on Canada  – Dairy (Article 21.5 – New 
Zealand and US II) , para. 5.160. 
122 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 5.160.  WT/DS265/R 
 Page 41 
 
 
 of the Illustrative List, the Compla inants held that, when comparing the attractiveness to exporters of 
sourcing beet from the EC domestic market or th e world market, the former was necessarily more 
attractive to exporters as, for technical and othe r reasons (including protective tariffs against 
imports)123 commercial quantities of beet could not be ac quired on the world market on any terms.  
The terms of domestic supply were thus inevitably more favourable, ac cording 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 elem ents 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 subsid ies' 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 Commun ities 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 Co mplainants 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 quan tities specified in its 
reduction commitments.  Having demonstrated that pa rt 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, incons istently with Article 10.1 of the Agreement on Agriculture .   
4.109  The European Communities  responded that exports of C s ugar did not benefit from export 
subsidies within the meaning of Item (d) of the I llustrative 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 th e EC sugar regime "mandate d" 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 
                                                      
123 According to the EC Schedule CXL, the bound rate on fresh sugar beet (HS 1212 91 91) was 67 
ECU/tonne plus a special safeguard (SSG).  The bound rate on dried or powdered sugar beet (HS 121291 20) was 230 ECU/tonne plus SSG.  The bound rate on sugar cane (HS 1212 92 00) was 46 ECU/tonne plus SSG.  
Exhibit ALA-1, Table 3, for 2002/2003 indicative price;  based on the WTO bound rates and sugar beet prices 
of €47.60/tonne for A quota and  €28.84 /tonne for C1 beet, the ad valorem  equivalent of the above rates for 
fresh beet would currently be 140 per cent and 232 per cent respectively.  For C2 pr ices (Table 3), the rate 
would be 676 per cent, plus the SSG;  see also Taric database, Taric Code 1212918000, third country duty rate 
of  €67/tonne.  This figure did not include the special safeguards imposed on imports of sugar beet. (Note by the Secretariat:  1 ECU = 1 Euro). 
124 Panel Report on  Canada – Dairy, paras. 7.132-3;  Panel Report on C anada – Dairy (Article 21.5 – 
New Zealand and US II) , para. 5.164. 
125 Appellate Body Report on US – FSC , para. 136;  Appellate Body Report on Canada – Dairy , 
para. 87. 
126 Panel Report on  Canada – Dairy, para. 7.133;  Panel Report on Canada  – Dairy (Article 21.5 – New 
Zealand and US II),  paras. 5.167-174. 
127 Appellate Body Report on US – FSC , paras. 148 and 152. WT/DS265/R 
Page 42  
 
 the C beet was freely agreed between the grower s 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 privat e parties was not sufficient to consider that such 
action was "mandated" by the government.  The interpretation of "manda ted" found contextual 
support in the definition of "subsid y" included in Article 1 of the SCM Agreement , according to which 
the supply of goods to an enterprise could not be co nsidered 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 
Restraints
128, 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 Eu ropean Communities, the term "mandated" suggested 
a greater degree of government compulsion than th e terms "entrust" or "direct".  Since the EC 
authorities had not "explicitly and affirmatively dele gated 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 th e 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 reject ed 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 Ca nadian 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 Comm unities' 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 tr ading operations.  The relative freedom of a beet 
grower to grow C beet did not form part of the test s of Item (d).  Instead, the tests related to whether 
the European Communities mandated the production of C beet to exporters on th e 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 I llustrative List, the Eur opean Communities still had 
to show that no other export subsidy was provided, a ccording 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 
                                                      
128 Panel Report on US – Export Restraints , para. 8.44. 
129 Appellate Body Report on  Canada – Dairy (Article 21.5 – New Zealand and US II), para. 128; and 
footnote 113. 
130 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 117.   WT/DS265/R 
 Page 43 
 
 
 subsidy shall be deemed to exist if there was an y form of income or price support in the sense of 
Article XVI of GATT 1994; and a be nefit was thereby conferred. 
4.114  With respect to the first requirement, Austra lia held that the EC regime was explicitly 
designed to provide income support for beet grower s through the minimum pr ice scheme previously 
outlined above (see for instance paragraphs 4.103 and 4.105,)  The "chap eau" of Council Regulation 
No. 1260/2001131 described the objectives of the sugar regi me as "to ensure that Community growers 
of sugar beet and sugar cane continued to be nefit 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 le vel 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 ma rket, 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 indirec tly 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 cr oss-subsidising C sugar exports.  Moreover, the 
exclusion of C beet from the fixed minimum price re quired 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 thr ough quota sugar was no barrier to th e 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 term s of Article XVI:1, Australia was of the view that 
the EC regime also provided a subsidy "which opera ted directly or indirectly to increase exports of 
any product."  The EC sugar regime was therefor e 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 r ecipient of a measure under Article 1.1(a), and required a comparison 
between the situation of a recipient of this measur e, and the situation of that recipient absent the 
measure.132  If the measure delivered any form of advant age 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.  Th e price support given to quota beet and sugar, from 
which C beet and C sugar were excluded, allo wed for the provision of beet for export sugar 
production at a lower price, thereby reducing the co st to the processor of producing export sugar.  
Further, the subsidies delivered through the high domestic price support le vel 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 with in the terms of Article 10.1 of the Agreement on 
Agriculture ,  it had to be further established that the subs idy was an export subsidy.  In this regard, 
Australia reiterated that C sugar was manufactured ex clusively from C beet, and that C sugar must be 
                                                     
 
131 Chapeau para. (2) of Regulation No. 1260/2001. 
132 Appellate Body Report on Canada – Aircraft , paras 153-157;  Panel Report on Canada – Aircraft , 
para. 9.112. WT/DS265/R 
Page 44  
 
 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 suga r 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 s ugar 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 fu rther submitted that the definition of "export 
subsidy" found in Articles XVI.1 and XVI.3 of th e 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 "expor t 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 pe rformance" and could not be cons idered 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" a ttached 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 s ubsidy contingent on e xport performance.   
4.120  Australia recalled that the expor t subsidy definitions in the SCM Agreement  provided 
contextual guidance on the definition of an expor t 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 elemen t of subsidization provided through price or income 
support formed part of an export subsidy in the ci rcumstances 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 conti ngent on export performance' in the circumstances defined in the 
respective items.  According to Au stralia, 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 produ cers 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 buye rs in the domestic market"; and (c) "where the 
operations of that system are wholly or partly fi nanced out of government funds in addition to the 
funds collected from producers in respect of th e 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 pri ce lower than the comparable price charged 
for the like product to buyers in the domestic market.  WT/DS265/R 
 Page 45 
 
 
 3. Good faith 
(a) Exports of C sugar were consiste nt 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 re duction commitments sched uled 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, pa ragraphs 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 Comm unities to reduce its exports by a much larger 
percentage (60 per cent) than that agreed in th e 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 Convention  on 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 th e Modalities Paper was not part of the WTO Agreement , it 
was an agreement reached by all the participan ts 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 Communiti es asserted that its schedule reflect ed the understanding that exports 
of C sugar did not benefit from export subsidies and th at 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 pe riod 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 an d 4.125, the European 
Communities concluded that the base quantity leve l would have been 3,188,200 tonnes instead of 
1,612,000 tonnes, and the final commitment leve l 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 adjust ed 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 a bove.  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. 
                                                      
133 See for instance A. D'Amato, Good Faith , in Encyclopaedia of Public International Law , Ed. Max 
Planck Institute, New Holland, 1999, Vol. II, p.599; and B. Cheng, General Principles of Law as applied by 
International Courts and Tribunals , Cambridge, Grotius, 1987, p. 118. 
134 See Table 8 of the European Communities' first written submission; and Exhibit EC-9.  
135 See Table 9 of the European Communities' first written submission. WT/DS265/R 
Page 46  
 
 4.125  The European Communities indicated that its r easoning 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 expor ts of C sugar during the base period in the base 
outlay level from which the annual commitment leve ls 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 di fference 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 LXXX
136 specified that the amounts used in the calculation of the 
base outlay level for sugar were those of the pr oducer levies collected on the production of A and B 
sugar during the base period and used to finance the refunds on exports of A a nd 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 be nefit from export subsidies and that exports of 
C sugar were not included in the scheduled base quan tity 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 majo r exporters of sugar.  Before the Uruguay Round, 
Australia and Brazil had also challenged the Europe an Communities' system of export subsidies for 
sugar137 but neither of them had raised any question.  Similarly, during the Uruguay Round 
negotiations, no participant had ma de 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 R ound, the European Communities asserted, 
official assessments conducted by Australia140, the United States141, and ISO 142, confirmed that shared 
understanding. 
4.127  The European Communities submitted that the inte rpretation 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 pa rticipant 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 th e export of agricultural commodities below cost of 
                                                      
136 Exhibit EC-4. 
137 GATT Panel Report on EC – Sugar Exports (Australia) , BISD 26S/290;  GATT Panel Report on EC 
– Sugar Exports (Brazil) , BISD 27S/69. 
138 The European Communities indicated having submitted a first draft schedule of commitments on 
16 December 1992 (Exhibit EC-4), a revised draft on 14 December 1993 (Exhibit EC-6), and a final version on 
25 March 1994. 
139 Appellate Body Report on EC – Computer Equipment , paras. 109-110.  Tariff commitments 
"represent a common agreement among all Members" and "any clarification of the scope of tariff concessions that may be required during the negotiations is a task for all interested parties".  
140 Exhibit EC–12, pp. 8 and 38;  see also Exhibit EC-14, p. 37:  ABARE confirmed that "production 
beyond the combined A and B quotas, called C sugar receiv es no price support" and th at C sugar "is exported 
without support";  Exhibit EC-13 (the European Communities underlined that a distinction was established 
between "EC net exports" and "subsidized exports" in Table 1 on page 9). 
141 Exhibit EC-15, p. 25. 
142 International Sugar Organisation, The 1994 GATT Uruguay Round Agreement on Agriculture and 
the World Sugar Market , MECAS (99)16, 19 October 1999, p. 26.  WT/DS265/R 
 Page 47 
 
 
 production as an export subsidy.  Also, three succe ssive rulings by the Appellate Body on the same 
issues had been necessary to define the test on whic h 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 th e 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 we re not introduced by Canada until August 1995.  
Third, Canada had believed that the new regime wo uld 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 s ubsidies, 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 redu ction commitments did not require 
it to reduce its subsidized exports beyond the level ag reed 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 commit ment 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 negotiati ons, namely by 60 per cent.  Furthermore, if the 
footnote on ACP/India sugar were found to be inva lid, 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 accordan ce 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 i rrelevant 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 
                                                      
143 Exhibit EC-10, statements by Australia, New Z ealand and the United States;  and Exhibit EC-11, 
statement by Canada. 
144 Panel Report on  Canada – Dairy, paras. 2.34-2.37. 
145 Ibid., paras. 4.279-4.280. WT/DS265/R 
Page 48  
 
 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 th e covered agreements.  
Panels must follow the textual approach underlying the Vienna Convention  rules and "interpretation 
was not a matter of revising treaties or of readin g into them what they did not expressly or by 
necessary implication contain".
146  The Complainants held that, rath er than a good faith clarification, 
the European Communities was seek ing 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 commit ments 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 Roun d. In their view, only the commitments undertaken 
under the Agreement on Agriculture  were legally binding, which explained why that Agreement  made 
no reference to the Modalities Paper.  Recalling th at 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 becau se 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 M odalities Paper was context.  These were explicitly 
reflected in the Note by the Ch airman of the Negotiating Group on Market Access, which confirmed 
that the Modalities Paper was issued "for the pur pose 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 be  used 
as the basis for dispute settlement proceedings und er 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 w ould not give rise to rights and obligations which could be the 
subject of dispute settlement proceedings, but was is sued 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 le d to "a result which was manifestly absurd or 
unreasonable" as required by the Vienna Convention  (see also paragraph 4.130).  Brazil added that, 
should the Modalities Paper be considered as "pre paratory 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.   
                                                     
 
146 See R. Jennings and A. Watts (eds.),  Oppenheim's International Law , 9th ed. (Longman 1992), 
Vol. I, p. 1271.   WT/DS265/R 
 Page 49 
 
 
 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 woul d have enabled Australia to make an informed 
assessment of the cross subsidization of C suga r 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 produc tion 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 expectati on 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 independe nt verification of schedules and held that 
no developing country Member had the resources requi red 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 Co mmunities' claim was undermined by the absence of 
any subsequent efforts by the European Communiti es to rectify this "error".  In their view, the  
European Communities had committed more than a technical oversight, as it had failed to meet 
fundamental obligations in relation to its reducti on 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 bi ndings of base period and final commitment levels 
and that its schedule was developed in the fu ll knowledge that these commitment levels were 
irrevocable.  The European Communities knew th at, 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 unde r 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 H ungary's case in 1996 which involved an error in 
establishing base period levels for export subsidy co mmitments.  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 
                                                      
147 Exhibit COMP-8, p. 9. 
148 L/5113, para. 33. 
149 For example, Exhibits COMP-1, 2, 4, 10, 11, 12, 13, 17;  and EC Regulation No. 1260/2001. 
150 Exhibit ALA-5. WT/DS265/R 
Page 50  
 
 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 Comm unities (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 rela ting 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 th e 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 consen t to be bound by a treaty where the State had 
"contributed by its own conduct to the error or if th e 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, th e 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 wh ich was assumed by that 
State to exist at the time when the treaty was concl uded…".  The fact or situation that the European 
Communities assumed existed, in Thailand's understandi ng, 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 re port 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 appli cation 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 su ccessive rulings" (see paragraph 4.127) to define a 
precise test, the basic economic principle on which the Canada – Dairy's allegedly  "novel" and 
"unanticipated" interpretation  by 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 in to force and that the WTO did not allow the 
"grandfathering" of past practices that were inc onsistent with its provisions.  Many measures that 
                                                      
151 WT/GC/M/23, p. 17. 
152 The European Communities had taken the view  that:  "each Member had to respect its 
commitments, in particular since there were no procedur es available which would allow such corrections.  The 
European Communities were not convinced, on the basis of the evidence provided, that the situation was the 
result of an error and urged Hungary to comply with its commitments", G/AG/R/5, 5 July 1996, para. 13. 
153 See R. Jennings and A. Watts (eds.), Oppenheim's International Law , 9th ed. (Longman, 1992), Vol. 
I, p. 1289, footnote 3 (citing Eastern Greenland Case (1933), PCIJ, Series A/B, No. 53, p. 92 and Abu Dhabi 
arbitration,  ICLQ, 4th Series, Vol. i (1952), p 253;  ILR, 18 (1951), p. 144). 
154 Exhibit EC-11, para. 18. 
155 Jacob Viner, Dumping:  A Problem in International Trade , University of Chicago Press (1923), 
reprinted, Augustus M. Kelley (1991), 113-114.  WT/DS265/R 
 Page 51 
 
 
 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 agreem ents.  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 troubl ing 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 jurispruden ce 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 Marrakesh  Agreement 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 consiste nt with the principle of good faith if the 
European Communities were the only Member of th e 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 Bo dy'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 reduc tion commitments that it assumed in its schedule, 
with the export subsidy reduction commitments th at it claimed it would have assumed if it had known 
of the Appellate Body's interpreta tion of Article 9.1(c) at the time when it formulated its reduction 
commitments. Alternatively, the European Comm unities 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 divi ding 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 ma de 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 subsid ized exports", and the same would be true for the 
"base quantity".  Therefore, the European Communi ties was not pleading that its consent to the WTO 
Agreement  was invalid because it made an error with r espect 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) woul d 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 s hown 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 participan ts, 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 
                                                      
156 Appellate Body Report on Korea – Various Measures on Beef , para. 96. WT/DS265/R 
Page 52  
 
 Paper was an "agreement".  It had, in fact, e xhausted its legal effects upon the conclusion of the WTO 
Agreement, which, in the European Communities' view, e xplained 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 w ith 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 Co mmunities submitted that, if the Panel were to 
conclude otherwise, it would still be  justified to resort to the Mo dalities Paper under Article 32 of the 
Vienna Convention as preparatory work.  It was precisel y because the Modalities Paper was drafted 
with a view to agreeing on the commitment s 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 paragr aph 4.138, the European Communities clarified 
that when Hungary had claimed an error, the Eu ropean 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 al so pointed out that Hungary, unlike the European 
Communities in this case, had not claimed in 1996 th at 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, ex clusively addressed the conditions under which error 
may be invoked in order to invalidate a State's cons ent to a treaty (see paragraph 4.139).  It did not 
exhaust all the possible legal consequences of e rror.  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 th e party that "made" an er ror 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 w ho "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 differe nce between the quantity mentione d in the schedule (1.617 million 
tonnes) and the total quantity of EC exports dur ing 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 co mpare European Communiti es' 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 larg est 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 Comm unities 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 re ports 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 estab lishing 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 .  WT/DS265/R 
 Page 53 
 
 
 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 … national  schedules 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 establis hed 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" Me mbers 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 instan ces when the European 
Communities had expressed contrary views on this issue.158   
4.149  Referring to the Complainants arguments in pa ragraph 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 contextu al elements for the interpretation of that treaty.  
The panel had even concluded that an inform ally 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 part ies 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 Pane l were to conclude that exports of C sugar were in excess of the 
European Communities' re duction 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 seeki ng 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 br inging this claim because they had contributed 
to that error through their own conduct.  For t hose 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 
                                                      
157 Scheduling of Initial Commitments in Trade in Services: Explanatory Note MTN.GNS/W/164 
(3 September 1993), para. 1. 
158 Panel Report on EC – Bananas III (US) , paras. 4.105-4.106, 4.99;  Appellate Body Report on EC – 
Bananas III , para. 157. 
159 Panel Report on EC – Tariff Preferences , paras. 7.81-7.88.  
160 Appellate Body Report on US – FSC , para. 166. 
161 Appellate Body Report on US – Hot-Rolled Steel , para. 101. WT/DS265/R 
Page 54  
 
 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 ca ses, particularly "if po st-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 th at 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 accordan ce 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 f eatures 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 St ate, or result in advantages for the representing 
State.  Estoppel might arise not only from expres s 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 Communiti es 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 Eu ropean Communities considered that they would 
not have acted in good faith because they had faile d to advise the European  Communities to include 
those exports in the base quantity.  If, on the ot her 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 orde r to exact from the European Communities a 
concession that was never negotiated with, or requ ested from, the European Communities during the 
                                                      
162 Appellate Body Report on US – Offset Act (Byrd Amendment) , para. 297. 
163 Appellate Body Report on US – Shrimp , para.158;  B. Cheng, General Principles of Law as applied 
by International Courts and Tribunals , Cambridge, Grotius, 1987, p. 118. 
164 Appellate Body Report on US – Cotton Yarn , para. 81. 
165 The European Communities gave the following examples of judicial application of the principle of 
estoppel in support of its view:  Arbitral Award by the King of Spain Case  (ICJ Reports, 1960, 192 at 213);  
Temple of Preah Vihear Case  (ICJ Reports, 1962, 6 at 32);  opinions of Judges Alfaro and Fitzmaurice in the 
Temple of Preah Vihear Case  (ICJ Reports, 1962, 39-51, and 61-51);  Brownlie, Principles of Public 
International Law  (Oxford, 2003), p. 616); J.P. Müller and T. Cottier, in Encyclopaedia of Public International 
Law, Ed. Max Planck Institut, North Holland, 1992, p. 118. 
166 According to the European Communities, the panel in India – Autos  suggested that the principle of 
estoppel was applicable in WTO disputes (footnote 364).  The panel in Argentina – Poultry Anti-Dumping 
Duties declined to rule on this issue, in view of the fa ct that the conditions identified by Argentina for the 
application of that principle were not present (footnote 58).  The European Communities further stated that a 
number of other panels have addressed and rejected estoppel arguments, having regard to the specific facts of 
the dispute, without questioning the applicability of this principle to GATT/WTO disputes.  See Panel Report on EEC (Member States) – Bananas I , para. 362;  Panel Report on Guatemala – Cement II , paras. 8.23-8.24, and 
Panel Report on EC – Asbestos , para. 8.60. 
167 The European Communities referred in this regard to the judgement of the ICJ in the Temple of 
Preah Vihear Case  (ICJ Reports, 1962, 6-32 32);  see also opinio ns, in the same case, of:  Judge Fitzmaurice, p. 
62;  Judge Alfaro, pp. 41-42;  case law summarized by Judge Alfaro at pp. 43-51 of his opinion.   WT/DS265/R 
 Page 55 
 
 
 Uruguay Round, and for which no compensation was paid nor received.  Referring to its arguments 
concerning the awareness, lack of reaction, and shar ed understanding in paragr aphs 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 includ e exports of C sugar in the base levels.  Its 
position had therefore been prejudiced as outlined in pa ragraph 4.129.  To the extent that the alleged 
violation resulted from the non-inclusion of the expor ts 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 presen t 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 paragr aphs 4.150-4.152, the 
Complainants  responded that Article 3.10 dealt with th e 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 ri ght.  The Complainants considered that, although 
the principle of estoppel was linked to the general principle of good faith
172, this did not mean that a 
WTO Member could rely on that principle to de feat a claim brought by another Member.  The 
principle of estoppel was not imported into the WTO ag reements by the reference in Article 3.2 of the 
DSU  to the customary rules of interpretation of publ ic 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 th e 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 
                                                      
168 Appellate Body Report on US – Offset Act (Byrd Amendment) , paras. 297-298. 
169 Appellate Body Report on US – Shrimp , para. 158  
170 Appellate Body Report on US – Cotton Yarn , para. 81. 
171 Appellate Body Report on US – FSC , para. 166. 
172 1984 ICJ Reports, p. 305, para. 130. WT/DS265/R 
Page 56  
 
 engaged in dispute settlement procedures ("if a dispute arises").  The European Communities' 
argument that the Complainants were barred from br inging 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 th e Complainants, the weight to be given under 
Article 3.7 to the judgement of a Member bringi ng 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 conf irmed that complainants were entitled 
to benefit from the presumption of good faith perfo rmance 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 "fruitf ul".  Article 3.7 neither requires nor authorizes a 
panel to look behind that Member's decision and to qu estion 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 prin ciple 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 impl y 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.176  Brazil  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 Commun ities had not presented the facts 
necessary to justify the invocation of the doctrin es of estoppel or good faith in this dispute.  Australia  
submitted that if, despite its arguments to the contra ry, 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 repre sentation" by the Complainants, and that the 
European Communities was "induced" to act in relian ce of that representation.  In the Complainants' 
                                                      
173 Appellate Body Report on EC – Bananas III , para. 135. 
174 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US), para. 74. 
175 Panel Reports on India – Autos , footnote 364. 
176 See also Panel Report on Argentina – Poultry Anti-Dumping Duties , para. 7.20 and footnote 58;  
Panel Report on Guatemala – Cement II , paras. 8.23-8.24. 
177 Appellate Body Report on US – FSC , para. 63 (citations omitted). 
178 It is generally agreed that 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", see J.P. Müller and T. Cottier, in Encyclopaedia of Public  International Law , Ed. Max Planck 
Institute, North Holland, 1992, p. 116.  WT/DS265/R 
 Page 57 
 
 
 view, these conditions were without a doubt not sa tisfied in this case.  First, the European 
Communities had not argued that it relied upon "cl ear and unambiguous representations" made by the 
Complainants, but rather that it relied upon their "s ilence" (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 expressi on 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 representati on in "exceptional circumstances" such as 
where there was a duty or obligation to object, Thailand  noted that the Euro pean 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 verificati on process and furthermore could not reasonably be 
expected to do so. In this resp ect, Thailand recalled that the purpose of the verification process, 
referred to by the European Communities in thes e 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 subs idy reduction commitments assumed by the other 
participants were consistent with the guidelines fo r negotiations set out in the Modalities Paper.  The 
purpose of the verification process was not, in Thaila nd's view, to alert participants to instances in 
which they had not retained options open to th em under the Modalities Paper or to settle disputes 
about the consistency of the commitments assumed with the Agreement on Agriculture .  Therefore, 
the Complainants' silence  could not be deemed to have constituted an implic it 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 w as for the European Communities to define its export 
subsidy reduction commitments in terms which su ited 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 ma intain measures affording protection to domestic 
producers even though such measures were specifica lly 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 liberal ize beyond the agreed modalities in an effort to 
advance their national economic interests.  Furthermor e, 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 Eur opean 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' silenc e when the European Communities scheduled its 
base quantity levels and that it would have acted diffe rently if the Complainants had raised objections.  
Thailand  therefore  did not believe that the assumption that the European Communities would have 
increased the base period levels if advised of its "s cheduling error", and that the Complainants were 
aware of this, could be advanced.   
                                                      
179 GATT Panel Report on EEC (Member States) – Bananas I , paras. 361 and 363. 
180 See Temple of Preah Vihear Case  (ICJ Reports,1962) p. 62;  see also Panel Report on Guatemala – 
Cement II , footnote 791 ("it is clear that not any silence can be considered to constitute consent"). 
181 Appellate Body Report on EC – Computer Equipment , para. 109. 
182 Panel Report on Argentina  – Poultry  Anti-Dumping Duties , para. 7.39. WT/DS265/R 
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 4.162  The Complainants  contested the premises upon which the European Communities had based 
its argumentation on estoppel.  Recalling  the situation with regard to the availability and access to the 
relevant sources of information during th e 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 fi nanced.  Consequently, any expectation by the 
European Communities that Australia was in a posi tion to speak, or had a "duty to speak", was not 
reasonable.  Furthermore, as this dispute involve d 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 particul ar, those treaty obligations which could allegedly be 
extinguished by the European Comm unities' assertion that, prior to the conclusion of the WTO treaty, 
the Complainants had a responsibility to dr aw 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 settleme nt proceedings regarding measures in effect 
before the WTO agreements entered into force were ac ting in bad faith, in that they should be treated 
as having accepted the measure by their "silence" bot h before and since the WTO agreements entered 
into force.  This suggested th at WTO Members could initiate dis pute settlement proceedings against 
the European Communities only when the Eur opean 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 represen tations 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 multilatera l 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 th at 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 par ticular, from exercising their right to request a 
panel in an abusive manner so as to exact a manifest ly 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 pro ceedings 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 procedur es" used in Article 3.10 comprised all 
                                                      
183 Appellate Body Report on US – Corrosion-Resistant Steel Sunset Review , para. 86.  WT/DS265/R 
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 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 pa ragraph 4.164, the European Communities 
considered that the principle of estoppel did not op erate 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 Communitie s' 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 intern ational law.  Referring to recent pa nels' interpretation of that notion187, the 
European Communities sustained that the existe nce 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, rega rdless 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 larg ely superfluous the institution of estoppel.  In 
the European Communities' view, if a party "consen ted" 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 th e 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 Comp lainants shared, at the time of the conclusion of 
the WTO Agreement, its view that exports of C suga r did not benefit from export subsidies.  In this 
regard, the European Communities also considered th at silence could be legitimately construed as a 
representation of lack of objections, not only wh ere there was a "duty to speak", but also in 
circumstances where it was reasonable to expect th at 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 "p rejudice" as a result of such reliance.  In the 
present case, the European Communities sustained that upholding the Complainants' allegations 
would unfairly penalize the European Communi ties, as outlined in paragraph 4.129, for an 
unanticipated and until recently, shared, scheduli ng 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 paragr aph 4.69.  The fact that, for example, Brazil or 
Thailand, considered that their m easures, and therefore also the Eu ropean Communities' measures, did 
not provide export subsidies, amounted to a "cl ear representation" in the European Communities' 
                                                     
 
184 Ibid. 
185 Panel Report on India – Autos , footnote 364. 
186 Sinclair I., The Vienna Convention on the Law of the Treaties , 2nd Edition, Manchester University 
Press, 1984, p. 88. 
187 Panel Report on EC – Asbestos , para. 8.60;  Panel Report on Guatemala – Cement II , para. 8.23.  WT/DS265/R 
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 view.  Additionally, the Complainants' lack of reaction during the Uruguay Round clearly indicated to 
the European Communities that they shared the unde rstanding 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 exercisi ng 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 negotia ting environment, where the better resourced WTO 
Members would have an advantage over the sm aller 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 Memb ers during the negotiations as an excuse for not 
performing their commitments. 
E. 
ACP/INDIA "EQUIVALENT " SUGAR  
4.173  The Complainants  claimed that the European Commun ities 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 pri ces.  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 su gar in excess of its reduction commitments. 
1. Article 9.1(a) of the Agreement on Agriculture  
4.175  The Complainants  submitted that the European Comm unities 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 cove red this category of sugar notwithstanding the footnote inserted 
in the European Communities' Schedule of Con cessions.  Consequently the European Communities 
acted inconsistently with its obliga tions under Articles 3.3 and 8 of the Agreement on Agriculture .   
4.176  The Complainants further submitted that a quan tity of sugar that the European Communities 
considered to be "equivalent" to the amount of su gar imported under preferential trade arrangements 
was exported from the European Communities to th ird 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 consti tuted "direct subsidies" provided by government, 
to firms, to the exporting industry and to produ cers of sugar, "an agricultural product", and were 
"contingent on export performance", within the meaning of Article 9.1(a) of the Agreement on 
                                                      
188 The Complainants explained that, by bringing th is case, they were not seeking to affect the 
preferential access of the ACP countries and India to the EC market and were not requesting that the European 
Communities withdraw the preferential market access it granted to those countries.  WT/DS265/R 
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 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' sche duled commitment levels for that year.190  The 
Complainants submitted statistical data which s uggested 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 Complain ants had failed to properly 
interpret the European Communities' scheduled co mmitments.  The allegations that the European 
Communities had exceeded its export subsidy commi tments should therefore be rejected.  The 
European Communities explained that it had prov ided export refunds to an amount of exports 
equivalent to the sugar it imported under preferentia l import arrangements and th at such exports were 
eligible to receive export refunds.  The European Communities noted that its export statistics did not 
distinguish between refined sugar obtained from AC P/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 notificati ons to the Committee on Agriculture clearly indicated 
that it had exceeded its quantity commitmen t 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' categor ization 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 th e 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 th e meaning of Article 9.1(a) of the Agreement on Agriculture ; 
the export refunds granted to ACP/ India equivalent sugar and "notif ied A+B sugar" should be counted 
against the European Communities' reduction comm itments; and, for marketing year 2001-2002, the 
European Communities' quantity commitment le vel was 1.273 million tonnes and budgetary outlay 
commitment level was €499.1 million.  In th eir view, the European Communities' reduction 
commitments covered the exports of ACP and I ndia equivalent sugar, given the European 
Communities' own admission that all the export ref unds granted to sugar were  export subsidies, and 
                                                      
189 The European Communities notified certain export  refunds for quota sugar.  These refunds, 
provided under Article 27 of the Regulation, were the same as those provided to ACP/India equivalent sugar.  
190 Exhibit COMP-15, p. 17. 
191 The United Kingdom was the major importer of "Preferential" sugar (approximately 1.1 million 
tonnes), but exported less than 400,000 tonnes (104,000 tonnes to other EC member States and 383,000 tonnes 
to third countries).  Source http://statistics.defra.gov.uk. 
192 EC advice at consultations 21/22 November 2002, confirming that the exports in question of 
'Preferential sugar' were sourced from A and B quota.  S ee also Exhibit COMP-11, p. 9;  and L/4833 para. 2.19 
(GATT Panel Report on European Communities – Refunds on Exports of Sugar ). 
193 See Tables 10, 11, and 12 of the European Communities' first written submission. 
194 Exhibit ALA-6. WT/DS265/R 
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 that the export refunds granted to all categories of sugar were subject to reduction commitments.  The 
European Communities' contention that its expor t 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' asserti on before the WTO Committee on Agriculture 
that it had not assumed reduction commitments in respect of ACP/India equivalent sugar
195, the 
Complainants  considered that such a position was lega lly 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 mu st 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 Europ ean 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 Member s 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 Agreemen ts.  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 expressl y 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 corres ponding 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 inte gral 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 Artic le 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 sp ecified therein".  Further, Members "shall not 
provide such subsidies in respect of any agricultu ral 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 th erefore 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 
                                                      
195 Exhibit COMP-21:  The European Communities had replied that:  "As indicated in footnote 1 of the 
table on export subsidies contained in Part IV, Section II of Schedule CXL, the EC is not undertaking any 
reduction commitment on exports of ACP or Indian sugar.  Consequently, any financial assistance is not 
reported to the WTO.  For information, these exports amount to approximately 1.6 million tonnes per year." 
196 General Agreement on Trade in Services, Annex 1B to the Marrakesh Agreement Establishing the 
WTO, Articles XVII and XX.  WT/DS265/R 
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 scheduled commitments. In this context, the Comp lainants asserted that the reduction commitments 
under the first clause of Article 3.3 represente d 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  and with the "commitments as specified" in the Member's Schedule.  The 
Complainants submitted that the footnote was no t 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 Me mber 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 th at the Member agreed to reduce to specified levels.  Further, 
neither Article 3, nor Article 8, could be given a meaning which wa s 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 subsid ies 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 lis ted 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, th at 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 no t 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 WT O jurisprudence endorsed by the Appellate 
Body established that WTO Members could incorp orate 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 ma y yield rights and grant benefits, but it cannot 
diminish its obligations198, a principle further confirmed in EC – Poultry  199, 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 circumstanc es.  The European Communities would also have 
needed to seek a waiver for any recalculation of base level outlays and quantities, given that it had 
                                                      
197 Appellate Body Report on US – FSC , para. 147. 
198 Appellate Body Report on EC – Bananas III , paras. 153-158. 
199 Appellate Body Report on EC – Poultry , para. 98. 
200 Appellate Body Report on Chile – Price Band System , para. 272. WT/DS265/R 
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 bound the base levels in its Schedule.  The Compla inants noted that the European Communities had 
neither sought nor received a waiver for the exclus ion 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 obliga tion.  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 sche dule required the agreement of all WTO Members.
201  
In this context, the European Communities cons idered 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 w ould 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 w ould also be contrary to Article 3.2 of the DSU  which 
stated that dispute settlement "cannot add to or di minish the rights and obligations provided in the 
covered agreements."   
4.191  The European Communities contended that sch edules 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 compone nt (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 Commun ities continued, it applied to both the base outlays 
and base quantities, thus indicating the basis for th e 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 th e 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/I ndia equivalent sugar in the pe riod 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 s ugar, 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 limite d 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 e xport 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 Euro pean Communities argued that the combined 
                                                      
201 Appellate Body Report on EC – Computer Equipment , para. 109. 
202 Exhibit EC–5. 
203 Appellate Body Report on  Canada – Dairy, para. 135.  According to the European Communities, 
the Appellate Body had found that the panel had failed to give meaning to a condition in Canada's goods 
schedule which the panel had considered was no more than a "description".  WT/DS265/R 
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 operation of these two components meant that, overa ll, the European Communities had reduced its 
export subsidies on sugar, over th e implementation period. The Eur opean 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 Compla inants 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 articula tion 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 whic h 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 au thorized 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 coul d 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 th e European Communities had not assumed any 
commitment to reduce export subsidies granted in r espect of sugar of ACP or Indian origin.  The 
meaning that the European Communitie s attributed to the footnote was thus in direct contradiction to 
its text and indeed rendered the words "not maki ng 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 cons titute 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 or igin 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 a nd India were actually c onsumed within one EC 
member State, and were not exported.  Third, in response to Australia's quest ion 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  T h e  Complainants  thus held that, if the European 
Communities had intended to set out in the footno te 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 ma ke "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 Sec tion 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 Compla inants asserted that Article 9.2(b)(iv) provided 
further context for the nature of th e commitments as reduction commitments. 
                                                      
204 Tables 11 and 12 of the European Communities' first written submission. 
205 Australia's second oral statement, paras. 47-50. 
206 Australia, in this regard, referred to Annex I of EC's  second written submission. WT/DS265/R 
Page 66  
 
 4.195  Even if it were accepted that the footnote indicat ed the basis for quantity levels for subsidized 
exports of ACP/India equivalent s ugar, the Complainants underlined th at the footnote was silent about 
what values would be multiplied by those quantity leve ls to arrive at the put ative ceiling for budgetary 
outlays on subsidies on these exports.  Further, the alle ged "ceiling" had several flaws.  First, it could 
not be found in the text of the footnote or elsewhe re in the EC's Schedule of reduction commitments.  
Second, it did not establish a "ceiling" on these outlay s.  Third, despite the European Communities' 
explanations regarding the determ ination of such ceiling on the b asis of the difference between the 
world market price and the EC intervention price, that  difference was not a consta nt factor.  Indeed, to 
the extent that world market prices have declined  over recent years, the average export refund could 
increase commensurately.  Thus, the "ceiling" sup posedly imposed by the footnote on the European 
Communities' budgetary outlays on AC P/India equivalent sugar was not a ceiling at all, but a flexible 
cap that could increase or decre ase based on factors outside the Eu ropean Communities' control.  
Thus, far from acting as a ceiling, the budgetary outla ys 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 ar gue 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 jurisprudence 208: 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 av ailable jurisprudence was 
sound because panels and the Appellate Body coul d 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' effectiven ess 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 coul d 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 exemp tion 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 cond itions 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 pur porting 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 ex emption had the same legal effect as the negotiated 
exemptions in the Agreement on Agriculture .   
                                                      
207 R. Jennings and A. Watts (eds.), Oppenheim's International Law , 90th ed. (Longman, 1992), Vol. I, 
p. 1281. 
208 GATT Panel Report on US – Sugar , para. 5.3;  Appellate Body Report on EC – Bananas III , 
paras. 153-158;  Appellate Body Report on EC – Poultry , para. 98. 
209 Appellate Body Report on  Canada – Dairy, para. 134.  In that instance, the Appellate Body had 
concluded that the particular language contained in Ca nada's Schedule was not descriptive but defined the scope 
of Canada's concession. 
210 Thailand noted that no such framework existed, as the Modalities Paper did not permit any 
exemptions from export subsidy reduction commitments.   WT/DS265/R 
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 4.197  Thailand  also referred to the principle of " contra proferentem " to argue that the European 
Communities prepared, and inserted, the foot note 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 woul d 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 part y which prepared or proposed the provision was the 
meaning which that party had cons istently 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 inconsis tency between the interpretation now advanced 
by the European Communities and its prior stat ements 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 commitmen ts 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 Communitie s 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 reduc tion commitments, then th e European Communities' 
overall reduction of sugar subsidies was inc onsistent with Article 9.2(b)(iv).   
4.199  The European Communities' present position was al so 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 commitm ents 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 Compla inants 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 year s 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 commitmen ts, clarifying how it could have 
observed the requirements of Article 9.2(b) dur ing the implementation period even if its re-
interpretation were correct.  The Complainants  noted that the European Communities had not 
                                                      
211 R. Jennings and A. Watts (eds.), Oppenheim's International Law , 90th ed.  (Longman, 1992), Vol. I, 
p. 1279.  Thailand noted that this principle was a supplementary means of interpretation recognized in 
international law, according to which, if two meanings are admissible, the meaning should be preferred "which 
is least to the advantage of the party which prepared or proposed the provision, or for whose benefit it was inserted in the treaty.". 
212 Exhibit COMP-21, G/AG/R/17, p. 29:  "As indicated in footnote 1 of the table on export subsidies 
contained in Part IV, Section II of Schedule CXL, the EC is not undertaking any reduction commitment on exports of ACP or Indian sugar.  Consequently, any financial assistance is not reported to the WTO.  For 
information, these exports amount to approximately 1.6 million tonnes per year.";  see also G/AG/R/15, p. 59:  
"exports of ACP and India sugar are eligible to receive export refunds.  As mentioned in the EC's Schedule no 
reduction commitment is made on this category of sugar." 
213 European Communities' oral statement at the first substantive meeting of the Panel, para. 31. 
214 Exhibit COMP-17 (statement included in the notifications indicating that the EC is not notifying the 
export subsidies granted to sugar of ACP and Indian origin); G/AG/R/34 pp. 3-4; G/AG/R/35 pp. 30. See also 
footnote 211 above. WT/DS265/R 
Page 68  
 
 submitted any notifications to the Committee on Ag riculture relating to the export of ACP/India 
equivalent sugar and indeed had refused to provide this informa tion, notably when requested by 
Australia. 
4.200  In this context, the Complainants underlined th e approach adopted by the Appellate Body in 
Korea – Various Measures on Beef  in reaching a conclusion on the in terpretation 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 advan ced by the Member in statements before the 
Committee on Agriculture or implied in its notifi cations to that Committee.  The Complainants 
suggested that the Panel rely also, in the pr esent case, on the European Communities' statements 
before the Committee on Agriculture, and its annu al 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 fo r the resolution of the present dispute.  However, 
independently of how it was interp reted, the footnote could not have  the legal effect of exempting 
export refunds granted to ACP and India equi valent 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 or igin 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 w as 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 f ootnote and would give legal effect to it. Under 
Article 3.3 of the Agreement on Agriculture , export subsides listed in Ar ticle 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 interp retation, Thailand contended that the European 
Communities would be exceeding its export s ubsidy 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 footno te conflicted with the di stinct requirements under 
the Agreement on Agriculture .  Also, there should be no conflict be tween 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 Waiver
216 and EC – Bananas III217 into the  
                                                      
215 Appellate Body Report on Korea – Various Measures on Beef , paras. 103-105.   
216 GATT Panel Report on US – Sugar Waiver , paras. 5.2-5.3. 
217 Appellate Body Report on EC – Bananas III , paras. 153-158.  WT/DS265/R 
 Page 69 
 
 
 Agreement on Agriculture , in that it required that Schedules and any footnotes therein conform to the 
Agreement, and did not diminish the European Co mmunities' 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 f ootnote 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 Agricult ure 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 co mmitment".  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 Eu ropean 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 doi ng, 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 fi rst 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, th e level of export subsidies on that portion of its 
exports.  The first sentence therefore had legal effe ct, 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 commit ments, or that the European Communities had 
not reduced the maximum scheduled export subsid ies on an annual basis in its schedule.  
4.205  While the European Communities agreed that the second senten ce 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 Sche dule 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 ex ports 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 th e same way as base periods for all other products.  
However, while other base periods were the st arting point from which the maximum level of 
                                                      
218 Appellate Body Report on EC – Bananas III , para. 154. 
219 The European Communities indicated that in that table it had set out figures representing the base 
period levels, which provided the basis from which the limited authorization to provide export subsidies was 
subjected to gradual reduction.  The second sentence of the footnote was intended to have an "equivalent" effect, i.e., to establish the European Communities' commitment level in respect of the separately articulated 
commitment on ACP/India "equivalent" sugar. WT/DS265/R 
Page 70  
 
 subsidized exports was reduced, this base was not to be reduced, and was th erefore 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 Commun ities sustained that Article 3.3 incorporated the 
export subsidy commitments into the GATT, but di d not prescribe any form for such commitments.  
Since the European Communities cons idered that it had respected the commitments it had undertaken 
to limit subsidization on A/B sugar and ACP/India e quivalent sugar, it had ac ted 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 ha d 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 Europ ean Communities' opinion, Article 3.3 did 
not impose an obligation to have both a budgetary ou tlay and a quantity commitment level, but merely 
referred to the "commitment levels specified ther ein".  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 agre ed in the Modalities Paper, and that the footnote 
constituted one such departure.  The European Co mmunities contended that in the absence of any 
express indication to that effect, such departures c ould 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 commitmen ts well in excess of those agreed as part of 
the Modalities Paper.  In this context, the Eur opean Communities argued that it was not alone in 
negotiating such departures. New Zealand did not sp ecify 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 commit ments, 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 possi ble to schedule quantitative limitations, particularly 
in respect of incorporated products. As for the f ootnote, only one set of commitments was scheduled 
for these products.  Since, in the European Co mmunities' 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 Modaliti es 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 consistent ly 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 
                                                      
220 See Part IV, Section II of New Zealand's Schedule (XIII). 
221 See Part IV, Section II of Australia's Schedule (I).  WT/DS265/R 
 Page 71 
 
 
 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 Comm unities, in the present case, this would imply interpreting the 
footnote as setting a ceiling in order to allow the Eu ropean 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 ex port subsidy commitment needed not contain a 
budgetary outlay commitment level.  First, Aust ralia'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 whic h 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 "particul ar products" which might be exported than an 
overall reduction limit for a group of products.  Seco ndly, New Zealand had scheduled the elimination 
of all export subsidies on all cove red products by the end of the im plementation 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 quantiti es 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 agricu ltural 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 incor porated products could be expressed in terms of 
aggregate budgetary outlays.  Moreover, the presen t 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 irre levant.  The Complainants considered that the 
European Communities' novel pro position found no support in the Agreement on Agriculture. 
Article 3.3 prohibited granting s ubsidies 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 commit ment 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 compensat ion elsewhere in the WTO agreements for the 
departure from the European Co mmunities' 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 
                                                      
222 The European Communities pointed to the reference to Oppenheim's International Law  in 
footnote 58 to Thailand's second written submission; and McNair. 
223 See Chitty on Contracts, General Principles , 27th Edition, Sweet & Maxwell, London (1994) 
12-071 et seq.  The European Communities noted that few of the cases cited in Chitty dated from after the 
19th Century. 
224 Appellate Body Report on EC – Hormones , footnote 154. 
225 G/AG/R/2 and G/AG/R/3. WT/DS265/R 
Page 72  
 
 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. 
4.211  Moreover, the Complainants noted that the Eu ropean Communities did not cite the relevant 
provision of the Modalities Paper that would have permitted it to adopt a lesser obligation than that 
expressed in the language of para graphs 11 and 12 of that text.
226  In their view, the reduction 
commitments were multilateral in nature and did not constitute negotiated concessions.  Unlike the 
market access commitments, they were "self-contained"  in regard to the balance of concessions, since 
they were not made contingent on concessions in  other areas of the agriculture negotiations.227  
Paragraph 7, in particular, did not lend support to the notion that "ACP/India equivalent" sugar might 
be distinguished from other quota sugar within a quantitative category.  Further, there was no 
provision in the Agreement on Agriculture  which provided for lesser reduction commitments for 
developed WTO Members in respect of any product or sub-category of a product.  In the export 
competition area, there was no multilateral c over, comparable to Annex 5 of the Agreement on 
Agriculture , which was negotiated, and paid for, by additio nal undertakings, in the market access area.   
4.212  The European Communities  dismissed the allusion to Annex 5 of the Agreement on 
Agriculture  as an example of a negotiated exemption as irrelevant.  While the footnote was a 
departure from the Modalities Paper, it was not a departure from the Agreement on Agriculture .  
Annex 5, by contrast, constituted a departure from the Agreement on Agriculture .  Further, Annex 5 
provided an exemption to the Agreement on Agriculture  which had been open to all WTO Members, 
whereas the footnote was a negotiated departure from the Modalities Paper specific to one Member.  The European Communities found it therefore logical  that a general exemption appeared in the 
Agreement, and that specifically negotiated treatment should appear in the schedule of the Member 
concerned.  The European Communities suggested th at the Members who utilized Annex 5 had "paid" 
for it in exactly the same way that  the European Communities had "paid"  for the footnote, i.e. in the 
general balance of rights and obligations  negotiated in the Uruguay Round.   
4.213  In response to the Complainants' analysis summarized in paragraphs 4.181–4.187, the 
European Communities submitted that the conclusion regarding the consistency of the footnote with 
the Agreement on Agriculture  could be reached without creating a conflict between the provisions of 
the footnote, or those of the Agreement on Agriculture , as alleged by the Complainants.  According to 
the European Communities, the Panel was not obliged  to declare the footnote, which was part of a 
validly concluded treaty, invalid.  The Europ ean Communities noted that under general public 
international law, one part of a treaty could rarely re nder another part of the same treaty without legal 
effect.  The WTO Agreement  specifically recognized such a possibility: (a) the general interpretative 
note to Annex 1A established a hierarchy between the other Annex 1A Agre ements and GATT 1994;  
(b) Article XVI.3 of the WTO Agreement  established a hierarchy between the WTO Agreement  and 
the Annex IA Agreements; (c) Article 1.2 of the DSU  had a similar logic. Further, the US – Sugar 
Waiver case established that, on the basis of the specifi c wording of Article II.1 of the GATT 1947, its 
object and purpose, a GATT Contracting Party coul d not derogate, in its schedule, from other 
obligations.  The European Comm unities expressed doubt whether that  case-law could be transposed 
to Article 3 of the Agreement on Agriculture , since the  panel had largely based its reasoning on the 
terms of Article II.1 of the GATT 1947, involving market access "concessions", as compared to 
export subsidy "commi tments".  The European Communities al so questioned the basis on which the 
                                                     
 
226 Exhibit COMP-19. 
227 The Complainants pointed out that, in the export competition section of the paper, there were no 
counterpart provisions to paragraph 6 dealing with expansion of current access, which allowed for due account 
to be taken of reduction commitments in the export competition area.    WT/DS265/R 
 Page 73 
 
 
 Complainants would have the Panel derogate from so me of the fundamental principles of international 
law.  The European Communities believed that the Pa nel would not, in any event, need to address this 
issue because, when properly interp reted, the footnote could not be considered to conflict with the 
Agreement on Agriculture .   
3. Application of the footnote to "ACP/India equivalent sugar"   
4.214  The Complainants  submitted that the terms of the reservation made by the European 
Communities in its Schedule of Concession did not c over ACP/India equivalent sugar.  By failing to 
comply with the text of the footnote, the Eur opean Communities was acting inconsistently with 
Articles 3.3, 8 and 9.1 of the Agreement on Agriculture .  A finding that the terms of the footnote did 
not cover the subsidies at issue would not ensure a fully satisfactory resolution of the dispute.  The 
issues arising from the terms  of the footnote were subsidiary issues that the Panel should address only 
if it were to conclude that the footnote was legally valid. 
4.215  Referring to the European Communities' contenti on that the footnote excluded from the scope 
of its reduction commitment a quantity of sugar that was merely equivalent to the quantity of sugar 
that it imported from ACP countries and India228, the Complainants submitted that the terms of the 
footnote applied exclusively to exports of "sugar of  ACP and Indian origin".  The footnote thus 
contemplated exclusively the re-export of sugar of ACP or Indian origin.  In this respect, the Complainants noted the European Communities' explana tions to the effect that it could not distinguish 
whether the exported white sugar was produced from the same raw sugar that  was imported and that 
there were no dedicated facilities for refining this imported sugar.  In the Complainants' view, it was 
thus clear that the exported sugar was not pro cessed from the imported raw sugar.  Moreover, the 
footnote did not mention, and could not be interpre ted to cover, "equivalent " exports. Thus, even if 
the Panel were to find that Members could exem pt themselves from their obligations under the 
Agreement on Agriculture  by inserting footnotes in their Schedules of Concessions, the Panel would 
have to conclude that the footnote inserted by  the European Communities did not exempt it from 
those obligations in respect of quantities of sugar equivalent to sugar of ACP and Indian origin.  
4.216  The European Communities  replied that this issue constituted a separate claim which had 
not been properly stated in the panel requests (see Section IV.B above, Terms of  reference).  As part 
of its argumentation on good faith, the European  Communities submitted that the footnote covered 
refunds on exports equivalent to imports and that th e Complainants were aware of this fact during the 
Uruguay Round. 
4.217  The European Communities sustaine d that it was well known to all parties, at the time of the 
conclusion of the WTO Agreement, that the Eur opean Communities did not grant export refunds only 
on the re-export of sugar originally of ACP and Indi an origin, but to a quant ity equivalent to such 
exports.
229  According to the European Communities, this was reflected in the drafting of the footnote 
which referred to the "average of export" as be ing 1.6 million tonnes.  The European Communities 
argued that this was a reference to exports which were not ACP/India raw sugar imported, refined, 
and subsequently exported, but rather the equiva lent quantity of ACP/India sugar that had been 
imported.  The European Communities sustained that the term "export" in "ave rage of export" had the 
same meaning as "exports" in the first sentence.  In the European Communities' view, the footnote 
                                                      
228 Exhibit COMP-1, (2001/C 50/01) pp. 23-24, 27 and 29;  Exhibit COMP-21. 
229 Report of the Working Party on European Communities – Refunds on Exports of Sugar , adopted on 
10 March 1981, BISD 28S/80, para. 35:  "As was well known, the EEC imported 1.4 million tons per year or 
ACP raw sugar at guaranteed prices and exported an equivalent amount of white sugar."  The European 
Communities submitted that both Australia and Brazil participated in the Working Party, and that Australia was 
clearly aware of the fact that  not all imports of ACP/India were re-exported.  In para. 34 of the Working Party 
report, it is noted that:  "The representative of Australia also stated that most ACP sugar went to the United 
Kingdom market and was refined and consumed there." WT/DS265/R 
Page 74  
 
 therefore covered refunds on exports  equivalent to imports.  Second, the European Communities had 
made its intentions clear in two letters, when s ubmitting draft schedules and associated documents to 
the negotiating group
230, reiterating its objective to have the f ootnote adopted by the other negotiating 
parties.  Since the footnote was adopted as propo sed, the European Commun ities submitted that these 
cover letters were equally relevant  in establishing the meaning of the footnote, i.e. that it covered 
exports "corresponding" to imports.   
4.218  The Complainants  reaffirmed that the scope of appli cation of the footnote was a subsidiary 
argument supporting their legal claim that the European Communities was exceeding its export 
subsidy reduction commitments.  They sustained that the words "ACP and Indian origin" needed to be 
interpreted in accordance with the ordinary meanin g of "origin" to mean sugar that came from the 
ACP countries or India.  They registered the Eur opean Communities' recognition, in paragraph 4.217, 
that it exported an amount of sugar "equivalent" to the amount it imported from ACP countries and India, and that may actually be of domestic origin.
  They noted, however, that the amount of sugar 
exported was not equivalent to the amount of sugar imported under the preferential arrangements231, 
but was set at an arbitrary limit based on preferenti al imports plus, presumably, Special Preferential 
Sugar (SPS), despite the fact that SPS was not e ligible for export refunds. Even assuming that the 
footnote was a legitimate derogation from the Agreement on Agriculture,  the Complainants argued 
that the export of an "equivalent" amount of EC sugar was not what was provided for.  
4.219  Thailand  highlighted a discrepancy in the ar guments presented by the European 
Communities before the Committee on Agriculture232, where the European Communities had 
confirmed that export subsidies were granted only to processed sugar obtained from ACP and Indian 
sugar , and its standpoint in paragraph 4.217 wher e the European Communities interpreted the 
footnote as applying to sugar of EC origin that  was "equivalent" to s ugar imported from the ACP 
countries and India.  Referring to the European Communities' arguments with respect to circumstances supposedly "well-known" to th e participants in paragraph 4.217, the Complainants  
considered that what was at issue was treaty text.  The arguments presented by the European 
Communities were not based on an analysis of the term s of the treaty, considered in light of context 
and the object and purpose.  The cover letters  cited by the European Communities did not 
unambiguously support its interpretation, as the letters did not refer to "sugar of EC origin", but rather 
to sugar that "corresponds" to imports from ACP c ountries and India.  According to the Complainants, 
this phrase could refer to sugar refined from ra w sugar imported from the ACP countries and India 
rather than EC quota sugar.    
4.220  The European Communities  recalled its argumentation that this claim was not within the 
Panel's terms of reference.  Howe ver, should the Panel find that the question of interpretation of the 
terms of the footnote fell within its  terms of reference, the footnote  should be interpreted as permitting 
the export of a volume of subsidized exports "equivale nt" to the volume of imports of ACP and Indian 
origin.  Referring to its explanations relating to th e interpretation of the footnote, and those relating to 
the consistency with the Agreement on Agriculture , the European Communities reiterated that the 
figure represented by the word "export" in the second sentence of the footnote did not, in the 
knowledge of all Members, refer to  re-export of ACP or Indian s ugar, but rather to an amount 
"equivalent" to the total volume of imports from those countries.  To the extent that recourse to supplementary means of interpretation may be of assistance, the European Communities submitted 
that the preparatory work, and the circumstance s of conclusion, confirmed that the European 
Communities' interpretation was the meaning intend ed by the parties.  The European Communities 
had already noted that in the letters transmitting the draft schedule to th e GATT Secretariat, the 
                                                     
 
230 Exhibit EC-5 and Exhibit EC-6. 
231 Article 35 of Council Regulation No. 1260/2001. 
232 G/AG/R/15, p. 59.  WT/DS265/R 
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 European Communities had made it clear that it c onsidered that the footnote covered a volume of 
exports corresponding to the volume of imports from ACP countries and India. 
4.221  The European Communities confirmed that it gr anted export subsidies on exports of sugar 
"equivalent" to the amount of imports which could be imported from ACP countries and India, up to a 
maximum of 1.6 million tonnes, although both the import entitlement and the actual imports were 
frequently substantially more than 1.6 million tonnes.233 Where the amount of import entitlement was 
lower than 1.6 million tonnes, that amount opera ted as the ceiling. The European Communities 
submitted statistical data in support of the view that  it considered and treated the 1.6 million tonnes as 
a cap on the amount of exports which could benefi t from export subsidies as ACP/India equivalent 
sugar. 234   
4.222  Under Regulation No. 1260/2001, the European Communities continued, the competent 
authorities were authorized to grant export refunds  only to the extent that  there was a difference 
between world market and Community prices.  They could not distinguish between different "types" of sugar.  The European Communities authorities ha d limited control over the evolution of the amount 
of individual refunds.  The Commission verified on  a weekly basis that the export refunds granted 
remained within the limits set out in the WTO Agreement , by way of a control sheet 
235 used to track 
the volume of sugar for which export licences had been issued, and establishing a running total of 
volume and outlays, and the average export refund.  These figures were then compared to the total of 
the two component limits of the European Commun ities' export subsidy commitments: its standard 
commitments (1,273,500 tonnes and €499,100,000) and its ACP/India equivalent commitments (1,600,000 tonnes and 1,600,000 multiplied by th e average export refund).  Through this tender 
system, the European Communities managed its export  refunds in order to respect its export subsidy 
commitments under the WTO.   
4.223  The European Communities reaffirmed that the footnote was a negotiated commitment and 
was part of the complex balance of rights and obligations set out in the WTO Agreement , the 
individual agreements annexed to it, and the schedules of Members which were an integral part of the 
Agreement.  The European Communities continued to respect that obligation which required it to 
export onto the world market.  The European Commun ities sustained that since the early 1980s, it had 
consistently argued that the portion of its exports  "equivalent" to its imports from ACP and India 
should be entitled to differential treatment.  This diffe rential treatment, in its view, was articulated in 
the footnote, a commitment which the European Co mmunities claimed to have negotiated, and paid 
for, in the Uruguay Round negotiations, including w ith the Complainants. The footnote was also a 
derogation from the Modalities Paper.  The European  Communities asserted that its interpretation of 
the footnote was consistent with its own objectiv es and those of other WTO Members, in negotiating 
the footnote.  The European Communities held that the Appellate Body had made it clear that a treaty 
interpreter could not lightly assume that a WT O Member projected no demonstrable purpose on a 
specific provision.
236  
4.224  The European Communities considered that Au stralia, in the documents it had submitted to 
the Panel, had admitted that it shared the European  Communities' understanding of the footnote.  For 
instance, the G8 "Record of discussion" eviden ced Australia's understanding of the European 
Communities' intention to reduce only that porti on of its export subsidies corresponding to "net 
                                                      
233 Note by the EC: under the ACP Sugar Protocol, the EC-India Agreement on sugar and as special 
preferential sugar.  Fluctuations are typically brought about by changes to the amount of sugar which can be 
imported as special preferential sugar. 
234 Table 10 of the European Communities' first written submission. 
235 Exhibit EC-16. 
236 Appellate Body Report on  Canada – Dairy, para. 135. WT/DS265/R 
Page 76  
 
 exports".
237 More explicitly in the European Commun ities' view, the Australian memorandum on 
"Issues still requiring settlement" of 31 January 1 994 referred to export subsidies covered by the 
footnote as those "corresponding to [the EC's] im ports of sugar from ACP countries and India".238  
Given that Australia was the only Complainant who directly negotiated the footnote with the 
European Communities and was the only WTO Member  (with the exception of the ACP countries and 
India) who discussed the footnote with the Eu ropean Communities, the European Communities 
submitted that Australia's understanding of the footno te was highly probative of the parties intentions 
in adopting the footnote. 
4.225  Australia  contested the European Communities' a llegation that it had negotiated special 
exceptions from its WTO export subsidy reduction commitments for sugar, and noted that the 
European Communities could not cite any provision in the Modalities Paper – let alone any of the 
WTO agreements – for what it has described as an entitlement to differential treatment, a treatment 
more favourable than that accorded to developing country sugar exporters under the provisions of the 
Agreement on Agriculture .  There was no document signifying agreement by any participant in the 
Uruguay Round that the European Communities should enjoy differential treatment.  In signing on to 
the Final Act embodying the results of the Ur uguay Round, the European Communities undertook to 
ensure the conformity of its laws, regulations a nd administrative procedures with its obligations as 
provided in the annexed Agreements to the WTO Agreement239.  It also accepted the treaty obligation 
that no reservations may be made in respect of any of the provisions of the Multilateral Trade 
Agreements, except to the extent provided for in those Agreements240.  There was nothing in the 
Agriculture or SCM Agreements that permitted the European Communities to "grandfather" pre-
existing measures inconsistent with its WTO obligati ons for sugar export subsidies.  Australia further 
confirmed that it had raised this inconsistenc y with the European Communities during the Uruguay 
Round, pointing out that the footnote would be open to challenge.241   
4. Good faith and estoppel 
4.226  The European Communities  submitted, in the alternative, that, should the Panel first, 
disagree with the European Commun ities' interpretation of its commitm ents with respect to ACP/India 
equivalent sugar and second, agree with the Complain ants that the footnote constituted an inoperative 
exclusion from the European Communities' obligations under the Agreement on Agriculture , that the 
Panel should nevertheless reject the Complainants' claims for the following reasons.  By agreeing to 
the European Communities' proposed  treatment of ACP/India equivalent sugar, and bringing this 
challenge subsequently, the Complainants would have the European Communities reduce the exports 
provided from 1.6 million tonnes to zero, rather than  1,264,000 tonnes, as woul d have been the case if 
the 1.6 million tonnes had been reduced by 21  per cent, effectively requiring the European 
Communities to reduce the base quantity of subsidized  exports by 60 per cent instead of 21 per cent.  
The European Communities therefore submitted that  the Complainants exercised unreasonably their 
rights, were estopped from bringing this claim, acted inconsistently with the principle of good faith 
and Article 3.10 of the DSU , and that they should agree to  the correction of the European 
Communities' scheduling commitments.  The European  Communities indicated that the arguments set 
out with respect to C sugar applied, mutatis mutandis , to the Complainants' claims in respect of 
ACP/India equivalent sugar.  (See also paragraph 4.217) 
4.227  The European Communities drew an analogy w ith tariff concessions, submitting that export 
commitments were the subject of detailed negotiation s, and that the EC commitments represented the 
                                                      
237 Exhibit ALA-3. 
238 Exhibit ALA-8. 
239 Article XVI:4 of the WTO Agreement . 
240 Article XVI:5 of the WTO Agreement . 
241 Exhibit ALA-3.  WT/DS265/R 
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 negotiated balance of the varied interests of all participants in the Uruguay Round.  The European 
Communities submitted that, in challenging the Eur opean Communities' footno te, the Complainants 
were trying to alter that balance.242  The European Communities cons idered that it was only normal 
that importing Members defined their offers (and their ensuing obligations) in terms which suited 
their needs. On the other hand, exporting Members had to ensure that their corresponding rights were 
described in such a manner in the Schedules of im porting Members that their export interests, as 
agreed in the negotiations, were guaranteed.  A ccording to the European  Communities, a special 
arrangement was made for this purpose in the Urugu ay Round, and a process of verification of tariff 
schedules took place from 15 February through 25 Ma rch 1994, which allowed the participants to 
check and control, through consultations with thei r negotiating partners, the scope and definition of 
tariff concessions.  The fact that Members' Sc hedules were an integral part of the GATT 1994 
indicated that, while each Schedule represented the tariff commitments made by one Member, they 
represented a common agreement among all Members.   The European Communities held that the 
claims which the Complainants made in these pr oceedings should have been raised during the 
verification process, and if considered valid, the Me mbers concerned could have negotiated a different 
balance of concessions.  
4.228  According to the European Communities, th e Complainants were aware, by virtue, inter alia , 
of the inclusion of the footnote in the European  Communities' export subsidy commitments, both in 
its draft and final form, of the existence of the European Communities' intended treatment of 
ACP/India equivalent sugar.  The European Comm unities contended that, in 1981, the Complainants 
had argued against ACP equivalent sugar being treated separately from other export refunds on 
EC sugar.  In 1993 and 1994, the Complainants explicitly agreed to  the compartmenta lized treatment 
of ACP/India equivalent sugar in  negotiating and concluding the WTO Agreement .  The elements on 
which the Complainants based thei r challenge in this dispute were in existence at the time of 
conclusion of the Uruguay Round.   
4.229  With respect to ACP/India equivalent sugar, the Complainants  rejected the European 
Communities' claim that they were estopped from br inging their complaint, and that they implicitly 
agreed to the footnote in the EC's Schedule. The Complainants indicated that their rebuttal on good 
faith and estoppel for C sugar (see Section IV.D.3(b) above) applied mutatis mutandis  to the European 
Communities' arguments on these matters fo r ACP/India equivalent sugar.   
4.230  According to the Complainants, the European Communities had also mistakenly characterized 
the scheduling of export subsidy reduction commitmen ts as being conducted on a bilateral offer and 
request basis (see paragraph 4.227).  Contrary  to the European Communities' assertions, a WTO 
Member's Schedule of bound tariff concessions was not  analogous to the EC's Schedule of reduction 
commitments for export subsidies for agricultura l products.  While WTO Members bargained over 
their tariff concessions, no similar bargaining or ne gotiation took place over the contents of reduction 
commitment schedules.  To the extent that any an alogy to the bargaining of tariff concessions could 
be found in the Agreement on Agriculture , it was found in the reduction commitment levels provided 
in Article 9.2, rather than in the individual Me mber Schedules.  A WTO Member that objected to the 
content of another Member's Schedule of reduc tion commitments had neither the time nor the 
opportunity to negotiate further on the contents of  the Schedule. The only recourse would have been 
to decline to sign the WTO agreements altogether or  to engage in dispute settlement after the signing 
of the Uruguay Round Agreements.   
4.231  The Complainants argued that the Panel could not  give legal effect to a unilateral reservation 
like the European Communities' footnote, without  reducing the multilatera l agreement on subsidy 
reduction commitments contained in the Agreement on Agriculture  to a voluntary system of unilateral 
concessions.  The Complainants considered that this would have severe consequences for future 
                                                      
242 Appellate Body Report on EC – Computer Equipment , para. 109. WT/DS265/R 
Page 78  
 
 negotiations.  The closing weeks and days of nego tiations would see a flood of footnotes qualifying 
one previously negotiated commitment after another. WTO Members might never sign the 
agreements, as they would see negotiated benefits eliminated by footnotes or would simply conclude 
that they could not be sure what the agreements  meant.  According to the Complainants, dispute 
settlement would soon be concerned with interpretin g treaty text in light of footnotes, and even one 
footnote in light of another (see also arguments with  respect to C sugar in Section IV.D.3(b) above). 
F. A
RTICLE  3 OF THE SCM A GREEMENT  
4.232  The Complainants submitted that the export subsidies granted in respect of exports of quota 
sugar243, ACP/India equivalent sugar and C suga r were prohibited subsidies under the 
SCM Agreement .  More specifically, the Complainants claimed that the EC sugar regime provided 
subsidies that amounted to an export subsidy listed in Item (d) of the Illustrative List of Export 
Subsidies in Annex I of the SCM Agreement  (see Section IV.D.2(a) above) and that the export refund 
on exports of quota sugar and ACP/I ndia equivalent sugar amounted to an export subsidy listed in 
Item (a) of the same Illustrative List.  As such , the European Communities' export subsidies were 
prohibited under Article 3.1(a) of the SCM Agreement , and by maintaining and granting prohibited 
export subsidies, the European Comm unities violated Article 3.2 of the SCM Agreement .  
Furthermore, Australia  and Brazil  claimed that the EC sugar regime was also otherwise inconsistent 
with Article 3.2 of the SCM Agreement .  
4.233  The European Communities  argued that the SCM Agreement  was not applicable to 
agricultural products, in casu , sugar. It pointed to, inter alia , Article 21.1 of the Agreement on 
Agriculture  and claimed that this provision had been interpreted by the Appellate Body as meaning 
that the other Annex IA Agreements ap plied "except to the extent that the Agreement on Agriculture  
contains specific provisions dealing specifically with the same matter."244 The European Communities 
contended that it was clear that the Agreement on Agriculture  contained specific provisions dealing 
specifically with the "same matter". For example, it cite d the fact that Articles 3, 8, 9, 10 and 11 of the 
Agreement on Agriculture  set out detailed rules on the provision of export subsidies, thereby 
permitted them up to a certain level. Specific rules were also set out on the type of subsidies which 
could be granted, and specific mechanisms were  defined on how to deal with possible cases of 
circumvention.  For the Eur opean Communities, applying the SCM Agreement  to agricultural export 
subsidies (even those granted inconsistently with the Agreement on Agriculture ), and specifically the 
prohibition on export subsidies, would undermine the specificity of the agricultural regime, and the 
gradual process of reform which all Members signed up to.   
4.234  The Complainants  interpreted Article 21.1 of the Agreement on Agriculture  to mean that the 
Agreement on Agriculture  and the SCM Agreement  applied cumulatively to measures affecting 
agricultural products.  For them, the chapeau to Article 3 of the SCM Agreement , read together with 
Article 21.1 of the Agreement on Agriculture , set out a special exception for those export subsidies 
provided  in conformity with the Agreement on Agriculture , that is:  (a) Article 9.1 listed export 
subsidies subjected to reduction commitments;  (b ) Article 9.1 listed export subsidies on scheduled 
products that were not in excess of the budgetary outlay and quantity commitments specified in the 
Schedule;  and (c) fulfilment of the individual undertakings of each Member in accordance with 
Article 8 of that Agreement.  In the view of the Complainants, the Agreement on Agriculture  did not 
constitute a lex specialis  in regard to agricultural products or  to measures applied to agricultural 
products, whether subsidies or any other obligation subject to WTO disciplines. The Agreement on 
Agriculture and the SCM Agreement  were separate treaties, creating separate rights and obligations, 
                                                      
243 In this section of the Panel report, it should be noted that Australia's claims under the SCM 
Agreement  do not involve all quota sugar, rather the "ACP/India equivalent" component of the A and B quota 
sugar. 
244 Appellate Body Report on EC – Bananas III , para. 155.  WT/DS265/R 
 Page 79 
 
 
 and providing for different remedies.  A measure c ould be inconsistent with one agreement but not 
with the other, or it could be inconsistent with bot h.  A finding that a measure was inconsistent with 
both, however, would require pr oof of different elements. 
4.235  In this respect, the Comp lainants referred to the US-FSC  panels and Appellate Body reports 
which analysed export subsidies granted to agricultural products under both the SCM Agreement  and 
the Agreement on Agriculture . For the Complainants, the relevant provisions of the SCM and the 
Agreement on Agriculture  needed to be read in context and needed  to give meaning to the intent of the 
negotiators to integrate – at least partially  – agricultural export subsidies into the SCM Agreement . 
Here, the Appellate Body had examined  the challenged measures under both the Agreement on 
Agriculture  and the SCM Agreement , without any suggestion that to do so in any way undermined 
Article 21.1 of the Agreement on Agriculture.245 The Appellate Body, in both the original proceedings 
and the recourse to Article 21.5, found that the s ubsidies in that case were not only prohibited export 
subsidies under Article 3.1(a) and 3.2 of the SCM Agreement  but also inconsistent with the export 
subsidy obligations under Articles 3.3, 8 and 10.1 of the Agreement on Agriculture .246  
4.236  The Complainants  also cited Article 3.1 of the SCM Agreement , which prohibited export 
subsidies, "except as provided  in the Agreement on Agriculture ."  In Canada – Dairy , the Appellate 
Body had said that this clause "indicates that the WTO-consistency of an export subsidy for agricultural products has to be examined, in the first place , under the Agreement on Agriculture ."
247  If 
an examination "in the first place" of export subsidies under the Agreement on Agriculture revealed 
that these subsidies were not "as provided in the Agreement on Agriculture, " then an examination "in 
the second place" was required under the SCM Agreement .  
4.237  For the Complainants, there was no inconsiste ncy or conflict between the references in 
Article 3.1 of the SCM Agreement  ("except as provided in the Agreement on Agriculture ") and that in 
Article 21.1 of the Agreement on Agriculture  (that provisions of other ag reements apply "subject to 
the provisions of this Agreement").  These two pr ovisions, read together, meant that any subsidy 
permitted under the Agreement on Agriculture  was not subject to the disciplines of the 
SCM Agreement .  However, this reading did not compel or  even imply the additional inference drawn 
by the European Communities that subsidies not permitted under the Agreement on Agriculture  were 
equally not subject to the disciplines of the SCM Agreement .  Nothing in the text or, indeed, the object 
and purpose, of either provision supported such a br oad reading of the two provisions.  The European 
Communities' interpretation of th e relationship between these agreem ents and the limited scope of 
application of the SCM Agreement  in respect of export subsidies granted to agricultural products 
could not be reconciled with the plain wording of the provisions regulating this matter. The meaning 
of the terms in the SCM Agreement  was unambiguous: "except" where the Agreement on Agriculture  
provides otherwise, the disciplines set out in Article 3 of the SCM Agreement  apply to subsidies on 
agricultural products.  
4.238  The European Communities, in response to the Complainants arguments in paragraph 4.235 
in relation to the US – FSC  dispute submitted that neither the pa nel nor the Appellate Body had found 
that the SCM Agreement  applied to agricultural products.  The panel had found that the FSC scheme 
was inconsistent with the SCM Agreement , "except as provided in the Agreement on Agriculture ".248  
The panel, however, did not make a finding that, b ecause the FSC scheme was inconsistent with the 
Agreement on Agriculture , it was subject to and inconsistent with the SCM Agreement  as far as 
                                                      
245 Appellate Body Report on US – FSC (Article 21.5 – EC) , paras. 256-257. 
246 Appellate Body Report on US – FSC , paras. 177(a) and (d).  See also Appellate Body Report on US 
– FSC (Article 21.5 – EC) , paras. 256(b) and (d). 
247 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 123 
(emphasis added). 
248 Panel Report on US – FSC , paras. 7.130 and 8.1. WT/DS265/R 
Page 80  
 
 agricultural products were concerned.  Furtherm ore, the panel considered it necessary to make 
separate recommendations under the SCM Agreement  and the Agreement of Agriculture .
249  T h i s  
suggested that the panel considered that the Agreement on Agriculture  excluded the applicability of 
the SCM Agreement  with respect to agricultural products. In  determining the leve l of countermeasures 
under Article 4.10 of the SCM Agreement  in the Article 22.6 arbitration in the FSC dispute, the 
European Communities continued, the Arbitrators took the view that an amount corresponding to the 
value of the subsidy to agri cultural goods should be deducted.250  The panel clearly understood, 
therefore, the SCM Agreement  as not being applicable to expor t subsidies granted on agricultural 
goods. 
4.239  The European Communities also noted that there were significant factual differences between 
the schemes at issue in the FSC dispute and th e present dispute, which explained why the Agreement 
on Agriculture and the SCM Agreement  applied concurrently in the FSC dispute, but did not apply 
cumulatively, as the Complainants woul d have it in the current dispute251.  As a consequence, the 
application of the two agreements concurrently in the FSC dispute, did not mean that the two 
agreements could be applied cumulatively in the present dispute. 
4.240  The Complainants  responded that this interpreta tion was not supported by WTO 
jurisprudence and would serve to void the rele vant provisions of the Agriculture and SCM 
Agreements of any meaning. The Complain ants reiterated that Article 3.1 of the SCM Agreement  
("Except as provided  in the Agreement on Agriculture ...") and Article 21 of the Agreement on 
Agriculture ("The provisions of GATT 1994 and of [other covered Agreements] shall apply subject to 
the provisions of this Agreement ") were straightforwardly consistent  and complementary.  If a subsidy 
was permitted or exempted from action under the Agreement on Agriculture , the SCM Agreement  did 
not apply to that subsidy.  If a subsidy was not permitted or exempted from action under the 
Agreement on Agriculture , the SCM Agreement  did apply. Finally, the Complainants contended that if 
the drafters of the SCM Agreement  had intended that the SCM Agreement  should not apply to 
agricultural products at all, it would have been simp le to have inserted a provision to that effect.  
However, no such provision existed. On the contra ry, for the limited timeframe of the implementation 
period, the Peace Clause of the Agreement on Agriculture  indicated that only those export subsidies 
that fully conformed to the provisions of the Agreement on Agriculture  on export subsidies were 
exempted from actions under the SCM Agreement . The logical implication of this provision was that 
export subsidies that did not conform fully to the Agreement on Agriculture  were not exempted from 
actions under the SCM Agreement . 
4.241  The European Communities,  referring to the Appellate Body in EC – Bananas III252, 
reiterated that the Agreement on Agriculture 's provisions on export subsid ies for agricultural products 
were "specific provisions dealing specifically with the same matter" as the SCM Agreement  
prohibition on export subsidies.  Thus, to apply the SCM Agreement  to agricultural export subsidies 
would undermine the specificity of the agricultura l regime, and the gradual process of reform which 
all Members had accepted.  It would therefore be inconsistent with the object and purpose of the 
Agreement on Agriculture .  This would nevertheless not rende r Article 13(c) meaningless because 
Article 13 in general, and Article 13(c) in particular, were intended  to provide added clarity to the 
                                                      
249 Ibid., paras. 8.3-8.4. 
250 US – FSC (Article 22.6 – US), Table A.1. 
251 According to the European Comm unities, in the FSC dispute, th e FSC scheme (and its successors) 
applied concurrently to exports of both agricultural goods and non-agricultural goods.  For that reason, it made sense for the panel, and the EC as complainant, to argu e that the two Agreements applied concurrently to the 
FSC scheme.  In the present case;  however, the CMO fo r sugar applied exclusively to agricultural products, and 
not to any non-agricultural products.  In this case, the Complainants sought to apply the Agreement on Agriculture and the SCM Agreement not concurrently but cumulatively. 
252 Appellate Body Report on EC – Bananas III , para. 155.  WT/DS265/R 
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 relationship between the two agreements during a sp ecific time-period (the nine year implementation 
period for Article 13).  Given the existence of Article 21.1 of the Agreement on Agriculture , the mere 
existence of Article 13(c) of the Agreement on Agriculture was not dispositive of a final conclusion 
on the relationship between the two agreements. 
4.242  The Complainants submitted that the export subs idies granted in respect of exports of quota 
sugar, ACP/India equivalent sugar and C sugar were  prohibited subsidies under Article 3.1(a) of the 
SCM Agreement .  For the Complainants , the use of the term 'including' in Article 3.1 of the 
SCM Agreement  made it clear that the items listed in the Illustrative List of Export Subsidies in 
Annex I of the SCM Agreement  constituted subsidies contingent on  export performance.  Provided a 
measure fell within the definitional scope of any item in the Illustrative List, it would constitute a 
prohibited export subsidy for the purposes of Article 3.1 and 3.2 of the SCM Agreement .  There was 
no need to determine whether a measure came within  the definition of a subsidy for the purposes of 
Article 1.1 of that Agreement or to demonstrate export contingency, as the subsidy and contingency 
elements were inherent in the definitions.  Th is had been confirmed by WTO jurisprudence.  
4.243  The European Communities agreed with the Complainants but submitted that, nevertheless, 
the definition of "export subsidy" in Article 3.1 was still relevant context for interpreting the terms of 
the Illustrative List.  
4.244  The Complainants  argued that the European Commun ities' subsidies on C sugar exports 
were prohibited export subsidies within the meaning of Item (d) of the Illustrative List. (See full 
description of the Complainants' arguments in rega rd to Item (d) of the Illustrative List in 
Section IV.D.2(a)). 
4.245  The Complainants  also argued that Item (a) of the Illu strative List covered "[t]he provision 
by governments of direct subsidies to a firm or  an industry contingent upon export performance." 
Since the European Communities' direct subsidie s to sugar exporters upon  the export of A and B 
quota as well as ACP/India equivalent sugar were c ontingent upon export, these subsidies were also 
prohibited through the operation of Item (a) of the I llustrative List and Articles 3.1(a) and 3.2 of the 
SCM Agreement . 
4.246  In addition to its claims concerning Item (a) of the Illustrative List, Brazil  argued that export 
subsidies granted by the European Communities on the sugar exported in excess of its reduction 
commitments were inconsistent with, a nd were prohibited by, Article 3 of the SCM Agreement .  In 
this regard, Brazil referred to Article 1.1 of the SCM Agreement  which defined a subsidy as a 
"financial contribution" that confers a benefit.  For Brazil, exporters of A and B sugar and ACP/India 
"equivalent" sugar received at least two forms of financial contributions, each of which conferred a 
benefit within the meaning of Article 1.1 of the SCM Agreement .  First, the payments received by 
exporters of A and B sugar and of ACP/India equiva lent sugar constituted a "financial contribution" 
from the European Communities in the form of a di rect transfer of funds, within the meaning of 
Article 1.1(a)(1)(i) of the SCM Agreement .   
4.247  Second, a financial contribution within the meaning of Article 1.1(a) of the SCM Agreement  
was also made if "there was any form of income  or price support in the sense of Article XVI of 
GATT 1994".  Article XVI:1 of GATT 1994 encompassed "any form of income or price support, 
which operates directly or indirectly to increase expor ts of any product from, or to reduce imports of 
any product into," the territory of a Member.  The EC sugar regime did that.  It increased exports of 
sugar from the European Communities by subsidiz ing the production of A and B quota sugar in 
excess of the amount consumed internally. These fina ncial contributions conferred a benefit on their 
recipients within the meaning of Article 1.1(b) of the SCM Agreement  because the recipients were, in 
the words of the Appellate Body, "'better off'  than they would otherwise have been." WT/DS265/R 
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 4.248  Brazil also argued that the EC price suppor t regime permitted producers to cover a 
disproportionate share of their fixed costs through guaranteed high returns on A and B quota beet and sugar, and also generated the pr oduction of C beet and C sugar.  It was therefore a financial 
contribution to producers of C beet and C suga r within the meaning of Article 1.1 of the 
SCM Agreement .  This financial contribution permitted th em to produce and sell C beet and C sugar 
below the average total cost of production, thereby be nefiting those producers.  Since C sugar must be 
exported, and the C beet from which it was made was devoted exclusively to the production of 
C sugar, the subsidies received by the producers of  C beet and C sugar were contingent on exports 
within the meaning of Article 3.1(a) of the SCM Agreement .  These subsidies were, accordingly, 
prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement .   
4.249  The Complainants noted that if a panel were to find the measure at issue to be inconsistent 
with one of the multilateral trade agreements, such a finding normally would resolve the dispute.  The 
panel could therefore refrain, on grounds of judici al economy, from making a finding that the measure 
was also inconsistent with another multilateral trade agreement.  In the specific circumstances of this 
complaint, however, this was not the case.  
4.250  The Complainants , referring to the text of  Article 4.7 of the SCM Agreement , noted that the 
requirement to withdraw prohibited subsidies "without delay" had been interpre ted by previous panels 
to mean that a Member must withdraw the subsid y at issue within 90 days from the date of the 
adoption of the panel report by the DSB.
253  They further noted that the Agreement on Agriculture did 
not have a similar provision aimed at the prompt  withdrawal of subsidies in excess of reduction 
commitments.  In the case of an inconsistency wi th that Agreement, only the substantially more 
lenient remedies set out in Articles 19 to 22 of the DSU  applied.  Neverthele ss, Article 19.1 of the 
DSU  did not serve to prevent a panel from making a recommendation in line with the provisions of 
Article 4.7 of the SCM Agreement , nor did Article 21.1 of the Agreement on Agriculture prevent a 
specific recommendation in line with Article 4.7 of the SCM Agreement . 
4.251  According to Article 19 of the Agreement on Agriculture , the Complainants continued, the 
DSU  applied to disputes under the Agreement on Agriculture .  However, Article 1.2 of the DSU  
specified that special rules or procedures set out in the covered agreements and listed in Appendix 2 
of the DSU  "shall prevail" over the general dispute se ttlement rules and procedures set out in the DSU  
to the extent that "there is difference" between th e rules and procedures.  According to Appendix 2 of 
the DSU , Article 4.7 of the SCM Agreement  was "a special or additional rule or procedure".  
Furthermore, it was one which entailed differences with  the rules and procedures of Articles 19 to 21 
of the DSU  and consequently prevails over Article 19.1 of the DSU  in disputes on prohibited 
subsidies. (see also paragraph 4.262 below) 
4.252  A ruling under the SCM Agreement  was, therefore, necessary to preserve the Complainants 
procedural right to a recommendation by the DSB that export subsidies prohibited under Agreement 
be withdrawn "without delay".  If the Panel were to refrain from determining whether or not the 
measures at issue were prohibited under the SCM Agreement , the DSB would not be in the position to 
make such a decision.  As a consequence, the Comp lainants would be deprived of their procedural 
right under Article 4.7 of the SCM Agreement .  The Complainants noted that the Appellate Body 
decided in Australia-Salmon that panels should ma ke the rulings necessary "to enable the DSB to 
make sufficiently precise recommendations and rulings  so as to allow for prompt compliance" lest 
they engage in "false judicial economy".254  For the Complainants, the Panel would be engaging in 
                                                      
253 See for example, Panel Report on Canada – Aircraft Credits and Guarantees ;  Panel Report on 
Canada – Autos , para. 11.7;  Panel Report on Canada – Aircraft , para. 10.4;  Panel Report on Brazil – Aircraft , 
para. 8.5;  and Panel Report on Australia – Automotive Leather II , para. 107.  
254 Appellate Body Report on Australia – Salmon , para. 223.   WT/DS265/R 
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 false judicial economy if it were to refrain from making the substantive rulings necessary to enable 
the DSB to make a recommendation to which they are legally entitled. 
4.253  The Complainants clarified that they had made a claim under the SCM Agreement  because 
they believed that the European Communities was ac ting inconsistently with the provisions of that 
Agreement and that if the European Communities w as found to be acting inconsistently, the remedy 
would follow.  Thus, one of the reasons for invoking the SCM Agreement  was to secure all of the 
rights to which the Complainants were entitled under all of the covered agreements that applied to the 
facts of this dispute.  To the extent that these agreements provided different remedies, the 
Complainants were entitled to those different remedies.  
4.254  The European Communities  did not agree with the Complainants and, referring to the same 
statement made by the Appellate Body in Australia – Salmon,  argued that panels were required to 
make rulings permitting the DSB to adopt suffici ently precise recommendations and rulings as to 
allow prompt compliance. To the extent that Article 4.7 of the SCM Agreement  could be read as 
permitting partial withdrawal, and subsequent reinstatement of th e same subsidy measure, then a 
ruling under the SCM Agreement  would add nothing to the ability of the DSB to arrive at sufficiently 
precise and detailed rulings and recommendations  to permit prompt and full compliance. 
4.255  Referring to a previous WTO panel case in which export subsidies were found to be 
inconsistent with both the SCM Agreement  and the Agreement on Agriculture , the Complainants  
noted that the panel in that case, at the request of the European Communities, recommended, pursuant 
to Article 4.7 of the SCM Agreement , that the DSB request the withdrawal of the subsidies without 
delay to the extent that they  were inconsistent with the SCM Agreement .255  
4.256  Furthermore, Thailand  submitted that the Agreement on Agriculture  gave a limited and 
clearly delineated authorization to Members to provi de subsidies in respect of agricultural products 
that would otherwise not be permitted.  Citing Article 13(c)(ii) of the Agreement on Agriculture, 
Thailand contended that the logical implication of  this provision was that, in respect of export 
subsidies that were inconsistent with the Agreement on Agriculture , the remedies set out in the 
SCM Agreement  were available because it would otherwise not have been necessary to protect 
Members against challenges under the SCM Agreement  during the implementation period.  Thus, 
subsidization beyond the limits of that authorizati on, did not merit any protection from the remedies 
of the SCM Agreement .  Australia  and Brazil  supported this approach. 
4.257  The European Communities assumed that the existence of a specific remedy under 
Article 4.7 of the SCM Agreement  was the main reason for the Co mplainants' request for a ruling 
thereunder.  The European Communities reiterated its position that  the two agreements should not be 
applied cumulatively.  In its view, the difficulty to  reconcile the two sets of remedies was evidence of 
the fact that WTO negotiators never intended th e agricultural export subsidy regime of the Agreement 
on Agriculture  to apply cumulatively with the SCM Agreement .  Under the Agreement on Agriculture, 
a Member had a limited authorisation to provide su bsidies up to a specific ceiling, and an obligation 
not to provide other subsidies in a manner which could circumvent its commitments. 
4.258  The European Communities argued that a finding  that exports of C sugar and ACP/India 
equivalent sugar had been subsidized in excess of  commitment levels would require the European 
Communities, in future years, to ensure that its  total subsidized exports remained within its 
commitments.  These would only be inconsistent with the Agreement on Agriculture if they exceeded 
the commitment levels.  There would be no requi rement, as such, that th e European Communities 
remove subsidized exports of C sugar and the ex port refunds on ACP/India equivalent sugar.  
                                                      
255 See Panel Report on US – FSC , para. 8.8 as confirmed by the Appellate Body report, para. 231.  See 
also Appellate Body report, US – FSC (Article 21.5 – EC) , para. 256(f). WT/DS265/R 
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 4.259  Thus, for the European Communities, while under the Agreement on Agriculture the measure 
providing the subsidy could be maintained (provi ding the relevant commit ments were respected), 
under the SCM Agreement  the measure providing the subsidy w ould have to be withdrawn without 
delay.  This would mean that, if the commitments we re exceeded at some point in a future year, the 
measure would have to be withdrawn, but that the losing Member would be able to reinstate it at the 
beginning of the next year.  However, such a situ ation would clearly be ill-matched with the concept 
of withdrawal, which implied a perm anent removal of a measure, and with the concept, in the second 
sentence of Article 4.7 of the SCM Agreement, that the measure should be withdrawn within a specific 
period of time.  The European Communities referred to the findings of the panel in Canada – Dairy , 
which concluded
256:  
"In the Panel's view, it results from Articles 8 and 21.1 of the Agreement on 
Agriculture  and Article 3.1 of the SCM Agreement that the Panel would not be able 
to recommend Canada to 'withdraw' – as interpreted by the Appellate Body – measures constituting an export subsidy, ex clusively in respect of agricultural 
products, both within the meaning of Article 9.1(c) of the Agreement on Agriculture  
and Article 3.1 of the SCM Agreement . Under Articles 3.3 and 8 of the Agreement on 
Agriculture , Canada has the right to provide export subsidies in respect of products 
specified in its Schedule, provided that it does not exceed the budgetary outlay and 
quantity commitment levels specified therei n. Accordingly, if Canada has exceeded 
its quantity commitment levels, the Panel can only recommend Canada to bring its 
measures into conformity with its obligations under the Agreement on Agriculture ." 
4.260  The European Communities submitted that this reasoning was  also applicable here. 
4.261  The Complainants  reiterated that the recommenda tions under Article 4.7 of the 
SCM Agreement  differed from those under Article 19.1 of the DSU  and referred to the observation of 
the Appellate Body in Brazil – Aircraft : 
"Article 4.7 [of the SCM Agreement ] contains several elements that are different from 
the provisions of Articles 19 to 21 of the DSU  with respect to recommendations by a 
panel and implementation of rulings  and recommendations of the DSB."
257 
4.262  For the Complainants, there were essentially three differences between the remedy, and the 
implementation of recommendations and rulings , provided by Articles 19 to 21 of the DSU  and that 
provided by Article 4.7 of the SCM Agreement : 
• Nature of the remedy :  Under Article 19.1 of the DSU, the Panel shall recommend 
that the measure at issue be brought into conformity while Article 4.7 of the SCM 
Agreement required the recommendation that  the prohibited subsidy be withdrawn 
• Timeframe :  According to Article 21.3 of the DSU, the measure at issue shall be 
brought into conformity within "a reasonabl e period of time" while Article 4.7 of the 
SCM Agreement required the recommendati on that the prohibited subsidy be 
withdrawn "without delay". 
                                                      
256 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US) , panel report, para. 6.99. 
257 Appellate Body Report on Brazil – Aircraft , para. 191.  See also Panel Report on Australia – 
Automotive Leather II (Article 21.5 – US) , paras. 6.41 and 6.42 , where the panel held that "'[w]ithdraw the 
subsidy' [in Article 4.7] is … different from 'bring the measure into conformity', the recommendation required under Article 19.1 of the DSU", and therefore that "to th e extent that 'withdraw the subsidy' requires some action 
that was different from 'bring the measure into conf ormity', it was that different action which prevails".  WT/DS265/R 
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 • Procedures :  According to Article 21.3(c) of the DSU, the implementation period 
shall be determined by binding arbitrati on, while Article 4.7 of the SCM Agreement 
assigned the task of determining the implementation period to the panel. 
4.263  Of the three differences listed above, the third was of particular importance to the 
Complainants in order to avoid further negotiati ons with the European Communities and possibly a 
lengthy and complex arbitration procedure to resolv e a matter that could and should be resolved by 
this Panel. 
4.264  Thailand  recognized that the European Communities was entitled to grant export subsidies in 
respect of sugar within the limits of its export reduction commitments and that, consequently, the 
Panel could not recommend that the DSB requ est the European Communities to withdraw all of its 
export subsidies on sugar.  In Canada – Dairy  (Article 21.5 – New Zealand and US) , the panel 
correctly found that such a recommendation coul d not be reconciled with Article 21 of the Agreement 
on Agriculture , according to which the provisions of the SCM Agreement  applied subject to those of 
the Agreement on Agriculture .258  In its first submission, Thailand therefore specifically requested the 
Panel to recommend that the DSB request the Europ ean Communities to bring its export subsidies for 
sugar into conformity with its obligations under the Agreement on Agriculture  by withdrawing the 
export subsidies for sugar that were inc onsistent with the Agreement on Agriculture .  Thailand thus 
requested the recommendation according to Article 4.7 of the SCM Agreement  only in respect of the 
subsidization that exceeded  the European Communities' rights under the Agreement on Agriculture .  
Thailand's request was therefore fully consistent with the principle set out in Article 21 of the 
Agreement on Agriculture.  
4.265  Brazil  considered that the Panel should find an  inconsistency with both agreements and 
recommend both remedies.  It could do the latter by recommending that the Member concerned bring 
its measure into compliance by withdrawing the prohi bited subsidy without delay.  In this regard, 
Brazil noted that the purpose of the export subsidy provisions of the Agreement on Agriculture was to 
provide a "safe harbour" for those subsidies that complied with the reduction commitment obligations 
of the Agreement;  it was not to deny Members the remedies to which they were entitled under the 
SCM Agreement  for export subsidies that did not comply with the requirements of the Agreement on 
Agriculture .  Australia  concurred with this approach a nd recalled that, in the original US-FSC case, 
the DSB recommended that the United States bring the FSC measure into conformity with its 
obligations under the covered agreements and that  the FSC subsidies found to be prohibited export 
subsidies within the meaning of the SCM Agreement  be withdrawn without delay.   
4.266  The European Communities  responded that the application of Article 4.7 of the 
SCM Agreement  would amount to denying the European Communities' right to maintain export 
subsidies up to the commitment levels specified in its Schedule and that this was inconsistent with 
Article 21.1 of the Agreement on Agriculture which provided that other Annex 1A Agreements only 
applied subject to the Agreement on Agriculture ;  in other words, the application of the other 
Agreements could not nullify the rights of WTO Members under the Agreement on Agriculture.  
G. NULLIFICATION OR IMPAIRMENT  
4.267  Subsidiarily, the European Communities  contended that the claim submitted by the 
Complainants with respect to the C sugar regime involved a complaint of the so-called "violation" 
type described in Article XXIII.1(b) of the GA TT 1994, which referred to the situation where a 
Member considered that a "benefit accruing to it direc tly or indirectly is being nullified or impaired … 
as the result of … the failure of another contracting party to carry out its obligations under this 
                                                      
258 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 6.99. WT/DS265/R 
Page 86  
 
 Agreement".
259  Citing Article 3.8 of the DSU , the European Communities submitted that Article 3.8 
of the DSU  made clear that, while a finding of viola tion of a covered agreement gave rise to a 
presumption of nullification or impairment of benef its accruing under that agreement, the defending 
party had the possibility to rebut such a presumption.  
4.268  The European Communities held that, even if th e C sugar regime resulted in a violation of 
Articles 3.3, 8 or 10.1 of the Agreement on Agriculture , such violation would not nullify or impair any 
benefits accruing to the complaining parties under those provisions as the Complainants could have 
had no reasonable expectations that the European Communities would take any measure to reduce its 
exports of C sugar.  Those Articles did not confer a right to a certain volume or amount of trade, the European Communities continued.  Rather, the "ben efits" accruing under Articles 3.3, 8 and 10 of the 
Agreement on Agriculture  consisted of the expectations  of improved competitive opportunities which 
arose out of the limitations placed on export subsidies by those provisions. 
4.269  The European Communities referred in partic ular to the Appellate Body report in India – 
Patent (US)  in which case the Appellate Body emphasized that the expectations of the complaining 
party only become relevant after  a violation had been found, as part  of the examination of whether 
such violation led to nullification or impairment.
260  At the time of the conclusion of the WTO 
Agreement, the European Communities continued, and until recently, the Complainants had shared 
the European Communities' understanding that the C sugar regime did not pr ovide export subsidies 
and, therefore, could have had no expectations that the European Communities would reduce its exports of C sugar.  The European Communities cons idered, therefore, that the Complainants could 
not now act as if their expectations  were being nullified or impaired by  the alleged inconsistency with  
Articles 3, 8 or 10.1 of the Agreement on Agriculture .  
4.270  The European Communities submitted that, if nevertheless the Panel were of the view that the 
Complainants were entitled to expect that the European Communities would reduce its exports of 
C sugar such expectations would be limited to a 21 per cent reduction, as envisaged in the Modalities 
Paper with respect to all export subsidies, rather th an their complete elimination.  Accordingly, the 
alleged violation of Articles 3, 8 and 10.1 of the Agreement on Agriculture  would nullify or impair 
benefits accruing to the Complainants only to the ex tent that the current volume of subsidized exports 
exceeded 79 per cent of the quantity of subsidi zed exports made during the base period.   
4.271  Moreover, for the same reasons as for C sugar
261 , the European Communities contended, the 
alleged violation in respect of ACP/India equivale nt sugar did not nullify or impair any benefits 
accruing to the Complainants, because they could have had no expectations that the European 
Communities would reduce the quantity of subsidized exports mentioned therein (see also paragraph 
4.283). 
4.272  Australia  submitted that the European Communities' infringement of its obligations under the 
Agreement on Agriculture  and the SCM Agreement  had resulted in a prima facie case that nullification 
and impairment had been suffered by Australia.  Aust ralia recalled that, pursuan t to Article 3.8 of the 
DSU , the European Communities, as the defending party, had to rebut the presumption of nullification 
and impairment.   
4.273  Australia considered that the assertion by the European Communities that the Complainants 
could have had no expectations of improved competitive opportunities in relation to C sugar and 
ACP/India equivalent sugar and that, therefore, no benefits had been nullified or impaired, was a 
                                                      
259 Articles XXII and XXIII of the GATT apply to dispute settlements under the Agreement on 
Agriculture  pursuant to Article 19 of the latter Agreement. 
260 Appellate Body Report on India – Patents (US) , para. 40. 
261 See in particular Section III.5 of the Eu ropean Communities' first written submission.  WT/DS265/R 
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 novel argument.  Australia contended that this  argument did not counter the presumption in 
Article 3.8 of the DSU  which required the European Communities to establish that its breach of its 
WTO obligations has had no "adverse impact" on Australia. 
4.274  Referring to the Appellate Body report in EC – Bananas III and its reference to  the US – 
Superfund  case262  with respect to its discussion of the rebu ttal of nullification or impairment, as well 
as to the panel report in Turkey – Textiles on the same subject263, Australia submitted that  the 
European Communities had not provided any evid ence in this case, to rebut the presumption of 
nullification and impairment.  The mere fact that the Complainants might have increased exports was 
irrelevant to the determination of this issue. 
4.275  Contrary to the European Communities' assertions, Australia  continued, the relevant 
provisions of the Agreement on Agriculture  and the SCM Agreement  did not merely serve to confer 
legitimate expectations in regard to  a certain volume of reductions.  The Agreement on Agriculture  
conferred a right to expect that the European  Communities would act in conformity with its 
obligations, including that the European Communiti es would subject its export subsidies to reduction 
commitments, that it would not provi de export subsidies in excess of  scheduled commitments and that 
it would not circumvent those commitments.  The SCM Agreement  conferred upon Australia a right 
that the European Communities would not grant or maintain export subsidies on sugar except as 
provided in the Agreement on Agriculture .   
4.276  Responding to the European Communities' ar guments in paragraph 4.268-4.269 above,  Brazil  
submitted that Article 3.8 of the DSU  specified that a violation was prima facie evidence of 
nullification or impairment.  The European Comm unities had introduced no evidence to rebut that 
presumption.  Moreover, the European Communities'  reliance on the Appellate Body's opinion in 
India – Patent (US)  was, according to Brazil, misplaced as th at case involved reliance on expectations 
to establish  a violation.264  In this case, it was the violation that nullified or impaired the 
Complainants' legitimate expectations.  The Complain ants' legitimate expectations of improvement in 
the competitive relationship of their sugar and that exported by the European Communities were 
nullified or impaired when their sugar competed in the world market with EC sugar that was exported, 
with the aid of subsidies, in excess of the European Communities' reduction commitments. 
4.277  As concerns the footnote, Brazil submitted th at the points discussed in connection with 
C sugar also applied, mutatis mutandis  to ACP/India equivalent sugar.  
4.278  Thailand  contended that the European Communitie s was putting forward a novel legal theory 
according to which a WTO-inconsistent measure di d not nullify or impair benefits accruing under a 
covered agreement if it could be expected.  Thailand submitted that Article 3.8 of the DSU  defined 
clearly what the European Communities must establish to rebut the presumption of nullification and impairment:  it must demonstrate that its breach of the rules had not had "an adverse impact"  on 
Thailand.  Thailand considered that the European Communities had not done so.  
4.279  The European Communities  replied that even if exports of C sugar were found to benefit 
from export subsidies and were in excess of th e European Communities' reduction commitments and 
even if the Complainants were not barred from bringi ng a claim to that effect by Article 3.10 of the 
DSU  and the principle of good faith, the alleged viola tion would not, in any event, nullify or impair 
any benefits accruing to the Complainants. 
                                                     
 
262 GATT Panel Report on US – Superfund , BISD 34S/136, para. 5.1.9;  Appellate Body Report on 
EC – Bananas III , para. 252. 
263 Panel Report on Turkey – Textiles , para. 9.204. 
264 European Communities' first written submission, para. 147. WT/DS265/R 
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 4.280  Referring to Brazil's arguments in paragr aph 4.276 above, the European Communities 
explained that it relied on India – Patent (US)  for the proposition that in  this case the existence of 
nullification or impairment should be assessed by looking at the legitimate expectations of the Complainants.  The European Communities subm itted that the Brazilian arguments overlooked the 
thrust of the European Communities' defence, which was precisely that Brazil could have no 
"legitimate expectations" that the European Communities would stop its exports of C sugar.  At most, 
Brazil could have expected that the European Co mmunities would reduce those exports by 21 per cent 
(in quantity) as agreed in the Modalities Paper. 
4.281  Responding to Thailand's arguments in para graph 4.278 above, the European Communities 
submitted that it had shown that Thailand had suffered no "adverse impact" because the Complainants 
had no expectations that the European Communitie s would stop exporting C sugar.  The European 
Communities considered that the relevance of e xpectations in establishing the existence of 
nullification or impairment was not a "novel legal theory".
265  It was confirmed by the case law cited 
in the European Communities' first written subm ission, which Thailand did not address.  The 
European Communities disagreed that it had to sh ow that the alleged violation had had no actual 
effect on Thailand's exports in order to establish the absence of an "adverse impact".  In the opinion of 
the European Communities, that was not required by the ordinary meaning of the term "adverse 
impact". 
4.282  If the European Communities were to reduce its e xports of sugar by 60 per cent, as requested 
by the Complainants, it would be doing much more than removing any "adverse impact" suffered by 
them. It would be providing the Complainants with  an advantage that none of them expected, nor 
could have expected, at the conclusion of the Uruguay Round.  The ultimate purpose of dispute 
settlement procedures, the European Communities obser ved, was to maintain the agreed balance of 
concessions and not to present some Members with a windfall profit at the expense of another Member.  The notion of "nullification and impairme nt" must be interpreted in the light of that 
purpose.   
4.283  Finally, for the reasons explained in its vari ous submissions with respect to C sugar, the 
European Communities recalled that, subsidiarily, in the same sense as there ha d been no nullification 
and impairment in respect of C sugar, there had b een no such nullification and impairment in respect 
of ACP/India equivalent sugar. 
4.284  Brazil  recalled, in response to arguments to the effect that the Complainants' claims would 
lead to serious harm to some developing countries, that two of the Complainants, Brazil and Thailand, 
were themselves developing countries whose benefits were most certainly bein g nullified or impaired.  
Brazil also recalled the European Communities' arguments that nothing in its sugar regime nullified or 
impaired any benefits accruing to Complainants under the Agreement on Agriculture .  Referring to a 
March 2004 study by Oxfam
266 which had calculated, based on 2002 exports, that the EC sugar 
regime caused immediate losses of $494 million for Brazil and $151 million for Thailand in that year 
alone, Brazil submitted that that was serious nullifica tion or impairment by any reasonable standard.  
Brazil and Thailand were not the onl y developing countries hurt by the European Communities' sugar 
regime.  Oxfam noted the cost to South Africa a nd a number of other developing countries, and the 
Panel had heard directly from Colombia and Paragua y concerning the harm the regime did to them. 
                                                      
265 Thailand's oral statement, first substantive meeting, para. 44. 
266 Exhibit ALA-12.  WT/DS265/R 
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 V. ARGUMENTS BY THIRD PARTIES 
5.1 The ACP  countries267 268 explained that the objectives of the EC/ACP Partnership Agreement 
had been in the centre of the EC-ACP relationshi ps since the beginning. These objectives underpinned 
all the preferential agreements, including the Sugar Protocol, and had always been in line with GATT 
and WTO objectives for positive and effective effo rts towards the sustainable development of 
developing and least developed countries.  They su bmitted that they had substantial trade interests and 
systemic interests in the present dispute in ensuri ng the proper interpretation and application of the 
WTO Agreement on Agriculture  so as not to destabilize the balan ce of concessions reached at the end 
of the Uruguay Round and which concerned all Memb ers, including the ACP and the Complainants..  
They were of the opinion that the upholding of the claims of the complainants would have serious 
adverse consequences on the trade and economic be nefits, which they currently derived from the 
export of sugar to the European Communities under the ACP/EC trading arra ngement on sugar (Sugar 
Protocol).  
5.2 Exports to the EC market constituted a vital ou tlet for the ACP sugar supplying states.  They 
noted that they benefited from guaranteed preferential access to the EC market and remunerative 
prices for their exports.  The obligations of th e European Communities in respect of the Sugar 
Protocol had to be fulfilled within the framewo rk of the EC sugar regime and the European 
Communities was importing fixed quantities of raw cane sugar, from the ACP countries, at guaranteed prices equivalent to the EC intervention prices. 
5.3 This guaranteed level of prices, they asserted, ensured predictable and stable earnings crucial 
for the economic and social development of these developing and least developed countries, for 
whose economies sugar represented their life-blood.  Th e Sugar Protocol had been a key factor in the 
socio-economic development of the ACP countries, en abling them to meet, to a certain extent, the 
objectives set out in the Preamble of the Marrakech  Agreement, namely raising the standards of 
living, ensuring full employment and a steady vol ume of real income.  The ACP sugar industries 
played a multifunctional role in their respective economies. More specifically, they promoted rural 
development, poverty alleviation, social development,  social peace, protection of the environment as 
well as the tourism industry. 
5.4 The ACP countries explained that during th e period 1999-2001, exports under the Sugar 
Protocol accounted, on average, for 50.6 per cent of agricultural exports and 13.6 per cent of GDP of 
the ACP countries concerned.  During the same peri od, the number of persons employed in the sugar 
sector was on average 43.8 per cent of the total num ber of persons employed in agriculture.  These 
figures had to be compared with the very small sh are of the sugar market of the ACP in terms of 
world trade: the 1.6 million tonnes exported to the Eur opean Communities represented 3.6 per cent of 
world trade in sugar. This trade corresponded to 0.18 per cent of global agricultural trade.  While 
these exports had, they contended, a minute effect on global trade, the same exports were critical to 
the economic growth of the ACP countries which included least-developed, net-food importing, 
landlocked or island states and single-commodity  producers/exporters with specific economic and 
social difficulties. 
                                                     
 
267 Barbados, Belize, Fiji, Guyana, Côte d'Ivoire, Jamaica, Kenya, Madagascar, Malawi, Mauritius, 
St. Kitts & Nevis, Swaziland, Tanzania and Trinidad & Tobago presented a joint written submission as well as a 
joint oral presentation as ACP Sugar Supplying States (ACP  countries).  Each of these countries also separately 
endorsed the views expressed in paras. 5.1-5.12.  Th e distinctive arguments ela borated by each of these 
countries presented separately in their own written submissions or oral statements have been briefly reflected  individually. 
268 ACP countries benefiting from the Sugar Protocol. WT/DS265/R 
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 5.5 The preferences granted to the ACP sugar expor ting countries in terms of market access and 
the scope of the reduction commitments of the European Communities in the Uruguay Round, the 
ACP countries submitted, were to be considered as a whole and not in isolation from the European 
Communities' export possibilities.  The purpose of Foot note 1 in the EC Schedule, interpreted in the 
context of both the Sugar Protocol and the CMO, was, in the opinion of the ACP countries, to allow 
for the exportation by the European Communities of quantities corresponding to those imported under 
the preferential agreements.  The ACP countries were  of the view that the Complainants' claim that 
the European Communities was not complying with th e terms of the footnote, did not fall within the 
terms of reference of the Panel. However, shoul d the Panel decide that there were grounds for 
examining this claim, an interpretation in good fa ith, based on the rules of interpretation applying in 
the context of the WTO, i.e. Articles 31(1), 31(4) and, if needed, 32 of the Vienna Convention , 
allowed no other reading than what was well known  to the Complainants prior to and during the 
negotiations, i.e. that the European Communities intended to keep the possibility to grant export 
refunds on exports of a quan tity corresponding to the quantities imported under the preferential 
agreements concluded with the ACP countries and I ndia.  This was a fundamental element of the 
balance achieved within the EC sugar regime.  Ther efore, the footnote to the EC's Schedule must, and 
could only be interpreted to cover corresponding expo rts, based on the ordinary meaning of its terms 
and the necessity to give an effet utile  to its wording. 
5.6 With respect to the interpretation of the footnote, the ACP countries argued that, applying 
Article 31(1) of the Vienna Convention
269, the footnote should be interpreted in good faith in 
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the 
light of its objects and purpose.  Accordingly, they claimed that, as regards the "terms" of the 
footnote, based on the necessity to give an effet utile  to its wording, " exports of sugar of ACP and 
Indian origin"  could not mean anything else but exports of white sugar in quantities corresponding  to 
the quantities of raw cane sugar imported under the EC /ACP and EC/India preferential arrangements.  
This would be, they argued, the only interpretation providing the footnote with an operative meaning, 
and which would truly reflect the intention of all the parties.270  Furthermore, the ACP countries 
asserted that the Sugar Protocol as well as the EC Regulation on the CMO would allow a proper understanding of not only the context of the footno te, but also its necessity, and therefore its object 
and purpose.
271  In this sense, the ACP countries concluded that the footnote must be interpreted so as 
to allow the European Communities to export 1.6 million tons of white sugar, corresponding to its 
imports of ACP/Indian raw sugar, w ith the benefit of export refunds. 
5.7 With respect to the Agreement on Agriculture,  the ACP countries were of the view that it 
primarily defined exports subsidies commitments as  a limitation.  Accordingly, WTO Members would 
enjoy a certain flexibility.  Referring to the text of Article 3.1 of the Agreement on Agriculture , they 
argued that in Canada – Dairy , the Appellate Body acknowledged the importance of the limitation 
concept by describing an export subsidy commitme nt as "an undertaking to limit the quantity of 
exports that may be subsidized."272 The European Communities was th erefore entitled to maintain an 
export subsidy on an agricultural product within the limits of its commitments. 
5.8 Referring to the Appellate Body report in Korea – Various Measures on Beef273, the ACP 
countries contended that, when taken together, th e two components of the European Communities' 
export subsidy commitments indicated that the tota l amount of export refunds granted on exports of 
sugar, as a whole, had been declining. Accord ingly, the specific structure of the European 
Communities' commitments had been working, de facto , as a limitation of the level of subsidies 
                                                      
269 ACP written submission, para. 78. 
270 Ibid., paras. 89-93. 
271 Ibid., para. 95. 
272 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 70. 
273 Appellate Body Report on Korea – Various Measures on Beef , para.97.  WT/DS265/R 
 Page 91 
 
 
 granted on its exports of sugar.  Therefore, in the opinion of the ACP countries, the European 
Communities had complied with its export subsidy commitments. 
5.9 With respect to the US – Sugar Waiver and the EC – Bananas III  cases referred to by the 
Complainants, the ACP countries assert ed that the issue at stake and the very nature of the legal 
provisions under consideration in this case were differ ent.  The set of provisions referred to by the 
Complainants, i.e. Articles 3, 8 and 9 of the Agreement on Agriculture  did not provide for such a 
general prohibition but rather for a limited authori zation for Members to provide subsidies up to the 
level of the reduction commitments specified in th eir Schedule.  In addition, in the case of export 
subsidy commitments, the benefits that WTO Member s could expect were based on the improvement 
of the competitive environment resulting from th e reduction of subsidization undertaken in 
conformity with the commitments and were of a different nature from those resulting from market 
access commitments.  The Complainants could not have had any reasonable expectation that the 
European Communities would reduce the quantities men tioned in the footnote. As a result, no specific 
benefits could have been impaired or nullified by  the European Communities' exports of 1.6 million 
tons with the benefit of export refunds. 
5.10 Referring to "estoppel" as "a general principle of international law deriving from the broader 
principle of good faith", the ACP countries submitte d that the Complainants were precluded from 
bringing a claim against the validity of the footnot e since they had acquiesced to the insertion of the 
footnote in the European Communities' Schedule of  Commitments and had given assurances of this 
acceptance by not raising any formal claims to that e ffect since the conclusion of the Uruguay Round.  
The interests not only of the European Communiti es, but also of the ACP countries, would be 
substantially prejudiced if the Complainants were  allowed to challenge what they previously 
acquiesced to.  Indeed, should the Panel accept the claims of the Complainants, it would mean that the 
Panel would allow them to benefit, de facto , from a reduction of 60 per cent of the quantities on which 
the European Communities was entitled to grant export refunds. 
5.11 The ACP countries referred to the relevance of the EC – Computer Equipment  case in 
particular regarding, firstly, the fact that all the schedules of Members represented a common 
agreement among all Members, and, secondly, the ob ligations of all participants in respect of 
verification. 
5.12 The ACP countries endorsed the European Commun ities' position with respect to the C sugar 
issue and the SCM Agreement  issue.  
5.13 Barbados274 added that to understand the full implica tions of what the likely consequences of 
a decision unfavourable to the European Communiti es could mean to the ACP countries, it would be 
important to consider the characteristics of the sugar industry within these countries and the critical 
role sugar played in their development.  
5.14 Barbados noted that it was not a major agricu ltural producer but the sugar industry, which 
was more than 300 years old, had maintained its dom inant position within its small agricultural sector  
Sugar was still the largest single agricultural export cr op and earned the most foreign exchange in that 
sector.  Consequently, agriculture generally, and sugar in particular, continued to play a strategic role 
as Barbados endeavoured to restructure its econo my in the face of the challenges resulting from 
liberalization and globalization.  The economic a nd social benefits derived from the production and 
export of sugar were evident in a number of ar eas, including contribution to the gross domestic 
product ("GDP"), employment, foreign exchange earnings and food security.  The sugar industry 
accounted for an average of 40 per cent of the agri cultural sector's input to real GDP in the period 
1998 to 2002.  For the same period, direct employ ment in the industry averaged 1200 persons, while 
                                                      
274 See also ACP statement in paras. 5.1-5.12 above. WT/DS265/R 
Page 92  
 
 indirect employment was significantly higher .  The export of bulk raw sugar earned Barbados an 
average of US $25 million per year during the same 5-year span.  
5.15 Barbados explained that as a small, vulne rable Net Food-Importing Developing Country 
(NFIDC) which already imported approximately 75 per cent of its food, food security was a major concern.  Sugar cane was one of the few crops appropriate for large-scale cultivation under the 
climatic and agronomic conditions in Barbados and could be fairly regarded as a stabilising factor 
within the agricultural sector.  The sugar industry th erefore played a major role in helping Barbados 
achieve its food security goals by maintaining a significant area of the island's landmass under agricultural production with a systematic crop rotation process and also by providing a vital source of foreign revenue. 
5.16 Barbados contended that the foreign excha nge earnings from the sugar exports would be 
significantly lower without the preferential marg in enjoyed under the ACP/EC Sugar Protocol. 
Barbados was therefore deeply concerned about the current dispute and the potentially negative 
impact that an adverse decision of this Panel was likely to have on the EC price for ACP sugar.
275  
5.17 Belize276 submitted that the multilateral rules-based trading system would only be sustained if 
innovative mechanisms existed to provide all Members,  even the most vulnerable, with a share in the 
growth in international trade commensurate with the needs of their economic development.  Belize 
was generally categorized as a mono-crop society.  It was an import-oriented economy, dependent on 
the exports of a few traditional commodities to genera te its revenue: approximately 20 per cent of the 
country's population was dependent on the sugar trad e.  Given its high cost of production of consumer 
goods and its small population, it was unable to produ ce most of what it consumed.  Further erosion 
of its ability to pay for imports would have severe consequences; 33 per cent of the population already 
lived below the poverty line.  It noted that it contributed less than one per cent277 to total world sugar 
exports, but alterations to the present EC sugar regi me could severely impact the fundamental fabric 
of the Belizean society.   
5.18 Belize  submitted further that a disruption of the pricing mechanism would have an adverse 
impact on the preferential arrangement s covered by the Sugar Protocol. It  argued that the various 
components of the EC sugar regime depended upon each other in so systemic a manner that the 
utmost care should be taken in a ttempting to rearrange its mechanism.  To dismantle any particular 
aspect of the regime would tend to weaken and damage  the very fabric of the preferential agreement: 
its quota system, its price structure, and its system of  compensation.  Accordingly, Belize held that the 
possible impact of each proposed change shoul d be taken into account in assessing its overall 
implications on the world's trading system. 
5.19 Belize was of the view that the footnote fully c oncurred with the obligations of the European 
Communities, expressing the Members' agreement with respect to what was an appropriate provision 
addressing the circumstances of vulnerable small developing countries within the broad rules-based framework.  Belize also considered that the EC C sugar regime , incl uding the exports of refined sugar 
with the benefit of export refunds, was an integr al part of the EC sugar regime and, as such, 
contributed to its overall balance and stability.
278   
5.20 Canada  submitted that Article 9.1(c) must be read  so as to maintain the distinction between 
domestic support and export subsidies.  With respect to the three distinct elements of Article 9.1(c), 
"payment", "on the export" and "financed by virtue  of government action", Ca nada noted that only the 
                                                      
275 Third party oral statement by Barbados. 
276 See also ACP statement in paras. 5.1-5.12 above. 
277 Third party oral statement by Belize referring to 1998-2000 FAO Statistics. 
278 Third party oral statement by Belize.  WT/DS265/R 
 Page 93 
 
 
 first and third of these elements were at issue before the Appellate Body in Canada – Dairy.279  
Therefore, that analysis could not be applied automatically in the present dispute.280  Canada was of 
the view that the Panel should turn to a contextual  reading of Article 9.1(c), looking at the whole of 
the Article and its place in the  Agreement on Agriculture , to provide guidance as to the appropriate 
relationship between these elements.   
5.21 Canada expressed concern over the suggestion th at the average cost of production would be 
the only appropriate benchmark against which to measure "payments".  In the light of the Canada – 
Dairy  decisions and the variety of transactions iden tified by the Complainants, Canada requested 
clarification with respect to the systemic meaning of "payments".281  Furthermore, Canada stressed the 
importance of ensuring that context-specific benchmar ks or guidelines used in previous disputes were 
not confused with legal standards de rived directly from the text of the  Agreement on Agriculture. .282 
5.22 With respect to Article 3.1(a) of the SCM Agreement , Canada  recalled, the Appellate Body 
had held that contingency did not suggest a simple  relationship of payment and export.  Rather, the 
grant of a subsidy must be conditional or dependent upon  export performance;  it must be "tied to" 
export performance.283  Referring to the common interpretati on of "export contingent" as found by the 
Appellate Body in US – FSC  and Canada – Aircraft (Article 21.5 – Brazil) , Canada was of the 
opinion that an indirect benefit, i.e., a cross-subsidy, that could result in an unintended or 
consequential  export, did not lead to a finding that an export subsidy was provided pursuant to 
Article 9.1(c). Finally, Canada noted that despite it being true that sugar production in the European 
Communities was the subject of a complex regulatory regime; this complexity was not by itself proof that C sugar benefited from export subsidies.  
5.23 Canada also requested clarification with respect to the relation between the various 
programmes, measures and transfers alleged by the Co mplainants to result in export subsidies, and the 
governmental actions that ostensibly finance those s ubsidies, i.e. if such financing could occur as a 
result of cross-subsidization, where was the th reshold between actions that resulted in cross-
subsidization and actions that did not? 
5.24 Canada recalled that the Appe llate Body had explained that the words "by virtue of" defined 
the relationship between governmental action and th e financing of payments under Article 9.1(c).
284  
That relationship was the link between a given action and the financing of payments "on the export".  
Canada asserted that this link did not exist merely  by virtue of government measures that permitted 
payments to occur;  instead, th e words "by virtue of" demanded a demonstrable link between the 
governmental action and the payments allegedly financed by that action.285 286 
5.25 China submitted , with respect to the question of burden of proof under Article 10.3 of the 
Agreement on Agriculture , that the European Communities must  establish the "export subsidization 
aspect" with respect to claims of violation of Ar ticles 3, 8, 9 and 10 and the consequences of any 
doubts about the European Communities' evidence of  export subsidization should be borne by the 
European Communities.  The European Communiti es should therefore fulfil its burden by submitting 
evidence sufficient to establish that the disputed measure did not represent an export subsidy , or 
benefits were not granted  with respect to a quantity of the product in question in excess of  its 
reduction commitment level , or both.  As concerns Article 3.3 of the Agreement on Agriculture , China  
                                                      
279 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 63. 
280 Third party written submission of Canada, para. 10. 
281 Ibid., paras. 16-18. 
282 Ibid., para. 7. 
283 Appellate Body Report on US – FSC (Article 21.5 – EC) , para. 111. 
284 Appellate Body Report on  Canada – Dairy (Article 21.5 – New Zealand and US II), para. 130. 
285 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US), para. 113. 
286 Third party written submission, para. 28, and oral statement of Canada. WT/DS265/R 
Page 94  
 
 considered that it did not allow any WTO Member to derogate from the export subsidy commitments 
contemplated therein. China recalled the Appellate Body report in US-FSC which explained that both 
scheduled and unscheduled agricultural products were  subject to export subsidy commitments. With 
respect to " scheduled " products, a Member was entitled to provide export subsidies within the 
"limited authorization ", which specifically referred to the "budgetary outlay and quantity commitment 
levels" specified in that Member's Schedule.  China contended that sugar fell within the product 
coverage under Article 2 and Annex 1 to the Agreement on Agriculture , and had been " scheduled " in 
the "Description of products" of the EC's Schedule.  Since "C sugar" was neither beyond the product 
coverage of the  Agreement on Agriculture, nor a separate categorised product description of the 
Schedule. Thus, it should be logically deemed as bei ng incorporated into the Schedule and subject to 
reduction commitments under Article 3.3 of the  Agreement on Agriculture .  Should the European 
Communities consider C sugar as a product other than a " scheduled " agricultural product, it should as 
a consequence be subject to the " prohibition"  against provision of export subsidies on " unscheduled " 
agricultural products.  
5.26 With respect to the role of the Modalities Paper as  a relevant element of the historical context 
within the meaning of Article 31.1(b) of the Vienna Convention , China recalled  that the note by the 
chairman of the Market Access Group
287 explicitly precluded the use of the negotiating modalities as a 
basis for dispute settlement proceedings under the "M TO" Agreement.  Furthermore, China noted that 
the Appellate Body in EC – Bananas III288 observed that the  Agreement on Agriculture  made no 
reference to the Modalitie s document or to any 'common understa nding' among the negotiators of the  
Agreement on Agriculture.  
5.27 As concerns the notion of the "average tota l cost of production", China saw no reason why 
this should not be adopted as the benchmark  or objective standard,  for the determination of whether 
the exports of C sugar involved "payments" under Article 9.1(c) of the Agreement on Agriculture .  
Furthermore, recalling the Appellate Body  report in Canada – Dairy (Article 21.5 – New Zealand and 
US II) , China considered that since the higher revenue  sales in the EC sugar market effectively 
financed part of the lower revenue sales on world ma rkets, "by funding the portion of the shared fixed 
costs" of production "attributable to the lower priced products,289 i.e. C sugar, the demonstrable link 
between the EC governmental action and the "financi ng" was well established.  The identification of 
the "average total costs of production" must be illustrated and objective, by taking into account any 
marginal costs of the EC sugar prod uction on an industry-wide basis.  
5.28 Referring to the interpretation of the footnote in the EC's Schedule,  China recalled290 that the 
European Communities had explained, before  the WTO Committee on Agriculture, that:  
"[A]s indicated in footnote 1 of the table on export subsidies contained in Part IV, 
Section II of Schedule CXL, the EC is not undertaking  any reduction commitment on 
exports of ACP or Indian sugar. Conse quently, any financial assistance is not 
reported to the WTO. For information , these exports amount to approximately 
1.6 million tonnes per year ."291 (emphasis added) 
5.29 China submitted that the footnote at issue wa s intended to exempt the European Communities 
from " undertaking " any reduction commitment with respect to "any financial assistance" and 
                                                      
287 Modalities for the establishment of specific bindi ng commitments under the reform programme – 
Note by the Chairman of the Market Access Group, MTN.GNG/MA/W/2 4, 20 December 1993. 
288 Appellate Body Report on EC – Bananas III . 
289 Ibid., para. 98. 
290 Ibid., para. 45. 
291 Committee on Agriculture, summary report of the meeting held on 17-18 November 1998 
(G/AG/R/17, 25 January 1999) p. 29.  See also first submission of Thailand, para.95.  WT/DS265/R 
 Page 95 
 
 
 notification requirements on exports amounting to approximately 1.6 million tonnes per year of 
"ACP/Indian origin" sugar. China was of the view  that the European Communities must demonstrate 
or establish the legal basis for the exemption of "ACP/India equivalent sugar" from reduction 
commitments.  Due to the equivocal meanings de rived from the footnote, the European Communities' 
"two – parts" interpretation of its subsidy commitments –  i.e. "limits" subject to reduction in respect 
of "scheduled " sugar and " a fixed ceiling " in respect of "ACP/India equivalent sugar" –  could not, in 
China's opinion, be justified as representing "a common agreement among all Members ".292 
5.30 Colombia  noted that it was the eighth largest exporter of sugar in the world and had one of 
the lowest cost of production levels and highest yiel ds per hectare.  Considering that Colombia could 
count on an efficient and productive sector, Colomb ia was facing many difficulties participating in 
international trade, not only in the European Communities but also in other countries.  The distortions 
in the price of sugar, in particular those which resulted from the complex regulation of the European 
market, were causing problems to the Colombian expor ts not only in the Europe but also in other 
markets in which those distortions had been iden tified as the reason for Colombia's limited access.  
Therefore, this dispute had both a systemic and commercial importance to Colombia. 
5.31 Referring to the legal value of the footnote, Colombia  enquired whether there was a legal 
basis to exclude a quantity of sugar equivalent to  the European Communities' imports from India and 
ACP countries from the export subsidies reduction commitments.  Colombia was of the view that, since exceptions in the WTO must be agreed upon through the multilateral procedure provided in 
Article IX of the Marrakech Agreement, the possib ility of granting legal value to the footnote would 
be unrealistic. 
5.32 With regard to the concept of estoppel, Colomb ia noted that it had never been recognised in 
the jurisprudence of the WTO and the concept in itself had its application limited to bilateral 
relationships.  Accordingly, even if the Panel f ound that some Members were aware of the European 
Communities' exemption to the reduction commitments ,  it was unthinkable that such a "bilateral 
understanding" could be applied in the multilateral context. 
5.33 Colombia considered that there were two ty pes of export subsidy commitment.  The first 
related to reduction and prohibition as la id down in Articles 8 and 9 of the Agreement on Agriculture .  
The combination of agreed disciplines under those Articles implied, according to Colombia, that 
subsidies included by Members in their Schedules must be reduced in accordance with multilateral 
disciplines.  Similarly, in its interpretation, s ubsidies for which no phasing-out commitments had been 
made should be prohibited. 
5.34 The second export subsidy commitment, Colombia  continued, related to anti-circumvention 
and was governed by Article 10.1 of the Agreement on Agriculture .  Colombia was of the view that 
Article 10.1 applied only to expr essly permitted subsidies. Its objec tive was to discipline the manner 
in which those subsidies were applied in order to a void that such application resulted in, or threatened 
to lead to, circumvention of export subsidy commitments.
293   
5.35 Côte d'Ivoire294 submitted that, by contesting the EC sugar regime, the Complainants put into 
question the basis for cooperation between Côte d' Ivoire and the European Communities.  If  
successful, the Complainants allegations would ha ve serious socio-economic consequences for the 
country.  Côte d'Ivoire explained that the sugar industry was highly important to the economy of the 
country.  It started as a bold government policy in the 1970s to diversify agriculture production and thus create a regional development pole in the north of the country.  In the last few years, the sugar 
                                                     
 
292 Third party written submission and oral statement by China. 
293 Third party oral statement by Colombia. 
294 See also ACP statement in paras. 5.1-5.12 above. WT/DS265/R 
Page 96  
 
 industry had experienced a clear development as Côte d' Ivoire privatized its sugar industry in 1997.  
Today, the industry was represented by two comp anies, Sucaf-Ci and Sucreivoire with sugar 
production being the second most important activity af ter cotton in the north of Côte d'Ivoire.   
5.36 In the last five years, €85 million had been i nvested in order to increase the country's sugar 
production, which thus went from 120,000 to nnes in 1997 to 170,000 tonnes currently, exceeding 
local consumption by some 20,000 tonnes per year.  Most of this quantity was exported to the 
European Communities under the Sugar Protocol and the SPS arrangements, representing some 
15 per cent of the sugar revenues of Côte d'Ivoire. 
5.37 The sugar industry, Côte d'Ivoire continued,  employed some 2,000 individuals directly and 
another 5,000 indirectly which, in the African context represented revenues for the subsistence of 
around 200,000 people.  On top of the approximately  22,000 hectares industrially planted, some 2,400 
hectares were village plantations, a policy recomm ended by the government and which had led to the 
reinsertion of some 800 families. 
5.38 In conclusion, Côte d'Ivoire, not wishing to see the only efficient international co-operation 
arrangement destroyed, hoped that the Panel w ould contribute to put development as an essential 
objective at the heart of the discussions.
295  
5.39 Cuba noted that sugar was one of its chief expor t items but Cuba was also interested in 
averting the erosion of the tariff preferences granted to the ACP States under the EC sugar regime.  Cuba considered that this dispute must be view ed in the light of the basic objectives of the GATT 
1994, which included raising standards of livin g and securing the progressive development of 
economies, while paying special attention to the fact that the achievement of these objectives was 
"particularly urgent" for the least-developed economies. 
5.40 Export income, Cuba continued, played a cruc ial role in many underdeveloped economies as 
their main source of subsistence and an important fa ctor of economic development.  The size of that 
income depended on the prices countries paid for essential imported products, the volume of their 
exports and the prices they were paid for the produ cts they exported.  Ther efore, the preferential 
access granted by the European Communities to sugar from the ACP countries was vital to the 
economies of those countries and compensated, albeit to  a limited extent, for the unfair terms of trade 
to which their underdeveloped economies were made subject. 
5.41 Cuba, therefore, submitted that the starting point  for consideration of this dispute should be 
the preambular provision of the Agreement on Agriculture , which states that "... in implementing their 
commitments on market access, developed country Members would take fully into account the 
particular needs and conditions of developi ng country Members by providing for a greater 
improvement of opportunities and terms of access for ag ricultural products of pa rticular interest to 
these Members ...".  Furthermore, Cuba submitted that the aim of these provisions on preferences was to foster the development of the ACP States in order to reduce and gradually eliminate poverty in 
those countries and integrate them into the main stream of global trade.  These objectives were 
consistent with WTO aims and principles and with  the development dimension concept established at 
the Doha Ministerial Conference, which was th e basic guideline for the current negotiations. 
5.42 Fiji
296 noted that it had a substantial interest in  this dispute, being a major producer and 
exporter of sugar to the European Communities under th e Sugar Protocol.  It explained that Fiji's raw 
sugar exports to the European Communities constitu ted 40-50 per cent of its annual agriculture GDP 
or 12-15 per cent of its national GDP .  Sugar earned between $250 to $ 300 million annually in foreign 
                                                      
295 Third party oral statement by Côte d'Ivoire. 
296 See also ACP statement in  paras. 5.1-5.12 above.  WT/DS265/R 
 Page 97 
 
 
 exchange for the country.  The ACP/EC Sugar Protocol and the more recent Special Preferential 
Sugar Agreement (SPS) for the importation of cane suga r, were an integral part of, and were fully 
incorporated within, the current EC sugar regime .  The total quantity imported by the European 
Communities was 1,294,700 metric tons white sugar e quivalent.  Fiji's share of this agreed quantity 
was 165,348.3 metric tons white suga r equivalent.  Some 60 per cent of Fiji's sugar exports were sold 
under the Sugar Protocol and the SPS Agreement.  In the five preceding years, 1998-2002, sugar 
consistently accounted for between 83 per cen t and 87 per cent of EC imports from Fiji.  
5.43 Fiji claimed that special arrangements like th e Sugar Protocol were specifically permitted 
under Article XXXVI (4) of the GATT.  Referring to the text of that Article, Fiji was of the view that 
the market access and the guaranteed remunerativ e prices received for its sugar exports to the 
European Communities were indeed measures designed to assist ACP states, given the fact that they 
were dependent on one or two prim ary products, to earn foreign exchange that was critical to their 
social and economic development. These special arrangements were specifically permitted under the 
above provision of GATT 1994 and s hould be taken into consider ation by the Panel in its 
determination of this dispute.  
5.44 Referring to the Agreement on Agriculture,  Fiji recalled that Article 15(1) specifically 
recognized that differential and more favourab le treatment for developing country Members  was an 
integral part of that Agreement.  Furthermore, Fiji also asked the Panel to consider the implications on 
non-trade concerns (NTCs), in the terms of Article 20 (c) of the  Agreement on Agriculture , that may 
result from the decisions the Panel take in this di spute.  Fiji submitted that its longstanding trade 
preferences with the European Communities as regards its sugar exports under the ACP/EC Sugar 
Protocol were precisely the kind of trade preferen ces that should be protected under the multilateral 
trading rules of the WTO.  
5.45 Fiji stressed that the various elements of the EC  sugar regime (the "C" sugar, the intervention 
price, the 1.6 million tons of sugar allowed for exportation by the European Communities under the 
Uruguay Round, etc) were interlinked.  If one aspect  were to be undermined, the implications would 
spread to other elements.  Once this happened, the coherency and the orderly management of the 
sugar regime would be lost and the very foundation and the fundamentals of the Sugar Protocol, under 
which Fiji sold its sugar to the European  Communities, would be lost along with it.297 
5.46 Guyana298 emphasized that the various components of the EC sugar regime depended upon 
each other in so systemic a manner that the utmost care should be taken in a ttempting to rearrange its 
mechanism.  To dismantle any particular aspect of  the regime might tend to weaken and damage the 
very fabric of the preferential agreement: its quot a system, its price structure, and its system of 
compensation.  The possible impact of each proposed  change should therefore be taken into account 
in assessing its overall implications in the world's trading system. 
5.47 Guyana explained that its economy relied heavil y on international trade.  Imports exceeded 
the value of GDP, and the level of exports was not significantly lower.  Of particular significance, 
however, was the fact that by far the greatest pr oportion of the country's exports was dependent upon 
preferential markets.  Sugar and rice, both of whic h could not be sold comp etitively abroad without 
the existence of guaranteed markets and prices,  dominated the traditional agriculture sector, 
accounting for nearly three-quarters of agricultura l production, and almost one half of the total 
economy.  Guyana's exports to the European Communities comprised over 90 per cent of the country's sales outside of the Caribbean, and funda mentally underpinned the nation's sugar industry 
and the entire economy of the nation.  Twenty pe r cent of Guyana's GDP, and over 50 per cent of its 
                                                     
 
297 Third party written submission and oral statement by Fiji. 
298 See also ACP statement in paras. 5.1-5.12 above. WT/DS265/R 
Page 98  
 
 agricultural product, came from sugar.  One out of  every five persons in the entire population of 
Guyana was dependent upon sugar. 
5.48 Guyana submitted that in the event of a su ccessful challenge, the European Communities 
might be obliged to reform its sugar regime.  Th is could result in a substantial reduction in the 
intervention price paid for preferential imports of raw sugar.  For several reasons Guyana, like most 
ACP countries, would find it well-nigh impossible to enhance its productivity, in order to enable it to 
sell competitively in European markets.  The remova l or containment of sugar preferences in Guyana 
would have a most disastrous influence not only on the rural economies, but on the national economy 
as a whole.  The collapse of preferences would lead to social and economic disintegration.
299   
5.49 India  considered that this dispute was of great systemic importance not merely in terms of 
clarifying the rights and obligations of parties under the WTO Agreement on Agriculture   but also in 
terms of its impact on the Doha Round. India noted that the Complainants ha d stated expressly that 
they had not raised any issues concerning the preferential access accord ed by the European 
Communities to sugar of ACP and Indian origin.  It  recalled the statement in the preamble of the 
Agreement on Agriculture  that " …[I]n implementing their commitments on market access, developed 
country Members would take fully into account the particular needs and c onditions of developing 
country Members by providing for a greater improvement of opportunities and terms of access for agricultural products of particular interest to th ese Members, including the fullest liberalization of 
trade in tropical agricultural products as agreed at  the Mid-Term Review…".  The preferential access 
granted by the European Communities to the suga r of ACP and Indian origin had resulted in 
significant economic benefits especially to the AC P countries.  India hoped, accordingly, that the 
preferential access to the EC market for sugar of ACP and Indian origin would not be undermined as a 
result of this dispute.  At the same time, India appreciated the importance to the Complainants of 
ensuring genuine and speedy liberalization of agricultur al export markets.  India noted that rulings of 
the Appellate Body and of dispute settlement panels in Canada – Dairy  had clarified that the term 
"payments" under Article 9.1(c) of the Agreement on Agriculture  included both payments-in-kind to 
an exporter in the form of inputs that were sold at reduced prices;
 300 and where there was a single line 
of production, the financing of below cost-of-pr oduction exports through "highly remunerative prices" 
in the domestic market that fully covered total fixed costs.301 
5.50 Whether a particular payment was financed by governmental action, India continued, must be 
assessed in terms of "governmental" action and invo lvement as a whole that permitted a transfer of 
resources to an exporting producer.302  India considered that the critical issue was whether "… 
governmental action was instrumental in providin g a significant percentage of producers with the 
resources that enabled them to sell at below the costs of production".303 Further, export contingency 
existed because "[o]nly by contracting for export an d effectively exporting [the agricultural product in 
question] can producers and processors engage  in transactions outside he regulatory 
framework…applicable to domestic market…transacti ons…".  In such a case, the payment is made 
'on the export of an agricultural product'".  It was not correct that the above principles would lead to 
confusing the distinction between do mestic support and export subsidies.  In India's view, where there 
was a single line of production and the quantities produ ced were to be sold in  two separate markets, 
domestic support would result also in an  export subsidy if two conditions  were satisfied:  (i) the 
regulatory framework ensured, for example, thro ugh domestic price support mechanisms and import 
barriers, that the revenue from domestic sales alone  was large enough that the entire fixed costs of 
                                                      
299 Third party written submission and oral statement by Guyana. 
300 Appellate Body Report on  Canada – Dairy, paras. 113-114.  
301 Appellate Body Report on Canada – Dairy (Article 21.5 New Zealand and US II) , paras. 139-140 
and 145-146. 
302 Appellate Body Report on  Canada – Dairy, paras. 119-120. 
303 Appellate Body Report on Canada – Dairy ( Article 21.5 New Zealand and US II), para. 147.  WT/DS265/R 
 Page 99 
 
 
 production were covered; and (ii) there were quotas that limited the maximum amount that the 
producer could sell on the domestic market s and excess production must be exported.   
5.51 If these conditions were satisfied, a rational farm er or processor of an agricultural product 
would certainly produce larger quantities of the pr oduct than could be sold on the domestic market 
provided that he had an outlet valve for the excess quan tities in terms of exports particularly at prices 
that exceeded his marginal cost of production.  Only by exporting the excess quantities could the 
farmer or the processor capture the entire benefit of this type of subsidy.  In the context of this type of 
regulatory framework, therefore, Members in e ffect were extending export subsidies that were 
camouflaged as domestic support.   
5.52 Further, India continued, once an Article 9. 1(c) export subsidy was found to exist, it was 
almost inevitable that the foreign buyer of subsidi zed agricultural products could also be characterized 
as receiving a benefit passed on by the exporting producer  This did not mean, however, that the exporting producer had not received an  Article 9.1(c) export subsidy. 
5.53 With respect to the applicability of the SCM Agreement  to subsidies for export of agricultural 
products, India stated that Article 13(c)(ii) of the  Agreement on Agriculture acknowledged that an 
export subsidy that was not cons istent with obligations assumed under the Agreement was actionable 
under Articles 3, 5 and 6 of the SCM Agreement .  India also considered that, under Article 21.1 of the 
Agreement on Agriculture , the provisions of the SCM Agreement  applied to an agricultural export 
subsidy that was not consistent with the provisions of the Agreement on Agriculture .
304  
5.54 Referring to the principle of good faith, India recalled the Appellate Body ruling in EC – 
Computer Equipment , in which a Member's schedule ordinarily was treated as part of the Agreement 
and the Agreement together with Members' sch edules represented the negotiated balance of 
concessions.305  Members often agree to become party to an agreement or to ratify it on the 
assumption that their schedules have been accepted by their trading partners in good faith.  Therefore, 
India held that panels and the Appe llate Body should hesitate to find that a conflict existed between a 
schedule and the substantive provisi ons of a covered agreement.  
5.55 India believed that a clear distinction needed to be made under the Agreement on Agriculture  
between the following situations: one, where a Me mber made certain budgetary outlay and quantity 
commitments in respect of a product in its Schedule but failed to include certain export subsidies; and 
two, where a Member expressly specified in its Sche dule, whether by way of a footnote or otherwise, 
that it was limiting its reduction commitments in resp ect of certain export subsidies. With respect to 
the first situation, by reading Articles 3.3 and 8 of the  Agreement on Agriculture, India  was of the 
view that if a Member made budgetary outlay and quantity commitments but failed to include in its 
schedule a particular type of subsidised export, it was prohibited from continuing to maintain such 
export subsidies to the extent th at these exceeded either the budgetary  outlay or quantity commitments 
contained in its Schedule.  A plea by a Member th at it had made a "scheduling error" based on an 
incorrect interpretation of Article 9.1(c) of the Agreement on Agriculture  amounted to nothing more 
than confessing to a mistake of law.  A mistake of la w in turn could never be an excuse for failure to 
comply with a substantive treaty obligation. Further,  the principle of good faith in public international 
law could not apply to excuse a Member who confessed  to a mistake of law.  Article 3.10 of the the 
DSU  could also have no application in this situat ion because it only required that a party should 
engage in dispute settlement under the DSU  in good faith, not that a party's obligations under a 
'covered agreement', as defi ned in Article 1.1 of the DSU , must be construed in accordance with its 
own mistaken interpretation of a partic ular provision of a covered agreement. 
                                                      
304 Ibid., para. 6 of India's third party submission. 
305 Appellate Body Report on EC – Computer Equipment , para. 109. WT/DS265/R 
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 5.56 A plea of "scheduling error" attributable to a mistaken interpretation of the provisions of the 
Agreement on Agriculture  must be distinguished, however, from the second situation referred to at the 
beginning of the previous paragraph. India subm itted that a provision in a Member's Schedule, 
whether by way of a footnote or otherwise, that  limited its export subsidy reduction commitments was 
consistent with the provisions of the Agreement on Agriculture . Based on its analysis of the provisions 
of the Agreement on Agriculture  relevant to export subsidies, i.e. Articles 3, 8 and 9 of the Agreement 
on Agriculture , India noted inter-alia  that in view of Article 8 a Member was under an obligation not 
to provide export subsidies except in conformity with the Agreement on Agriculture  and in 
accordance with the commitments sp ecified in its Schedule. It further noted that there was no 
definition in the  Agreement on Agriculture of the term "reduction commitments" or any provision that 
specified the extent and scope of reduction commitmen ts in respect of export subsidies that must be 
made by a Member for purposes of either Article 3.3 or Article 9.1.  India argued that although sub-
paragraph 2(b)(iv) of Article 9 pr ovided for a reduction in a Member's export subsidies, this was only 
in the context of exceeding the budgetary outlay or quantity commitment levels specified in a 
Member's Schedule for the second through fifth year s of the implementation period.  It had no 
application where the Member's Schedule limited its export subsidy reduction commitments and did 
not undertake budgetary outlay or quantity commitments.   Finally, India was of the view that the only 
understanding among Members on the extent of the reduction commitments was the "Modalities 
document", which in India's opinion, was not a c overed agreement.  Therefore, it could not be 
enforced through the DSU . 
5.57 From this analysis,  India inferred that Articles 3.3, 8 and 9.1 would not come into play where 
a Member had not made budgetary outlay and quant ity reduction commitments in its Schedule or had 
expressly limited its export subsid y reduction commitments. India argued that where a Member had 
made budgetary outlay and quantity commitments in its  Schedule in respect of export subsidies for a 
particular product, Articles 3.3 and 8 certain ly required the Member to abide by these 
commitments.
306 
5.58 Jamaica307 noted that sugar remained it's most im portant agricultural export, contributing 
nearly 40 per cent of income earned from all agricultu ral exports.  It continued to be Jamaica's most 
integrated agro-industry involving not only the cultiv ation of sugar cane, but also the manufacture of 
sugar, rum and molasses.  Over 40 per cent of land in permanent agricultural cultivation was in sugar 
cane.  It was estimated that nearly 200,000 pe rsons or 8 per cent of the Jamaican population of 
2.5 million benefited directly and indirectly from the industry.  
5.59 The income earned from the export of sugar, primarily to the European Communities, was 
approximately US$78 million in the 2002/2003 season.  The income earned was an important factor 
in Jamaica's interest in this dispute.  The pricin g mechanism which was the b asis of this income was a 
primary element of the Sugar Protocol. A disruption of the pricing mechanism would have an adverse 
impact on the preferential arrangements covered by th e Sugar Protocol and could lead to the demise 
of the industry causing high unemployment in rural areas, increasing the level of rural to urban 
migration and thus leading to serious social and economic dislocation.  
5.60 With respect to the legal arguments and Jamaic a's systemic interest, Jamaica noted that the 
Complainants and various third parties had argued th at the burden of proof rested with the European 
Communities to prove that the amounts of sugar e xported in excess of its reduction commitments had 
not been subsidised as required by Article 10.3 of the Agreement on Agriculture .  But an analysis of 
WTO jurisprudence would show, Jamaica submitted, that this was only one aspect of the issue of 
burden of proof.  The Complainants had the initial bu rden of proof to demonstrate that the European 
Communities' exports of sugar bene fited from export subsidies in contravention of the European 
                                                      
306 Third party written submission and oral statement by India. 
307 See also ACP statement in paras. 5.1-5.12 above.  WT/DS265/R 
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 Communities' obligations under the WTO Agreement on Agriculture .  According to Jamaica, WTO 
case-law required that the party who had the burd en of proof must establish a prima facie case as 
discussed in the Appellate Body report on US – Shirts and Blouses308 and had been cited in practically 
all subsequent disputes when a burden of proof issue arose. 
5.61 Referring to the panel report on India – Autos  where it was established that if the party 
carrying the burden of proof did not manage to estab lish a prima facie case, the panel had no basis for 
a specific ruling on the issue at hand309, Jamaica submitted that if the European Communities 
successfully rebutted the Complainants' arguments or simply provided submissions which balanced 
out those made by them, the Panel should rule in fa vour of the European Communities in line with the 
WTO jurisprudence 
5.62 With respect to the footnote in the EC Sche dule, Jamaica was of the view that it was an 
integral part of the European Communities' comm itments on sugar. Jamaica considered that the 
interpretation of the schedule did not form part of the Panel's terms of refere nce, but should the Panel 
consider this issue, a proper interpretation of th e footnote in accordance with the general rules of 
interpretation of the Vienna Convention  would allow the European Communities to export 1.6 million 
tons, with the benefit of export refunds, corr esponding to its imports of ACP/Indian sugar.310 
5.63 Kenya311 noted that it was part of a large block of developing countries under the auspices of 
ACP countries whose partnership with the Europ ean Communities was geared  towards a long-term 
objective of eradicating poverty and supporting deve lopment in the ACP countries.  The ACP sugar 
exports to the European Communities created the requisite market access and formed part of the 
ACP/EC arrangement.  Sugar is one of the few major commercial crops grown in Kenya.  The 
average production area was estimated at 100,000 h ectares, producing 4 million tons per year and 
employing over 200,000 small scale farmers.  The sugar sector in Kenya was of vital importance as it contributed directly and indirectly to GDP in terms of employment, source of revenue to the 
government, foreign exchange earner, and poverty reduction and rural development. 
5.64 The subsidy issue raised by the Complainants  contested the very foundation on which the EC-
ACP countries' arrangement was predicated and u ndermined the vision of eradicating poverty in 
developing countries such as Kenya.  This arrange ment had provided Kenya an assurance of stable 
prices and income to small scale farmers, not to mention investment in the sugar industry at a time when the flow of foreign direct investment have drastically diminished.  Referring to Article 3.5 of 
the DSU , Kenya contended that the claim of the Compla inants would have a detrimental effect on a 
large group of developing countries including Kenya as the Complainants had prima facie neglected 
the core principle therein. 
5.65 Kenya noted that the European Communities a nd ACP waiver from the obligations of the 
European Communities under paragraph 1 of Article 1 of the General Agreement with respect to the 
preferential treatment for products originating in ACP states had been granted in good faith by all 
WTO members including the Complainants.  The prim ary objective of this waiver was to safeguard 
the interests of ACP countries whose economies were heavily dependent on export of a few primary 
commodities. This, Kenya believed should be taken in to account by the Panel.  This waiver was fully 
consistent with the 1979 Decision on differential and more favourable treatment, reciprocity and fuller 
participation of devel oping countries in the multilateral trading system. 
                                                     
 
308 Appellate Body Report on US – Wool Shirts and Blouses , para. 14. 
309 Panel Report on India – Autos,  paras. 7.231-7.233. 
310 Third party oral statement by Jamaica. 
311 See also ACP statement in paras. 5.1-5.12 above. WT/DS265/R 
Page 102  
 
 5.66 Kenya recalled that agriculture formed the backbone of most of the ACP third party countries 
participating in this dispute.  It also stressed th e economic importance of the sugar industry in Kenya, 
and indeed in the ACP countries as it formed the corn erstone of the poverty redu ction strategy of most 
of these countries.
312   
5.67 Madagascar313recalled the history of sugar cane production in Madagascar which started in 
1917 at the instigation of the French colonial power.  Already at that time, the production was export-
oriented and the five production units developed then were the same ones today.  These sugar 
industries were playing an essential role in the struggle against poverty in the country, constituting a 
the driving-force for the socio-economic developmen t of the five regions in which these industries 
were situated.   
5.68 Madagascar explained that the benefits from cane sugar growing was not limited to sugar 
production.  Of the 2 million tonnes of cane produced annually, 900,000 tonnes were processed by the 
sugar industry;  the rest went to the distillery in dustry or for other usages.  Moreover, the sugar 
industry was a non-negligible employer with 3.82 per cent of the active population and 5.65 per cent 
of agriculture employment.  The sugar industry assu red also such services as health, education, roads 
and electricity since the State often did not have the appropriate budgetary means.   
5.69 Recent inventories, Madagascar continued, had shown that the country had enormous 
potential in exploitable land for sugar cane pr oduction.  Even though Madagascar suffered 
periodically from tropical hurricanes, its climate was favourable to sugar cane production, a fact 
recognized by foreign investors.  Thus, sugar cane production assured not only a multifunctional role 
in the economy of Madagascar, but also a vital one.   Therefore, Madagascar concluded, as a least 
developed country and producer and exporter of sugar, it was very concerned that a Panel decision 
would confirm the Complainants allegations.  Access to the EC market, at guaranteed prices, was the 
key to sustained development of th e sugar industry and its "satellites".314   
5.70 Malawi315 noted that it was a least developed,  landlocked country whose economy was 
heavily dependent on commodities such as sugar.  It  submitted that the sugar industry played a very 
vital developmental role by provid ing employment and other social services such as health, education, 
housing, and infrastructure.  Furthermore, th e sugar industry had led to the socio-economic 
transformation of the rural areas where the sugar indu stry was located, resulting in the growth of small 
townships actively engaged in trading and ot her related activities. Small scale businesses had 
developed which provided services to  the industry and its employees. 
5.71 The economic importance of the sugar industry in Malawi's socio-economic development and 
its positive impact in the fight against poverty was demonstrated by the fact that it employed directly 
more than 15,000 people in the field and factory ope rations. Directly and indirectly the sugar industry 
was responsible for the livelihood of over 95,000 pe ople. Since the introduction of the preferential 
treatment under the Sugar Protocol to which Malawi  became a beneficiary, sugar had replaced tea to 
rank second only to tobacco as a major foreign excha nge earner.  The ACP/EC sugar regime provided 
the necessary price stability and predictability for attracting investment. The industry` was now 
floated on the local bourse, affording Malawians an opportunity to own shares. 
5.72 The foreign exchange revenue from sugar e xports had contributed significantly to the 
government budget by broadening both the corporate and income tax base.  Needless to say the 
industry had become an important contributor to Malawi's GDP. 
                                                      
312 Third party oral statement by Kenya. 
313 See also ACP statement in paras. 5.1-5.12 above. 
314 Third party oral statement of Madagascar. 
315 See also ACP statement in paras. 5.1-5.12 above.  WT/DS265/R 
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 5.73 Malawi noted that it had for a long time de pended on tobacco as the predominant foreign 
exchange earner and for its development. Howeve r, tobacco was experiencing a great deal of 
problems as a result of the global anti-smoking lobb y.  Malawi therefore needed to diversify its 
economy and sugar provided the most viable alternat ive.  All these were huge challenges for a small 
landlocked, commodity dependent LDC.   For Malawi to be economically viable and for it to graduate 
to the next level of development,  it had to continue making huge sacrifices.  The outcome of this 
challenge could therefore very well determine how Malawi would confront and succeed in its 
development efforts amidst these daunting challe nges.  Only a positive outcome would guarantee 
Malawi's competitiveness in its trade and trade related activities.316 
5.74 Mauritius317 explained that the sugar industry had a multifunctional role in Mauritius, having 
both an economic impact as well as a socio-economic , energy and environmental impact.  Mauritius 
noted that 50 per cent of the land area in the country  was devoted to agriculture, 90 per cent of which 
was used for sugar cane production.  Also, 90 pe r cent of agricultural export proceeds came from 
sugar exports with gross sugar export earni ngs amounting to some US$330 million or some 
20 per cent of all merchandise exports.  The net suga r export earnings covered 75 per cent of the food 
import bill in a country that had to import nearly all of its food requirements;   this food procurement 
capacity, Mauritius submitted, was vital for its food security. 
5.75 Furthermore, some 200,000 persons were directly  or indirectly dependent on the sugar sector 
for their livelihood, out of a population of 1.2 milli on, and sugar proceeds were used to provide key 
services such as research and insu rance to the industry.  Electricity generated by sugar factories or 
power plants using bagasse, Mauritius continued,  an environment friendly renewable source of 
energy, represented 25 per cent of the national produc tion.  The use of bagasse in an island devoid of 
fossil fuels was a key element of the energy strategy.  With respect to the environmental impact of the 
sugar industry, Mauritius observed that the can e plant was by far the most important carbon 
sequestrator of all cultivated plants. The high yiel d per hectare of cane helped to mitigate the 
enhanced greenhouse effect. 
5.76 Mauritius had remained largely a single-commodity exporter, not out of choice but as the 
result of the inherent constraints the country faced as a small island state located in a cyclonic belt.  In 
view of the overall importance of the sugar industr y, any disruption of the EC sugar regime would 
result in a significant fall in Mauritius export earning s and would severely damage the island's fragile 
economy, social fabric and environment. 
5.77 Mauritius submitted that the sugar exports of Mauritius or other ACP sugar-supplying states 
to the European Communities did not affect the ba lance of interests established between the various 
stakeholders under the EC sugar regime. Though the ACP exports to the European Communities have 
since 1975 increased from 1.3 million tonnes to 1.6 milli on tonnes, they could not be deemed to create 
any market distortion.  The ACP/EC sugar trade ag reement was an important pillar of the EC sugar 
regime and any ruling in favour of the Complain ants could only jeopardise the survival of the 
economy of Mauritius and of other ACP States.318 
5.78 New Zealand  referred to the Appellate Body report in Canada – Dairy and argued that in the 
context of Article 9.1 (c), "p ayment" included revenue foregone.319  To determine whether a payment 
had been made "requires a comparison between the price actually charged by the provider of the 
goods or services… and some objective standard or benchmark which reflects the proper value of the 
                                                      
316 Third party oral statement by Malawi. 
317 See also ACP statement in paras. 5.1-5.12 above. 
318 Third party oral statement by Mauritius. 
319 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 73. WT/DS265/R 
Page 104  
 
 goods or services to their provider...".
320 The "objective standard or benchmark" identified by the 
Appellate Body in Canada – Dairy  was the average total cost of production.  Accordingly, where a 
producer sold a product at less than it cost to produ ce it, there was a "payment" within the meaning of 
Article 9.1(c).  New Zealand held that the Compla inants had provided factua l evidence demonstrating 
that the producers of C sugar were charging a price for their exports that was below the average total 
cost of production of C sugar and that the Eur opean Communities had produced no evidence to the 
contrary.  Nor had it sought to provide an alternativ e benchmark to that of the average total cost of 
production, as applied in Canada – Dairy .  There was, therefore, a "payment" in the context of 
Article 9.1(c).  The attempt by the European Commun ities to suggest that this conclusion should turn 
on whether or not there was an intermediary involved in the export of sugar  had no basis in logic, and 
no foundation in law. 
5.79 New Zealand stressed that, unlike what was ar gued by the European Communities, there was 
no need to demonstrate the existence of a "benefit"  within the meaning of Article 1.1(b) of the 
SCM Agreement  in order to satisfy the requirements of Article 9.1(c) of the Agreement on Agriculture  
since the terms of Article 9.1(c) established a "sta nd alone" definition of an export subsidy that could 
be given effect on its own terms, as it had in the Canada – Dairy  dispute. .  In any case, even if such a 
"benefit" needed to be demonstrated, one clearly  exists.  Producers can export "C" sugar without 
making a loss (indeed in doing so they make a prof it) because they need only cover their marginal 
costs, and thus receive a benefit. 
5.80 New Zealand concurred with the Complainants that the payments on C sugar were dependent 
or conditional upon the C sugar being exported.  If the C sugar was not exported, no payments were 
made (there was no revenue foregone ). C sugar could only be exported – it could not be sold on the 
domestic market.  C sugar was also not eligible for Article 9.1(a) export subsidies.  Nor could C sugar 
viably be exported in th e absence of the payment.  When the opt ion was exercised of carrying over the 
C sugar to the next marketing year where it could be  reallocated as 'A' sugar and either sold at the 
high domestic price or exported with the benefit of Article 9.1(a) export subsidies, no payment in the 
context of Article 9.1(c) would be made. 
5.81 New Zealand questioned the European Communities' argument that the requirement of export 
contingency applied to the measures that financed  the payments, rather than to the payments 
themselves.321 In the opinion of New Zealand, Article 9.1( c) requires that it is the "payments" that 
must be "on the export" and not the government al action which finances them.  Moreover, New 
Zealand argued,  there was no requirement to show  that the operation of the European Communities' 
domestic price support mechanisms we re contingent upon the export of C sugar.  What was required 
and which New Zealand believed had been  demonstrated by the Comp lainants, was that the payments 
to C sugar were contingent upon C sugar being exported. 
5.82 Finally, New Zealand asserted that if the European Communities were to "remove the 
condition" that required C sugar to be exported, then the Article 9. 1(c) export subsidy would indeed 
no longer be in place.  There would be nothing in  such an action requiring the European Communities 
to cease supporting its domestic production. Theref ore, New Zealand rejected the European 
Communities' claim322 that the Complainant's interpretation of Article 9.1(c) would blur the 
distinction between the disciplines on do mestic support and export subsidies.. 
5.83 With respect to "financed by virtue of gove rnmental action", New Zealand referred to the 
reasoning developed by the Appellate Body in the Canada – Dairy  dispute, in which it was required 
to establish the existence of a demonstrable link between the governmental action at issue and how 
                                                      
320 Ibid., para. 74. 
321 European Communities' first written submission, para. 42. 
322 European Communities' first written submission, para. 64.  WT/DS265/R 
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 payments were financed.323  New Zealand argued that, as was the case in Canada – Dairy , producers 
could cover their fixed production costs through sal es of 'A' and 'B' quota sugar and needed to cover 
only the marginal costs of C sugar production on sales in the export market.  In this way the domestic 
sales of 'A' and 'B' sugar cross-subsidised exports of C sugar that would otherwise not occur or be 
made at a loss.  New Zealand believed, as demons trated by the Complainants, that governmental 
action created both the means and the incentive for th is cross-subsidisation to occur and exports of 
C sugar to be made.  Governmental  action was inherent throughout th e tight regulatory controls that 
the European Communiti es exercised over every aspect of sugar production in the European 
Communities.  Those controls set guaranteed prices  for 'A' and 'B' sugar production for the domestic 
market.  The high domestic prices offset some of the cost of C sugar production, which was further 
encouraged by other aspects of the regime.  Thus, for New Zealand, there was clearly a "demonstrable 
link" between the relevant "governmental action" and the means by which "payments" were financed. 
5.84 In the alternative, New Zealand submitted, th e European Communities' sugar regime provided 
export subsidies not listed in Article 9 resulting in circumvention of the European Communities' 
export subsidy commitments contrary to Article 10.1 of the  Agreement on Agriculture .  New Zealand 
considered that the Complainants had demonstrat ed that the EC sugar regime provided an export 
subsidy as described in paragraph (d) of Annex I to the SCM Agreement . As the Appellate Body had 
confirmed, the Illustrative List in Annex 1 to the SCM Agreement  provides a list of practices 
considered to be "export subsidies" under the SCM Agreement  and thus, if a measure was described in 
the Illustrative List it may be characterised as an "e xport subsidy" within the meaning of Article 10.1. 
5.85 As regards the applicability of the SCM Agreement , in New Zealand's view the words "Except 
as provided in the  Agreement on Agriculture " had the effect of applying the prohibitions on the 
subsidies set out in Article 3 of the SCM Agreement  except where such subsidies were expressly 
permitted by the Agreement on Agriculture .  This approach reflected the fact that the  Agreement on 
Agriculture provided a limited and clearly delineated authori sation to Members to provide subsidies in 
respect of agricultural products that would otherwise not be permitted.   
5.86 Referring to the European Communities' ar gument with respect to impairment or 
nullification324, New Zealand held that the issue in this  dispute was whether the benefit accruing to 
Members under Articles 3.3, 8 and 10.1 of the  Agreement on Agriculture , was adversely impacted by 
the European Communities' breach.  As r ecognized by the European Communities,  325 Articles 3.3, 8 
and 10.1 protect an expectation as to the competitive relationship that would exist between the exports 
of one Member and those of another.  Accordingl y, there was no reason, in New Zealand's view, to 
reach a different conclusion from that reached in US – Superfund  that "a change in that competitive 
relationship contrary to [the provisions of the  Agreement on Agriculture] must consequently be 
regarded ipso facto  as a nullification or impairment of benefits accruing [under the Agreement on 
Agriculture]326. Furthermore, New Zealand did not belie ve there was any requirement to show 
"injury", which had a specific meaning in the context of WTO law. 
5.87 As concerns exports of ACP/India equiva lent sugar and reduction commitments, New 
Zealand sustained that there was no option in the  Agreement on Agriculture whereby Members could 
cap the volume of an Article 9 export subsidy.  T hus, subsidies on the export of 1.6 million tonnes of 
ACP/India equivalent sugar could only be  provided subject to reduction commitments.327 
                                                      
323 Report of the Appellate Body, Canada – Dairy ( Article 21.5 – New Zealand and US) , para. 113. 
324 European Communities' first written submission, para. 145. 
325 Ibid., para. 148. 
326 GATT Panel Report on US – Superfund , para. 5.1.9. 
327 Third party written submission and oral statement by New Zealand. WT/DS265/R 
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 5.88 Paraguay  considered that the assistance granted by  the European Communities to its Member 
States was at odds with the multilateral provisions of the SCM Agreement and the  Agreement on 
Agriculture  as well as with the rules of the GATT 1994.  For the purposes of this dispute, given that 
not only was this assistance distorting international trade, but the distortion was, in the opinion of 
Paraguay, particularly damaging to the developi ng countries, Paraguay submitted that there was a 
violation of rules and principles as well as adverse effects on trade which were seriously injuring the 
economy and development, in this case of Paraguay. 
5.89 As regards inconsistency with the Agreement on Agriculture , Paraguay noted the effects on 
the export and competitiveness of the product at issu e in the international market, which were, in 
Paraguay's opinion, inconsistent with Articles 3. 3 and 8 of the Agreement.  Paraguay deemed it 
important to consider Article 8 of the Agreement on Agriculture  with respect to domestic policies that 
jeopardize export competition.  That article clea rly lays down the obligation for each Member to 
refrain from providing export subsidies otherwise than  in conformity with the Agreement and with 
commitments as specified in that Member's Schedule. 
5.90 Paraguay held that the commitments not to pr ovide export subsidies in accordance with the 
conditions set forth in Article 8 of the  Agreement on Agriculture assumed that there would be 
individual cases in which countries were free to apply domestic support mechanisms (in this case a subsidy).  Such freedom was contingent upon policies to encourage agricultural and rural 
development in the developing countries as part of agricultural programm es for low-income or 
resource-poor producers.  In such cases,  develo ping countries were entitled under the WTO not to 
reduce their domestic support (Article 6 of the Agreement on Agriculture ).  In the case at issue, the 
subject of the dispute clearly did not reflect the situ ation described above.  This was why, as stated by 
the Complaining parties, the European Communities a ppeared to be violating Articles 3.3 and 8 of the 
Agreement on Agriculture .  Indeed, in the circumstances described, the granting of the export subsidy 
applied to a quantity of sugar that exceeded the level of its support reduction obligations. 
5.91 Paraguay explained that it was a country faced w ith an urgent need to increase the volume of 
its exports, in particular its ag ricultural exports. The Sugar protocol imposed obstacles or difficulties 
in exercising what Paraguay considered as its genuine right of access to larger markets.  In this sense, 
Paraguay was of the view that the European Comm unities must comply with the provisions of the  
Agreement on Agriculture , bearing in mind that the export subsidies granted to the European countries 
in question were inconsistent with Ar ticles 3.3 and 9.1 of that Agreement.
328 
5.92 St Kitts and Nevis329 explained that sugar and mol asses accounted for as much as 
92.3 per cent of the islands total agricultural e xports as well as for 58.2 per cent of the total number 
employed in agriculture, which was indicative of the country's high dependen ce on sugar.  St. Kitts 
and Nevis was classified as a Small Island Developing  State and was the smallest independent State in 
the Americas, and also the smallest member both in  terms of size, population and volume of trade, of 
the WTO.   
5.93 St. Kitts and Nevis was also a traditional s ugar exporter with no r ealistic opportunity for 
diversification of the agricultural sector which was defined in terms of a single agricultural export – 
sugar – to a single export market – the European Communities.  St. Kitts and Nevis exported some 
15,000 tonnes per year to the European Communitie s.  Sugar exports to the European Communities 
represented a vital source of foreign exchange, a major source of rural employment and income, and 
given the multi-functionality of sugar, it was of gr eat social, economic and e nvironmental importance 
to St. Kitts and Nevis.  The country was also a net food importing country an d agricultural production 
on sugar estates helped alleviate this situation.   
                                                      
328 Third party written submission an d oral statement by Paraguay. 
329 See also ACP statement in paras. 5.1-5.12 above.  WT/DS265/R 
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 5.94 St. Kitts and Nevis submitted that the ACP third party submission and statement had 
demonstrated the unique arrangements which comprised  the EC sugar regime.  This regime was based 
on a system of guarantees which were dependent up on each other in so systemic a manner that any 
rearrangement or dismantling of any aspect of that re gime would likely lead to a collapse of the entire 
system.  The EC Sugar Protocol, from which the preferential arrangements derived, had become 
enshrined in international treaty obligations and had been sanctioned by WTO rules and laws and, 
indeed, St. Kitts and Nevis noted, the Complainan ts were among the GATT Members which reviewed 
the Sugar Protocol and agreed to grant it a waiver  from Article I of the GATT.  The Complainants 
therefore knew or ought to have known that one of  the objectives of the Sugar Protocol was the 
reduction and eventual eradication of poverty, c onsistent with sustaina ble development and the 
gradual integration of the ACP countries into the wo rld economy.  St. Kitts and Nevis therefore found 
it troubling that at this late stage, the Complainants were trying to claw back benefits that had  been 
conceded to the ACP.330 
5.95 Swaziland331 noted that it was a small and vulnerabl e landlocked developing country heavily 
dependent on the production and expor t of sugar, relying on the predictable and stable earnings from 
sugar exports to the European Communities under the ACP/EC trading arrangements on sugar for 
addressing specific economic and social difficulties and for sustainable economic development in 
general.  Sugar was the most important pillar of the Swazi economy.  With the recent expansion into 
smallholder agricultural schemes, it had brought si gnificant relief to the government's policy objective 
of poverty reduction and played a key role in supp orting key sectors of the economy such as transport, 
finance, water and electricity.  
5.96 In a normal year, sugar cane production contributed 61 per cent to agricultural output which 
in turn was 11 per cent of GDP.  Sugar's contribution to agriculture rose to 75 per cent during periods of drought.  For Swaziland, sugar was and would rema in the predominant agricultural activity.  But, 
due to geography and climate, Swaziland could not become a world class multi-commodity exporter 
even in the foreseeable future.  Sugar exports pr ovided much-needed foreign exchange earnings for 
the Swazi economy.  In 2002, export earnings derived from sugar sales accounted for 7 per cent of the 
country's total export earnings and 36 per cent of total agricultural export receipts.  These export 
earnings were used inter-alia  to finance development programmes,  rationalisation and modernisation 
programmes in the sugar industry as well as diversifi cation in other sectors.  Sugar exports to the 
European Communities represented more than one-t hird of the country's sugar production and. a 
much higher proportion of the sugar revenue, divide d between millers and growers in accordance with 
an agreed formula.   
5.97 Furthermore, Swaziland explained, the sugar industry was a major employer, accounting for 
more than 9 per cent of the working population.  It was estimated that the sugar industry provided 
support to about 86,000 people (9 per cent of the tota l population of just over l million).  It accounted 
for 92 per cent of total agricultural employment.  A positive externality that had resulted from the 
growth of the sugar industry was its contributi on toward the achievement of the Government's 
objectives of poverty reduction through the provision of social services to the population. The Swazi sugar industry had invested substan tially in housing, education (kinde rgarten, primary and secondary), 
health care services, recreational facilities and clean water.  These benefits had been extended beyond 
the sugar industry's precincts to the surrounding ru ral communities.  In addition, the sugar growing 
areas had attracted other support businesses such as finance, transport and retail trade. 
5.98 Although sugar exports from Swaz iland and other ACP countries comprised an insignificant 
amount of global sugar trade and did not affect th e market shares of large sugar exporters like the 
Complainants in this dispute, they played consider able roles in their respective economies.  Due to the 
                                                     
 
330 Third party oral statement by St Kitts and Nevis. 
331 See also ACP statement in paras. 5.1-5.12 above. WT/DS265/R 
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 fragile and vulnerable nature of its economy, Swaziland would not be in a position to absorb 
precipitous changes without serious disruptions in  its socio-economic stability. As a narrowly based 
economy, which was difficult to diversify, Swaziland c ould not absorb changes in  the same time scale 
as more developed and broadly based economies. 
5.99 Swaziland considered that a ruling in favour of the Complainants would be devastating for its 
fragile economy.  It would result in a drastic reduc tion in the level of economic activity in a country 
where two-thirds of the population lived below the poverty line.  Swaziland concluded that the 
consequences of the ruling in favour of the Complain ants in this dispute would be much against the 
spirit of the ACP/EC Partnership Agreements and the objectives set out in the 
-Preamble of the 
Marrakech Agreement, as well as the objectives of the GATT and WTO.332 
5.100  Tanzania333 was of the view the Sugar Protocol was anchored in a moral imperative to create 
a special opportunity that could support the devel opment aspirations of ACP countries, among whom 
were some of the world's weakest and most vul nerable nations.  Unlike Australia, Brazil and 
Thailand, Tanzania remained one of the world' s poorest countries classified as LDCs.  The economy 
was weak, dominated by agriculture which made up about 60 per cent of the GDP, 85 per cent of total 
export earnings and employed 90 per cent of the activ e labour force.  Over 90 per cent of Tanzania's 
agriculture relied on smallholder peasants.  Topogr aphy and harsh climatic conditions limited crop 
production to less than 4 per cent of the total land area.  
5.101  The Industry sector, which accounted for only 10 per cent of Tanzania's GDP, was one of the 
smallest in Africa and the world. About 50 per cent of the manufacturing industry was agro-based,  
including sugar.  Its contribution to exports was small, because of Tanzania's low capacity to 
penetrate international markets and compete with big suppliers, including those of sugar.  The modest 
quantities of sugar that Tanzania did export were act ually thanks to the EC/ACP Sugar Protocol.   
5.102  Under the EC sugar arrangements, Tanzania explained, it did not only benefit from the 
preferential export market and remunerative pri ces, but also derived greater investment and 
employment opportunities, which were crucial for the economic and social transformation of the 
country.  Consequently, after a three-decade peri od of setbacks, sugar production was increasing, 
along with exports.  Tanzania's sugar production was expected to increase from 190,120 tonnes last 
year, to 245,000 tonnes this year.  On the other ha nd, sugar exports to the EC markets increased from 
22,150 tonnes in 2001/2002, to 22,700 tonnes in 2002/2003.  The turnaround had also expanded employment opportunities to a large numb er of smallholders and professionals.
334 
5.103  Trinidad and Tobago335 submitted that the European Communities' sugar regime and the 
Sugar Protocol were symbiotically linked.  An a ttack on any one area of this special arrangement 
would have a deleterious effect on the entire struct ure.  Trinidad and Tobago was fully cognizant of 
the multifunctional role of agriculture particularly in  rural communities. For Trinidad and Tobago, 
agriculture was more than a trad e activity in which market access w as actively pursued.  Agriculture 
contributed to the very social and cultural fabric of our communities.  The sugar industry promoted 
and supported other commercial activ ities, provided infrastructure, and recreational facilities and 
more importantly, by its very presence, limited rural exodus through the provision of meaningful 
employment.  Further, in Trinidad and Tobago, sugar cane cultivation was practised primarily by small farmers.  A loss of market share or preferential access would negatively affect and displace not only these cane farmers, but also employees, other stakeholders and residents in surrounding 
                                                     
 
332 Third party oral statement by Swaziland. 
333 See also ACP statement in paras. 5.1-5.12 above. 
334 Third party oral statement by Tanzania. 
335 See also ACP statement in paras. 5.1-5.12 above.  WT/DS265/R 
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 communities where cane farming and production was pr ominent. It was the benefits derived from 
preferential access that permitted the conti nuation of the aforementioned activities.  
5.104  In Trinidad and Tobago's view, the two primar y benefits derived from the Sugar Protocol's 
preferential quota arrangements were the guaranteed  access and the remunerative prices.  The Sugar 
Protocol had in effect reduced the instability of e xport earnings and had been an important source of 
both price stability and sales security for sugar produ cers.  Trinidad and Tobago's current quota under 
the Sugar Protocol was 45,404 tonnes of raw sugar while that under the Special Preferential System 
(SPS) it was 7,385 tonnes.  For th e period 1994–2002, Trinidad and Tobago's shipments of Protocol 
sugar averaged 38 per cent of the country's total sugar production and 84 per cent of its total sugar 
exports.  In 2003, according to the provisional figur es provided by Trinidad and Tobago's statistical 
authorities, the earnings of the sugar industry were assessed at TT $328 million (approximately US 
$52 million).  For Trinidad and Tobago, this was a significant sum and it represented approximately 43 per cent of the total earnings of the agriculture sector.  
5.105  Trinidad and Tobago had embarked on a path of restructuring and reorga nization of its sugar 
industry, the intent being that there be less governmental  intervention.  As a result of the restructuring, 
the number of cane farmers and those involved in related activities had been substantially reduced 
with its social and economic consequences.  Tr inidad and Tobago noted that the preferential 
arrangements were one of the pillars  on which the restructured industry had been built.  Referring to 
the preamble of the Marrakech Ag reement Establishing the World Trade Organization, Trinidad and 
Tobago was of the opinion that the present challenge to the ACP/EC preferential trading arrangement on sugar could result in the substantial reduction or  complete elimination of Trinidad and Tobago's 
sugar industry, i.e. the very opposite of the objectives in the preamble would most likely be 
realised.
336 
5.106  The United States  noted that it took no view as to whethe r, under the facts of this dispute, the 
measures at issue were consistent with the Agreement on Agriculture  and/or the SCM Agreement .  
However, the question was whether the European  Communities was providing export subsidies for C 
Sugar, a question that needed to be reso lved by reference to the text of the Agreement on Agriculture  
and the SCM Agreement .  If the answer was that the European Communities was providing export 
subsidies for C sugar, then the question would be whether the European  Communities was exceeding 
its export subsidy commitments for sugar.  And that was a question that needed to be resolved with 
reference to the Agreement on Agriculture  and the EC's Schedule.337 
5.107  In response to the European Communities' argume nts that, first, it was known at the time it 
negotiated its Schedule that C sugar did not receive export subsidies and, therefore, it was known that 
the European Communities did not include C sugar in  the base quantity for calculation of its reduction 
commitments; and second, that the modalities guide lines developed during th e negotiations supported 
the European Communities' position that, if the Pa nel concluded that the European Communities was 
exceeding its commitments, the European Communitie s' commitment levels for sugar export subsidies 
should be recalculated, the United States was of the opinion that neither of these arguments could be 
used to contradict the text of the WTO Agreement. 
5.108  The United States, referring to the European Co mmunities' argument with respect to what was 
"known" at the time the European Communities negotia ted its Schedule, considered that this was not 
the issue.  Members' alleged "knowledge" did not govern the legal inquiry, but rather it was the 
Members' agreement, reflected in the text of th e WTO Agreement, that governed.  Similarly, the 
United States recalled that the modalities guidelines we re not a covered agreement, indeed were not 
                                                      
336 Third party oral statement of Trinidad and Tobago. 
337 Third party written submission of the United States, para. 3. WT/DS265/R 
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 an agreement at all, and did not provide "context"  for interpreting the text of the WTO Agreement.
 338  
It stressed that the modalities document itself established that it was not a covered agreement.339 
5.109  In this respect,  the United States recalled the Appellate Body report in  EC – Bananas III , in 
which the Appellate Body made the observation that  the modalities paper was not referred to in the 
Agreement on Agriculture .340  The United States also contended th at Members had explicitly rejected 
the modalities guidelines as "context" for interpre ting Member Schedules.  The United States was 
further of the view that it was not necessary, in th is case to have recourse to supplementary means of 
interpretation as set out in Article 32 of the Vienna Convention . 
5.110  Accordingly, to determine whether the measur es at issue constituted export subsidies for 
purposes of the Agreement on Agriculture , it was necessary to refer to the definition of export subsidy 
in that Agreement and related provisions.  Similarl y, it would be necessary to refer to the definition 
and related provisions in the SCM Agreement  to determine if the measur es were export subsidies for 
purposes of that Agreement.  If the measures were export subsidies, the United States continued, and 
were in excess of the European Communities' e xport subsidy commitments, then the European 
Communities would need to bring its measures into compliance.  Additionally, the measures would be 
subject to the SCM Agreement  disciplines. 
5.111  The United States  was of the view that, contrary to  what the European Communities was 
alleging, the FSC dispute showed that subsidies could be analyzed under both the SCM  Agreement 
and the Agreement on Agriculture .  Contrary to the European Communities' assertion, the United 
States noted that the Canada-Dairy dispute also di d not stand for the proposition that a measure could 
not be analysed under both agreements. This was not to say, however, that the SCM Agreement  
applied to all agricultural support or subsidies.  Ra ther, the question needed to be approached on a 
provision-by-provision, case-by-case basis.  Such an interpretation was supported by the language of 
Article 3 of the SCM  Agreement, which states that certain subsidies are prohibited "except as 
provided in the  Agreement on Agriculture ".  If export subsidies did not fully conform to the 
commitments established under Part V of the Agreement on Agriculture , those subsidies were subject 
to the SCM Agreement disciplines.   
5.112  With respect to export contingency, the United States recalled that in Canada – Dairy, the 
panel had found, in a statement not modified by th e Appellate Body, that Canada's payments were 
made contingent on the export of the agricultural product at issue.341  This critical aspect of 
government intervention – export contingency – was found because Canada's governmental scheme 
mandated that products for which pa yments were received had to be  exported.  Thus, governmental 
intervention requiring export performance was a neces sary part of any analysis of the obligations 
under Article 9.1(c) of the  Agreement on Agriculture.   In the opinion of the United States, this export 
contingency requirement applied to both the Agreement on Agriculture and the SCM  Agreement.   
5.113  With respect to the discussion of the role of international law, particularly concerning the 
concept of estoppel, the United States reiterated that  Article 1.1, Appendix 1, and Article 3.2 of the 
DSU  reflected a very conscious choice on the part of WTO Members to limit the use of international 
law in WTO dispute settlement proceedings to cust omary rules of interpretation.  Members had not 
consented to provide for the application of the pr inciple of estoppel in WTO dispute settlement.  No 
provision of international law as such, the United St ates continued, was a "covered agreement" that 
                                                      
338 Third party written submission of the United States, para. 4. 
339 Modalities for the Establishment of Specific Binding Commitments, MTN.GNG/MA/W/24 
(20 December 1993) (Exhibit EC-3). 
340 See Appellate Body Report on EC – Bananas III , para. 157. 
341 See Appellate Body Report on Canada –  Dairy (Article 21.5  – New Zealand and US II) , para. 79.   WT/DS265/R 
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 may be applied in WTO dispute settlement, nor was there any other basis for importing into the WTO 
other provisions or obligations of  public international law.   
5.114  The lack of any textual basis for importing the principle of estoppel, the United States 
continued, was further emphasized by the lack of consistent description of the concept when panels 
had had occasion to discuss estoppel in the past.  In EEC (Member States) – Bananas I , for example, 
the panel stated that estoppel can only "result from the express, or in exceptional cases implied, 
consent of the complaining parties."342  In EC – Asbestos and Guatemala – Cement , by contrast, the 
panels stated that estoppel was relevant when a party "reasonably relies" on the assurances of another 
party, and then suffers negative consequences r esulting from a change in the other party's position.343  
These inconsistencies illustrated the dangers of seeking to identify purportedly agreed-upon legal 
concepts beyond the only source all Members had agreed to – the text of the DSU  itself.344 
VI. INTERIM REVIEW 
6.1 On 17 August 2004, pursuant to Article 15.2 of the DSU , Article 16 of the Panel's Working 
Procedures and the revised Timetable for Panel Pr oceedings, the parties provided their comments on 
the Interim Reports.  None of the parties requested a meeting to review part(s) of the Interim Reports. 
On 24 August 2004, pursuant to the revised Timeta ble for Panel Proceedings, the parties submitted 
further written comments on the comments that had already been provided on the Interim Reports on 
17 August 2004.   
6.2 In light of the parties' interim comments, th e Panel has reviewed its Findings. Pursuant to 
Article 15.3 of the DSU , this section of the Panel Reports contains the Panel's response to the main 
comments made by the parties in relation to the Inte rim Reports and forms part of the Findings of the 
Panel Reports. 
A. EDITORIAL AND OTHER CHANGES  
6.3 The parties have suggested a number of ed itorial changes to the Interim Reports and 
corrections of typographical errors; parties have also suggested different ways to present their 
arguments and have sometimes requested that references be added to specific arguments or specific 
exhibits or that factual statements made by the Pa nel be deleted.  The Panel has largely accepted these 
suggestions and revised its findings accordingly.  
B. TERMS OF REFERENCE  
6.4 The European Communities considers that its obj ections concerning the scope of the terms of 
reference should be dealt with by the Panel separately with respect to each complaining party, taking 
into account exclusively what is stated by each co mplaining party in its own panel request and the 
arguments/claims made by each of them during the pr oceedings and the moment at which they were 
made for the first time by each of them. 
6.5 The Panel agrees with the European Communitie s that each of the Complainants' panel 
requests must comply with the requirements of Article 6 of the DSU .  Moreover, while the three 
disputes dealt with the same matter and were  joined pursuant to Article 9 of the DSU , Article 9.2 
                                                      
342 See Panel Report on Argentina  – Poultry  Anti-Dumping Duties , para. 7.38 (quoting EEC (Member 
States) – Bananas I . 
343 See Panel Report on EC – Asbestos , para. 8.60 (citations omitted);  Panel Report on Guatemala – 
Cement I , paras. 8.23-8.24.  
344 Third party oral statement of the United States, para. 9. WT/DS265/R 
Page 112  
 
 makes clear that in such circumstances the Panel has to ensure "that the rights which the parties to the 
dispute would have enjoyed had separate panels examin ed the complaints are in no way impaired".    
6.6 In the Panel's view, although the complaining parties drafted their panel requests using 
slightly different terms
345, each of the Complainants' panel requ ests has identified essentially the same 
measures – subsidies accorded under EC Council Regul ation 1260/2001 under th e so-called EC Sugar 
regime – and the same alleged violation - the European Communities exceeds its budgetary outlays 
and quantity commitments contrary to Articles 3 and 8 of the Agreement on Agriculture .  For this 
reason, after noting the specific language of each pa nel request, and in light of the fact that the 
Complainants endorsed each other's factual and lega l arguments, the Panel was able to examine the 
European Communities' allegations concerning the Panel's terms of reference and whether some of 
the Complainants' arguments could be validly in voked in the course of the present proceedings.  
6.7 In particular, the European Communities has argued that each payment discussed by the 
Complainants constitutes a distinct claim and all these claims (alleged payments) have not been  
specifically identified in each of the Complain ants' Panel requests - and for the European 
Communities this lacuna cannot be cured by th e allegation during the panel process that all 
Complainants endorsed each other's arguments. 
6.8 The Panel agrees with the European Communitie s that the Complainant's claims must be 
adequately specified in each of the Complainan ts' Panel requests.  The legal basis of the 
Complainants' claims is Articles 3 and 8 of the Agreement on Agriculture .  The Panel is of the view 
that a claim under Article 3 (and Article 8) of the Agreement on Agriculture  requires allegations that, 
first, the European Communities has exported suga r above its commitment levels and, second,  that 
such exports of sugar were subsidized.  In the Pa nel's view, the Complainants have satisfied these 
requirements adequately.  In their requests for esta blishment of a panel, the Complainants did not 
have to detail how and why such exports were being subsidized, only that the commitment levels were 
exceeded and that exports were subsidized.  Moreove r, the Complainants did indicate some aspects of 
the export subsidization of EC sugar in their panel re quests in referring to Article 9.1(a) and 9.1(c) of 
the Agreement on Agriculture .   
6.9 Therefore, the Panel considers that the Comp lainants' Panel requests complied with the 
requirements of Article 6.2 of the DSU  in that they adequately identified the measures at issue and the 
violations claimed to have occurred, i.e. that th e European Communities' exports of subsidized sugar 
exceeded the European Communitie s' commitment level contrary to Articles 3 and 8 of the Agreement 
on Agriculture .  They further developed in their written or  oral submissions argumentation as to how 
and why in their view, exports of C sugar are su bsidized.  In the Panel's view, the European 
Communities understood these claims from the beginning of the DSU process and articulated its defence accordingly. 
C. 
THERE ARE NO "C SUGAR PRODUCERS " AND NO "C BEET GROWERS " AS SUCH  
6.10 Australia suggests that the references to "C beet growers" and "C sugar producers" are 
inaccurate in that this terminology implies th at there are enterprises engaged solely in the 
growing/farming of C beet and enterprises engaged solely in the production of C sugar.  Australia 
emphasises that the "growers of C beet are also growers of A and B beet" that is, there is no 
independent production of C beet.  Moreover, the producers of C sugar are the same companies that 
produce A and B sugar, that is, there is  no independent production of C sugar. 
6.11 The Panel is aware of the fact that strictly sp eaking there are no "C sugar producers" as such;  
there are no sugar producers that produce only C sugar.  C sugar is produced by the producers of A 
                                                      
345 See the full text of the panel requests in Annex D below.  WT/DS265/R 
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 and B sugar.  Therefore "C sugar producers" are EC sugar producers who produce C sugar in addition 
to A and B sugar.  The same is true for C beet.  There are no beet farmers who grow only C beet.  C beet is grown by farmers of A and B beet.  Therefore "C beet growers" are the EC beet farmers who also grow C beet, in addition to A and B beet.  The Panel has tried to make this clear in footnote 544 of its Panel Reports.  In the present dispute, the Panel has had to assess whether the exports of sugar 
in amounts exceeding the European Communities' sche duled commitment levels are subsidized.  The 
Panel understands that the exceeding sugar is composed  of C sugar and ACP/India equivalent sugar.  
In its assessment of whether exports of C sugar are subsidized, the Panel examines the costs of 
growing C beet as well as the costs of processing and producing C sugar.  In doing so the Panel refers 
to C beet growers and C sugar producers with a vi ew to focussing on the exports of sugar that are 
above the European Communities' commitment levels.  
D. A
 REFERENCE TO THE EUROPEAN COMMUNITIES ' COMMITMENTS FOR BUDGETARY OUTLAYS  
6.12 Australia has requested that the Panel clarifies in  its conclusions that Footnote 1 to Section II, 
Part IV of the European Communities' Schedule do es not enlarge or otherwise modify the European 
Communities' specified quantity commitment of 1, 273,500 tonnes per year, nor does it modify or 
enlarge the European Communities' specified budgetary outlays. 
6.13 The Panel agrees with Australia and has clarified its findings and conclusions so that it is now 
clear that the European Communities' annual budge tary outlay and quantity commitment levels for 
exports of subsidized sugar are dete rmined with reference to the entri es specified in Section II, Part IV 
of its Schedule and that the content of Footnote 1, in  relation to these entries, is of no legal effect and 
does not enlarge or otherwise modify the Europ ean Communities' specified commitment levels.  
E. PANEL 'S EXERCISE OF JUDICIAL ECONOMY OVER THE SCM CLAIMS  
6.14 Australia requested the Panel to reconsider its decision to exercise judicial economy in regard 
to findings under the SCM Agreement because (1) the European Co mmunities had contested the 
claims and arguments of Australia that the SCM Agreement  has application to agricultural products 
and may apply to the same measures as are at issue pursuant to the Agreement on Agriculture ; (2) the 
prohibitions in the SCM Agreement have no direct counterpart in the reduction commitment 
obligations in the Agreement on Agriculture ;  (3) the Appellate Body's decision in Australia – Salmon 
did not involve claims under the SCM Agreement , Article 4.7 of which imposes a duty on panels to 
recommend a time period for withdrawal of a measure;  and (4) in the context of Article 19.2 of the 
DSU , a decision not to examine claims under the SCM Agreement would diminish the rights of 
Australia in regard to the implementation time peri od in the event of its claims proceeding.  The 
European Communities opposed Australia's request.  The Panel has modified paragraph 7.382 and has 
added paragraph 7.385 in response to Australia's comments but declines to change its decision to 
exercise judicial economy in regard to findings under the SCM Agreement .   
6.15 Australia also requested that the Panel recons ider its comments in paragraph 7.386. Although 
the Panel does not consider that changes to paragraph 7.386 are necessary, it observes that its 
comments should not be taken in any way as a critic ism of the manner in which the parties argued a 
highly complex case under tight time constraints.  The point is merely that the focus of the dispute was understandably on the Agreement on Agriculture and that this was an additional consideration 
relevant to the Panel's judgement to exercise judicial economy in this case.  WT/DS265/R 
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 VII. FINDINGS 
A. 
MAIN CLAIMS AND GENERAL ARGUMENTS OF THE PARTIES  
7.1 The Complainants' claim346 that the European Communities has, since 1995, been exporting 
quantities of subsidized sugar in excess of its annua l commitment levels, contrary to Articles 3 and 8 
of the Agreement on Agriculture .  In particular the Complainants claim that in the 2001-2002 
marketing year the European Communities exported 4.097 million tonnes of subsidized sugar, well 
above the 1.273 million tonnes specified in its Schedule.347  The Complainants argue that, regardless 
of how the sugar is categorized, such subsidized expo rts of sugar were inconsistent with the European 
Communities' obligations under Articles 3, 8 and 9, or  in the alternative, with Article 10.1 of the 
Agreement on Agriculture .  Finally, the Complainants also  claim that the said measures are 
inconsistent with the SCM Agreement . 
7.2 The European Communities admits that its exports  of sugar have been in excess of the figure 
shown in Section II, Part IV of its Schedule348.  The European Communities submits that its export 
subsidy commitments for sugar are, in fact, made up of two components:  (i) one component which 
has been subject to progressive reduction during th e implementation period;  and (ii) a second 
component, Footnote 1 to Section II, Part IV to  its Schedule containing the so-called "ACP/India 
sugar Footnote" which, it maintains, is subject to a ceiling of 1.6 million tonnes.349  Thus, for the 
European Communities, its exports of ACP/India e quivalent sugar are not in excess of its commitment 
level.  The European Communities denies that C sugar benefits from subsidies that are inconsistent 
with the Agreement on Agriculture  or the SCM Agreement . The European Communities argues, 
"subsidiarily", that if the Panel concludes that  C sugar is subsidized, the only course of action 
consistent with the requirement of good faith would be for the Compla inants to agree to the correction 
of the European Communities' Schedule, in accordan ce with the Modalities Paper when interpreted in 
light of the principle of good faith.350  The European Communities rej ects the Complainants' claims 
under Article 10.1 of the Agreement on Agriculture  on the grounds that they are outside the Panel's 
terms of reference.  In the alternative, the Eur opean Communities submits that exports of C sugar do 
not benefit from any "other export subsidies" w ithin the meaning of Article 10.1.  Finally, the 
European Communities contest s the applicability of the SCM Agreement  to the present dispute.  
B. PROCEDURAL ISSUES IN THIS DISPUTE  
1. The European Communities' challenges of th e Panel's jurisdiction under its terms of 
reference  
7.3 The Panel recalls the parties' arguments with r espect to the terms of reference, summarized in 
paragraphs 4.10-4.24 above.  The European Commun ities has raised various objections to the Panel's 
jurisdiction over some of the Complainants' claims under the Agreement on Agriculture .  The 
European Communities submitted that the Complainan ts' panel requests did not include some of the 
claims they subsequently developed in thei r written and oral submissions.  The European 
Communities also alleged that the Complainants ha ve not always properly identified the measures 
subject to challenge.   
                                                      
346 See the Complainants' panel requests in Annex D.  The Panel also recalls that the complainants have 
accepted as their own the evidence and arguments submitted by th e other complaining parties. 
347 See para. 4.28 above. 
348 European Communities' reply to Panel question No. 9. 
349 See also paras. 4.191-4.193 above. 
350 European Communities' first written submission, paras. 34, 142 and 192.  WT/DS265/R 
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 7.4 The Panel notes that pursuant to Article 7 of the Understanding on Rules and Procedures 
Governing the Settlement of Disputes ( DSU ), the mandate and jurisdicti on of a panel are determined 
by the complaint of the complaining parties which mu st comply with the requirements of Article 6 of 
the DSU .  Pursuant to Article 6.1 of the DSU , the establishment of a panel by the Dispute Settlement 
Body (DSB) is quasi-automatic and a panel request is normally not subjected to detailed scrutiny by 
the DSB.  It is therefore "incumbent upon a panel to examine the request for the establishment of the 
panel very carefully to ensure its compliance with both the letter and the spirit of Article 6.2 of the 
DSU ."351  
(a) The timing of objections to the Panel's jurisdiction  
7.5 In the present dispute, the European Communiti es is not requesting an y preliminary rulings 
within the meaning of paragraph 13 of the Panel's Working Procedures.352  Yet, Australia alleges that 
the European Communities refrained from raisi ng these issues until the time of its first written 
submission, some six months after the Panel was established and more than two months after the 
Panel was composed.  Australia notes that the Eu ropean Communities did no t raise any concerns 
about the terms of reference at the time of Panel establishment; nor did it attempt to seek a 
preliminary ruling at an early stage of the Panel process (which it has done in other recent disputes in 
which it was a respondent).  
7.6 The WTO jurisprudence is clear that parties s hould bring alleged procedural deficiencies to 
the attention of the other party and the Panel at the earliest possible opportunity.353  Conversely, the 
responding Members are required to seasonably and pr omptly bring claimed procedural deficiencies 
to the attention of the complaining Member and to the DSB or to the Panel, so that corrections, if 
needed, can be made in order th at the dispute can be resolved.354  The Panel recalls that the procedural 
rules of WTO dispute settlement are designed to  promote, not the development of litigation 
techniques, but the fair, prompt and effective resolution of trade disputes.355  In Mexico – Corn Syrup  
(Article 21.5 – US ) the Appellate Body went as far as saying that "a Member that fails to raise its 
objections in a timely manner, notwithstanding one or more opportunities to do so, may be deemed to 
have waived its right to have a panel consider such objections."356   
7.7 The Panel also recalls that wh en assessing any procedural objection, the Panel should "take 
into account whether the ability of the respondent to defend itself was prejudiced, given the actual course of the panel proceedings ... ."
357   
7.8 The Panel notes that although the European Communities asserted orally at the first and 
second meetings of the Panel that it had sustained prejudice, it offered no supporting particulars in its 
replies to the Panel's questions, in its submission or at the hearings.   
                                                      
351 Appellate Body Report on EC – Bananas III , para. 142. 
352 Paragraph 13 of the Panel's Working Procedures: "A party shall submit any request for a 
preliminary ruling not later than in its first submission to  the Panel.  If the complaining party requests such a 
ruling, the respondent shall submit its response to the request in its first submission.  If the respondent requests 
such a  ruling, the complaining party shall submit its response to the request prior to the first substantive meeting 
of the Panel, at a time to be determined by the Panel in light of the request.  Exceptio ns to this procedure will be 
granted upon a showing of good cause." 
353 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , para. 50;  US – FSC , para. 166;  
and US – 1916 Act , para. 54. 
354 See the Appellate Body Report on US – FSC , para. 166.  
355 Panel Report on Korea – Various Measures on Beef , para. 797. 
356 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US),  paras. 49-50. 
357 Appellate Body Report on Korea – Dairy , para. 127. WT/DS265/R 
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 7.9 At the same time, the Panel agrees that certain i ssues relating to the "jurisdiction" of a panel 
can be raised at any time and even by the panel itself:   
"[I]n the interests of due process, parties s hould bring alleged procedural deficiencies 
to the attention of a panel at the earliest possible opportunity.
 358  (...)  At the same 
time, however, as we have observed pr eviously, certain issues going to the 
 jurisdiction   of a panel are so fundamental that they may be considered at any stage 
in a proceeding . 359  (emphasis added)" 
7.10 The Panel is not convinced that the European  Communities raised all its objections at the 
earliest possible time.  Nevertheless, some of th e European Communities' objections are concerned 
with the jurisdiction of this Panel, for which defi ciencies cannot be cured.  These objections may thus 
be viewed as so fundamental that they could be c onsidered at any stage of the Panel proceeding.  In 
this event, it is not clear to what extent the challenging Member needs to prove any prejudice.360    
7.11 In light of the above rules and with the view to ensuring clarity in the Panel's terms of 
reference and the security of this panel process, the Panel turns to exploring the issues of this Panel's 
jurisdiction and the European Communities' challenges thereof.361  
(b) The Complainants' requests for establishment of a panel362   
7.12 Before examining the parties' argumentation on  the European Communities' objections to the 
Panel's jurisdiction under its terms of reference, the Panel recalls the relevant parts of the panel 
requests where the Complainants identified the measur es at issue and the violations claimed to have 
occurred. 
7.13 For Australia, the measures are: 
(a) "The measures that are the subject of this request are the subsidies provided by the EC 
in excess  of its reduction commitment levels on sugar and sugar containing products 
including sugar cane and sugar beet, pr ocessed and unprocessed cane and beet sugar 
and chemically pure sucrose in solid form , molasses resulting from the extraction of 
refining of sugar, isoglucose, inulin syrup and the other products lis ted in Article 1 of 
Council Regulation (EC) No 1260/2001 of 19 June 2001 on the European 
Communities' Common Organization of the markets in the sugar sector (Official Journal of the European Communities, 30 June 2001, L178/1-45). 
The above mentioned subsidies are accorded  through the EC sugar regime, which is 
contained in a number of EC regulations  including Council Regulation No 1260/2001 
and related EC regulations, administrativ e policies, rules, decisions and other 
instruments including instruments pre-dating the above regulation, and their 
                                                     
 
358 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , para. 50;  US – FSC , para. 166;  
and US – 1916 Act , para. 54. 
359 Appellate Body Report on US – Carbon Steel,  para. 123 referring to the Appellate Body Report on 
Mexico – Corn Syrup (Article 21.5 – US) , para. 36;  and US – 1916 Act , para. 54. 
360 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , para. 36;  and US – 1916 Act , 
para. 54. 
361 Appellate Body Report on US – Carbon Steel,  para. 123. 
362 The Complainants' panel requests are attached in Annex D below.  WT/DS265/R 
 Page 117 
 
 
 implementation.  These various instruments will be referred to as “the EC sugar 
regime."363 
and the violations are: 
 
(b) "Australia considers that the provision of the above subsidie s and the relevant 
elements of the EC sugar regime are incons istent with the EC's obligations under the 
following provisions: Articles 3.3, 8, 9.1(a), 9.1(c), and alternatively, 10.1 of the Agreement on Agriculture ;" 
in particular Australia adds: 
"Australia is particularly concerned at the subsidies provided by the EC for 'C sugar' 
exports under the EC sugar regime.  Under the regime, producers of C sugar are able 
to sell C sugar on the world market at be low the total average cost of production 
through cross-subsidisation of C sugar from quota sugar profits.  By financing 
payments on the export of C sugar, the EC exceeds its export subsidy reduction 
commitments under the WTO Agreement on Agriculture . 
Australia is also particularly concerned at  the provisions of the EC sugar regime 
which accord direct subsidies continge nt on export performance for quantities of 
approximately 1.6 million tonnes of sugar which are additional to the budgetary 
outlays and quantities of subsidised export s notified by the EC to the Committee on 
Agriculture under the provisions of Article 18.2 of the Agreement on Agriculture.  In the application of those provisions, the EC significantly exceeds its budgetary outlays 
and quantity commitments for e xport subsidies on sugar under the Agreement on 
Agriculture. "
364 
7.14 For Brazil, the measures are:  
(a) "The specific measures at issue in this dispute are the subsidies  provided and 
maintained by the Eu ropean Communities, in excess of the EC's reduction 
commitment levels for sugar , under Council Regulation (EC) No. 1260/2001 of 
19 June 2001 on the European Communities' common organization of the markets in 
the sugar sector365, and pursuant to all other legislation, regulations, administrative 
policies and other instruments rela ting to the EC regime for sugar,  including the rules 
adopted pursuant to the procedure referred  to in Article 42(2) of Council Regulation 
(EC) No. 1260/2001 of 19 June 2001, and an y other provision related thereto."   
and the violations are: 
 
(b) "The EC provides export subsidies for sugar in excess of its reduction commitment 
levels  specified in Section II of Part IV of its Schedule of Concessions (Schedule 
CXL-European Communities), in violation of the Agreement on Agriculture and the 
                                                      
363 Australia's panel request continues as follows: "In addition to setting down the conditions attaching 
to imports of sugar, the EC sugar regime provides conditions attached to the production, supply and exports of 
sugar, including domestic support and export subsidies.  Sugar is classified into quota and non-quota sugar.  Non-quota sugar is known as C sugar.  The sugar regime provides for the reclassification from quota to C sugar 
and from C sugar to quota sugar.  Sugar classified as C sugar cannot be disposed of in the EC market". 
364 See Australia's panel request in Annex D below. 
365 Council Regulation (EC) No. 1260/2001 of 19 June 2001 on the common organization of the 
markets in the sugar sector, OJ L 178/1-45, 30.6.2001, p. 1.  WT/DS265/R 
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 SCM Agreement .  In particular, Brazil is concerned with two categories of subsidized 
EC exports: 
(i) The EC sugar regime guarantees a high price for the sugar that is produced 
within production quotas.  This is term ed "A and B sugar".  Sugar produced 
in excess of these quotas is termed "C s ugar".  Sugar classified as C sugar 
cannot be sold internally in the year in which it is produced, and must, in 
principle, be exported.  Payments in the form of high prices provided to growers and processors by the EC suga r regime finance the production and 
export of C sugar at prices below its total cost of production.   
(ii) The EC grants export subsidies to an  amount of white sugar ostensibly 
equivalent to the quantity of raw sugar that the EC imports under its 
preferential arrangements.  This am ount, reportedly, is approximately 
1.6million tons. 
  The EC unjustifiably excludes these subs idies from the calculation of the total 
amount of export subsidies that it provides for sugar.  The amount of sugar thus 
subsidized , alone or in combination with other e xport subsidies for sugar provided by 
the European Communities, exceeds the export subsidy reduction commitment levels 
and, as such, constitutes a violation of the EC 's obligations under Articles 3.3, 8, 9.1 
(a) and (c),  or, alternatively, Article 10.1 of the Agreement on Agriculture ..."
366 
 7.15 For Thailand the measures are:  
(a) "The measures at issue are the export subsidies  for sugar and sugar-containing 
products accorded under Council Regulation (E C) No. 1260/2001 of  19 June 2001 on 
the common organization of the markets in the sugar sector published in the Official 
Journal of the European Communities on 30 June 2001 (L 178/1-45 ) and related legal 
instruments." 
and the violations are: 
 
(b) "Under the EC sugar regime, sugar that is  produced within production quotas ("A" 
and "B" quotas) is guaranteed a high interven tion price.  Sugar produced in excess of 
those quotas ("C-sugar") must in principle be  exported.  By virtue of the EC sugar 
regime, exporters of C-sugar are able to e xport such sugar at prices below the average 
cost of production.  The EC therefore accord s export subsidies to C-sugar in the form 
of payments on the export of sugar fina nced by virtue of governmental action. 
Furthermore, under its sugar regime, the EC grants export refunds to an amount of 
white sugar that the EC claims to be equi valent to the quantity of raw sugar imported 
under preferential import arrangements.  The export refunds cover the difference 
between the world market price and the hi gh prices in the EC for the products in 
question, thus making it possible for those products to be exported.  The export refunds constitute direct subsidi es contingent on export performance. 
Under the Agreement on Agriculture, the EC undertook budgetary outlay and export 
quantity reduction commitments with respect to sugar.  In determining its budgetary 
outlays for export subsidies for sugar and the quantities benefiting from such 
subsidies, the EC does not take into acc ount exports of C-sugar and exports of an 
                                                     
 
366 See Brazil's panel request in Annex D below.  WT/DS265/R 
 Page 119 
 
 
 amount of white sugar equivalent to the quantity of raw sugar imported under 
preferential import arrangements.   
As a result, the EC provides export subsidies for sugar in excess of its reduction 
commitments and consequently acts inconsis tently with its obligations under Articles 
3.3, 8, 9.1(a) and 9.1(c) of the Agreement on Agriculture  or, alternatively, Article 
10.1 of the Agreement on Agriculture. By granting export subsidies within the 
meaning of Articles 1.1(a)(1)(i) and (i v), 1.1(a)(2), and 1.1(b) of the SCM Agreement , 
that are not permitted by the Agreement on Agriculture, the EC also acts inconsistently with its obligations under Articles 3.1(a) and 3.2 of the SCM 
Agreement. "
367  
7.16 In sum, for Australia and Brazil the measur es are the "subsidies in excess of the EC's 
reduction commitment levels under Council Regula tion No. 1260/2001", while for Thailand the 
measures are the "export subsidies accorded under Counc il Regulation No. 1260/2001" on sugar.  The 
violations claimed by the Complainants are ess entially the same, that is that the European 
Communities is providing export subsidies for sugar in excess of its commitment level and 
consequently the European Communities is acting in consistently with its obligations under Articles 
3.3, 8, 9.1(a) and 9.1(c) of the Agreement on Agriculture  or, alternatively, Article 10.1 of the 
Agreement on Agriculture .368   In the Panel's view, although the Complainants drafted their panel 
requests using slightly different terms, each of th e complaining parties' panel request has identified 
essentially the same measures – s ubsidies accorded under Council Regulation 1260/2001 for the EC 
sugar regime - and the same alle ged violation – that the European  Communities exceeds its budgetary 
outlays and quantity commitments cont rary to Article 3 and 8 of the Agreement on Agriculture .  
(c) Alleged lack of proper identification of th e "measures" covered by the claims under 
Article 10.1 of the Agreement on Agriculture  
7.17 In its first submission, the European Communiti es objected to the Complainants' claims under 
Article 10.1 of the Agreement on Agriculture , arguing that they are outside the Panel's terms of 
reference.  In light of the Panel's decision in pa ragraph 7.357 hereafter to exercise judicial economy 
with respect to the Complainants ' claims under Article 10.1 of the Agreement on Agriculture , there is 
no need for the Panel to assess that particular obj ection of the European Communities to the Panel's 
terms of reference.   
(d) Alleged lack of proper identification of "payments" as distinct measures or distinct claims 
under  Articles 3, 8 (and 9.1(c)) of the Agreement on Agriculture   
(i) Arguments of the parties 
7.18 The European Communities argued that the Complainants had not properly identified the 
measures that were inconsistent with the Agreement on Agriculture .  The European Communities 
contended that the measures that allegedly violated Articles 3.3 and 8 of the Agreement on 
Agriculture  were not the "export of sugar" as such, but the export subsidies granted by the European 
Communities.  According to the European Communities,  the Complainants should  have identified, in 
their panel requests, the specific measures of the Eu ropean Communities' sugar regime which, in their 
view, provided the alleged export subsidies app lied by the European Communities in order to 
circumvent its reduction commitments.  A simple reference to the European Communities' "sugar 
regime" or to Council Regulation No. 1260/2001 (which comprises of  51 articles, 6 annexes, and 
                                                      
367 See Thailand's panel request in Annex D below. 
368 The Complainants also claim inconsistencies with the SCM Agreement , but these are not concerned 
by the European Communities' objections. WT/DS265/R 
Page 120  
 
 covers 45 pages of the Official Journal of the European Communities) was not considered to be 
sufficiently "specific" by the European Commun ities.  Moreover, the European Communities held 
that the "exports of sugar" was a private transac tion, not a government "measure" within the meaning 
of Article 6.2 of the DSU , and thus could not be the subject of dispute settlement.
369 
7.19 The Complainants countered that they had suffi ciently identified the regulations that were 
relevant in the present dispute at various stages in these proceedings and which resulted in excess 
production of subsidized sugar contrary to th e European Communities' commitments.  They 
considered the reference to EC Regulation No. 126 0/2001 to be sufficiently specific to meet due 
process requirements.  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 thos e subsections from its description of the measures 
at issue did not mean that Brazil had failed to  identify those measures within the meaning of 
Article 6.2 of the DSU .  
7.20 The European Communities argued that Brazil's  "claims" regarding two forms of alleged 
payments i.e. those:  (i) from EC  consumers to EC sugar producers in  the form of "artificially high" 
domestic prices for A and B sugar;  and, (ii) paym ents-in-kind from the beet growers to the sugar 
producers in the form of C beet at prices below the minimum prices for A and B beet, had not been 
properly stated in Brazil's panel request.370  In support of its allegation, the European Communities 
referred to the Appellate Body report in Canada – Dairy  where it is stated that "[t] he second part of 
the claim is therefore, that the responding Member mu st have granted export subsidies with respect to 
quantities exceeding the quantity commitment level . There is, in other words a quantitative aspect and 
an export subsidization aspect to the claim."371 (emphasis added) 
7.21 The European Communities submitted that Article 10.3 of the Agreement on Agriculture 
transfers the burden of proof only with respect  to the "export subsidization aspect" of the 
Complainants' claim to the defending party.  Ho wever, the European Communities argued, before 
such a transfer of the burden of proof can take pl ace, it is necessary for the Comp lainants to state this 
as part of their claims.  For the European Commun ities, Brazil's panel request failed to "provide a 
brief summary of the legal basis" that is "suffici ent to present the problem clearly":  Brazil's panel 
request mentioned only one of the "payments" fu rther developed in its argumentation.  For the 
European Communities, Brazil made no suggestion that there may be other "payments" which may 
also pose a "problem", let alone explain how such  a "problem" would arise.  For the European 
Communities, it remained unclear what precisely th e other "payments" alleged by Brazil were, as, 
according to the European Communities,  the description kept on changing.  
7.22 The Complainants refuted the European Commun ities' assertion that their panel requests only 
covered certain forms of "payments".372  In Brazil's opinion, the existence of payments was only one 
aspect of the subsidies at issue in the present dispute.373  Brazil held that complaining Members are 
not required, by Article 6.2 of the DSU , to present evidence in their panel requests showing how and 
why exports of sugar are subsidized.  They are only  required to specify the measure at issue and the 
treaty provisions violated.  Evidence has to be provided in their first written submissions.374 
                                                      
369  See also paras. 4.10-4.13 above. 
370 See European Communities' reply to Panel question No. 4;  European Communities' second 
submission, paras. 5-6. 
371 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 70.  
372 Australia's second oral  statement, para. 85. 
373 Brazil's second oral st atement, paras. 22-25. 
374 Australia's second oral statem ent, para. 85; Brazil's second or al statement, paras. 22-25.  WT/DS265/R 
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 7.23 The Complainants also held that, because of the reversal of the burden of proof, it was not 
incumbent on them to identify or enumerate th e WTO agreements, provisions, or export subsidy 
definitions, that the European Communiti es might choose to invoke in its defence.375  I t  w a s  t h e  
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.376 
(ii) Assessment by the Panel 
7.24 The Panel recalls the content of the Complainan ts' Panel requests in paragraph 7.13, 7.14 and 
7.15 and in Annex D to this Panel Report where th e complaining parties have identified essentially the 
same measures and the same alleged violations (thus the same claims).   
7.25 In the Panel's view, the Complainants' allegation that exports of C sugar, subsidized through 
the operation of EC Regulation No. 1260/2001, ar e in excess of the European Communities' 
scheduled commitments and, thus, contravene Articles 3 and 8 of the Agreement on Agriculture , is 
sufficiently specific so as to allow the European Communities and the third parties to be "informed  of 
the legal basis of the complaints".377   
7.26 The European Communities argued that the Compla inants have confused the requirements of 
Article 6.2 of the DSU  with respect to the specificity of pa nel requests and the consequences of the 
special rules on the burden of proof of Article 10.3 of the Agreement on Agriculture .  Conversely, the 
Complainants submitted that it is the European Comm unities that has confused claims and arguments.  
The Panel examines th ese issues in turn. 
7.27 In this dispute, the special rules on the reversal  of the burden of proof of Article 10.3 of the 
Agreement on Agriculture  have been invoked by the Complainants.  Article 10.3 provides: 
"Any Member which claims that any qua ntity exported in excess of a reduction 
commitment level is not subsidized must establish that no export subsidy, whether 
listed in Article 9 or not, has been grante d in respect of the quantity of exports in 
question." 
7.28 With respect to the issue of burden of proof and the special rule of Article 10.3, the Appellate 
Body in Canada – Dairy (Article 21.5 – New Zealand and US II)  determined that there are two 
separate parts to a claim under Article 3 of the Agreement on Agriculture  and in light of Article 10.3, 
a different standard of burden of proof applies to each part. 
"In identifying the nature of the special rule , it is useful to analyze the character of 
claims brought under these provisions.  Pursuant to Article 3 of the  Agreement 
on Agriculture ,  a Member is entitled   to grant export subsidies within the limits of 
the reduction commitment specified in its Schedule. 378  Where a Member claims that 
another Member has acted in consistently with Article  3.3 by granting export 
subsidies in excess of a quantity commitment level, there are  two  separate parts to 
the claim.   First, the responding Member must  have exported an agricultural product 
in quantities exceeding its quantity commitment level.   If the quantities exported do 
                                                      
375 Brazil's first oral statement, para. 51; Brazil's second written submission, paras. 7-15; Australia's 
reply to Panel question No. 4. 
376 Ibid. 
377 Appellate Body Reports on EC – Bananas III , para. 142; Korea – Dairy , paras. 120-131; US – 
Carbon Steel , para. 127. 
378 (footnote original ) Under Articles 3.1 and 3.3 of the  Agreement on Agriculture ,  "commitments 
limiting subsidization" of exports ar e specified in the Schedule in terms of "budgetary outlay and quantity 
commitment levels". WT/DS265/R 
Page 122  
 
 not reach the quantity commitment level, there can be no violation of that 
commitment, under Article 3.3.  However,  merely exporting a product in quantities 
that exceed the quantity commitment level is not inconsistent with the commitment.  
The commitment is an undertaking to limit the quantity of exports that may be  
subsidized   and not a commitment to restrict the volume or quantity of exports  as 
such.  The second part of the claim is, ther efore, that the responding Member must 
have granted export subsidies with r espect to quantities exceeding the quantity 
commitment level .  There is, in other words, a  quantitative  aspect and an  export 
subsidization   aspect to the claim.379 (underlining added) 
7.29 Therefore, the Panel is of the view that a claim under Article 3 of the Agreement on 
Agriculture  requires allegations that, first,  the European Communities has exported sugar above its 
commitment level and, second,  that such exports of sugar were subsidized.   
7.30 In the Panel's view, the Complainants have sa tisfied these requirements adequately.  The legal 
basis of the Complainants' claims is Articles 3 and 8 of the Agreement on Agriculture .  In their 
requests for establishment of a panel, the Complain ants did not have to detail how and why such 
exports were being subsidized, only that the commitm ent levels were exceeded and that exports were 
subsidized.  Moreover, the Complainants did indi cate some aspects of the export subsidization of 
EC sugar in their panel requests (in referri ng to Article 9.1(a) and 9.1(c) of the Agreement on 
Agriculture ).   
7.31 Contrary to claims , which must be specifically identified in a panel request, parties' 
arguments  can evolve and develop throughout the proceedings.380  In advance of the European 
Communities' response to their allegations, and to the extent that the European Communities would 
deny any subsidization of its exports of sugar, the Complainants developed in their first written 
submissions, arguments  on why and how, in their view, exports of sugar were indeed subsidized.  
They did this in the attempt to further substantia te their claims that the European Communities was 
subsidizing exports of sugar in excess of its commitment level. 
7.32 While the issue of the specificity of a panel request under Article 6.2 of the DSU  can be 
determined on the face of the panel request381, the issue of the burden of proof relates to the 
                                                      
379 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 70. 
380 In EC – Bananas III , at para. 141, the Appellate Body held that "claims" which are to be outlined in 
a panel's request for the establishment of a panel are to be distinguished from "arguments" which are to be 
addressed at a later stage:  "In our view, th ere is a significant difference between the claims  identified in the 
request for the establishment of a Panel, which establis h the Panel's terms of reference under Article 7 of the 
DSU , and the arguments  supporting those claims, which are set out and progressively clarified in the first 
written submissions, the rebuttal submissions and the first a nd second Panel meetings with the parties".  See also 
at para. 143: "Article 6.2 of the DSU  requires that the claims , but not the arguments , must all be specified 
sufficiently in the request for the establishment of a Pa nel in order to allow the defending party and any third 
parties to know the legal basis of the complaint". (underlining added)  See also the Appellate Body report on EC-Hormones , para. 156. 
381 In US – Carbon Steel  the Appellate Body stated, in para. 127: "As we have said previously, 
compliance with the requirements of Article 6.2 must be demonstrated on the face  of the request for the 
establishment of a panel.  Defects in the request for the establishment of a panel cannot be "cured" in the 
subsequent submissions of the parties during the panel proceedings.   Nevertheless, in considering the sufficiency 
of a panel request, submissions and statements made duri ng the course of the panel proceeding s, in particular 
the first written submission of the complaining party, may be consulted in order to confirm the meaning of the 
words used in the panel request and as part of the assessment of whether the ability of the respondent to defend 
itself was prejudiced . Moreover, compliance with the requirements of Article 6.2 must be determined on the 
merits of each case, having considered the panel request as a whole , and in the light of attendant 
circumstances." (footnotes omitted) (emphasis added).  WT/DS265/R 
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 substantive demonstrations of violations (t hrough evidence and argumentation) taking place during 
the entire panel process.382  
7.33 Again in Canada – Dairy (Article 21.5 – New Zealand and US II) , the Appellate Body 
determined that a different standard of burden of proof applies to each part of a claim under Article 3: 
"Under the usual rules on burden of proof, the complaining Member would bear the 
burden of proving both parts of the claim.  However, Article 10.3 of the  Agreement 
on Agriculture   partially alters the usual rules.   The provision cleaves the complaining 
Member's claim in two, allocating to differ ent parties the burden of proof with respect 
to the two parts of the claim we have described. 
Consistent with the usual rules on burden of  proof, it is for the complaining Member 
to prove the first part of the claim, namely that the responding Member has exported 
an agricultural product in quantities that exceed the responding Member's quantity 
commitment level ."383 (underlining added) 
7.34 If the complaining Member succeeds in proving the quantitative part of the claim, and the 
responding Member contests the export subsidization asp ect of the claim, then, under Article 10.3, the 
responding Member " must establish   that no export subsidy … has been granted" in respect of the 
excess quantity exported. (emphasis added)  The langua ge of Article 10.3 is clearly intended to alter 
the generally-accepted rules on burden of proof.384  While the Complainants bear the burden of 
proving that the export quantities are above the specifi c commitment level, once they have done so, it 
is for the European Communities to prove that such exports of sugar were not subsidized .   
7.35 In the Panel's view, the Complainants' panel requests sufficiently in formed the European 
Communities what measures the Complainants were ch allenging and what violations were claimed.  
This is obviously the case since in  its first submission the European Communities stated that if the 
Panel considers that exports of C sugar are subsidized, the Panel shoul d assess the situation in light of 
what the European Communities' commitment level s hould have been, had C sugar been calculated in 
accordance with the Modalities Paper.385  In the Panel's view, the Complainants' panel requests were 
sufficiently detailed "to present the problem clearly".386 
7.36 Therefore, the Panel considered that the Co mplainants' panel requests complied with the 
requirements of Article 6.2 of the DSU  in that they adequately identified the measures at issue and the 
violations claimed to have occurred, i.e. that th e European Communities' exports of subsidized sugar 
exceeded the European Communitie s' commitment level contrary to Articles 3 and 8 of the Agreement 
on Agriculture .  
7.37 Consequently, the Complainants' argumentation that C sugar receives advantages from 
various subsidies and payments, within the meaning of Article 9.1(c) of the Agreement on 
Agriculture , is not outside the Panel's terms of reference. 
                                                      
382 Panel Report on Thailand – H-Beams , at para. 7.43. 
383 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 71-73. 
384 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II ), paras. 71-73. 
385 European Communities' first written submission, para. 34. 
386 Appellate Body Report on Korea – Dairy , para. 120. WT/DS265/R 
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 (e) Alleged lack of proper identification of "claims" under Article 9.2(b)(iv) of the Agreement on 
Agriculture  
(i) Arguments of the parties 
7.38 The European Communities also contended that  Article 9.2(b)(iv) of the Agreement on 
Agriculture  was not mentioned in the Complainants' panel requests, nor in their first written 
submissions, (only in the first oral statements of Brazil and Thailand).
387  The European Communities 
alleged that it had no idea, prior to the first substa ntive meeting, that the Complainants were claiming 
that Footnote 1 to Schedule the European Schedule CX L was also inconsistent with Article 9.2(b)(iv) 
of the Agreement on Agriculture.388  Accordingly, even if found to be acting inconsistently with 
Article 9.2(b)(iv) of the Agreement on Agriculture , the European Communities contended that this 
provision could not form the basis for a finding of inconsistency with any other provision of the 
Agreement on Agriculture .  Moreover, the European Communiti es believed that the claim that its 
export subsidies had not been reduced sufficiently , though still unfounded, is qu ite different, from the 
qualitative point-of-view, from the claim that the Eur opean Communities had exceeded its export 
subsidy commitment levels.   
7.39 The Complainants  explained that Article 9.2(b)(iv) of the Agreement on Agriculture  was 
introduced by them as a counter-argument and in  response to arguments made by the European 
Communities, and not as a claim of violation requiring specification in their panel requests.389  The 
Complainants referred specifically to Article 9.2(b)(iv) of the Agreement on Agriculture  to underline 
that accepting the Footnote to the Eu ropean Communities' Schedule as valid, even if interpreted as 
imposing a quantity limit, led the European Commun ities to act inconsistently with its reduction 
obligations.  As a consequence, the European  Communities was providing export subsidies in a 
manner inconsistent with the Agreement on Agriculture  – particularly in violation of Articles 3 and 8 
of the Agreement on Agriculture . 
(ii) Assessment by the Panel 
7.40 As noted by the Panel before, the Complainants' main claim under the Agreement on 
Agriculture  is that the EC sugar exports are being subsidized above the European Communities' 
commitment level in violation of Articles 3 and 8 of the Agreement on Agriculture .  In the context of 
the parties' arguments and attempts to identify the relevant commitment level for the European 
Communities for sugar, the Complainants made referen ce to the provisions of Article 9.2(b)(iv) of the 
Agreement on Agriculture , which determines the Members' overall level of commitment at the end of 
the annual reduction stages of the implementation period.  All parties agree that Members' 
commitment levels today are the same as they were at the end of the implementation period.  
Therefore, Brazil and Thailand made refe rences to Article 9.2(b)(iv) of the Agreement on Agriculture  
as part of the legal context of Articles 3, 8 and 10.3 of the Agreement on Agriculture  with a view to 
discussing the European Communities' commitment leve ls for exports of sugar since 2001, and in 
support of their argument that that commitment leve ls should be determined with reference to the 
European Communities' entries in Sec tion II, Part IV of its Schedule. 
7.41 The Panel recalls the distinction between claims and arguments.390  In the Panel's view, a 
panel request containing a claim under Article 3 of the Agreement on Agriculture  must state that: (i) 
                                                      
387 European Communities' first written submission, paras. 69-70; European Communities' reply to 
Panel question No. 28.  See also para. 4.19 above. 
388 European Communities' reply to Panel question No. 28. 
389 Brazil's second oral statement, paras.  82-83.  See also para. 4.18 above. 
390 See the Appellate Body Reports on EC – Bananas III , paras. 142-143, EC – Hormones , para. 156, 
US – Certain EC Products , para. 123.  WT/DS265/R 
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 exports of the scheduled products are above commitm ent levels and (ii) su ch exports have been 
subsidized.  In the Panel's view, the Complainan ts' panel requests comply with these requirements.391  
Subsequently, during the panel process the Compla inants were entitled to further develop their 
argumentation that the exceeding exports of sugar had benefited from export subsidies within the 
meaning of the Agreement on Agriculture .  
7.42 The European Communities submitted that "an ap propriate test for distinguishing "'claims' 
from 'arguments' would be to anticipate what wo uld be the consequences of upholding a given 
'argument'.  If upholding a purported 'argument' lead s to establishing a violation of a legal provision, 
but does not render unnecessary the examination of  another purported 'argument' made under the 
same legal provision, it is because each of th e two 'arguments' involve a distinct 'claim'." 392 The 
European Communities added that when this test is  applied in the present case, it becomes clear that 
each of the "payments" alleged by Brazil is a distinct "claim". 
7.43 The Panel does not agree with the European Co mmunities' suggestion.  The Panel is of the 
view that the European Communities' assertions are contrary to the existing WTO jurisprudence and 
to the Panel's discretion to reach a conclusion that a claim of violation is justified on the basis of 
arguments not even raised by the parties and, in certain situations, without having to address all the 
arguments of the parties.  The Panel has already reached the conclusion that the Complainants have 
adequately identified the measures at is sue and the related violations of the Agreement on Agriculture .  
7.44 In the Panel's view, the European Communities'  allegation that the Complainants' arguments 
and references to Article 9.2(b)(iv) are outside the Panel's terms of reference is thus not founded.  
(f) Alleged lack of proper identification of claims in relation to Footnote 1 to the EC's Schedule 
(ACP/India sugar)393 
(i) Arguments of the parties 
7.45 In its first submission, the European Commun ities also observed that the Complainants had 
made subsidiary claims that the European Commun ities was not respecting the terms of Footnote 1 to 
its Schedule. The European Communities considered th at these claims were not sufficiently identified. 
The European Communities therefore argued that it could not defend any ( unidentified) measure 
which it may have adopted with respect to ACP/Indi a sugar in respect of unidentified provisions of 
the Agreement on Agriculture , or provisions which were merely cited without further explanation.  
The European Communities contended that these claims were not made in the requests for 
establishment of a panel by the Complainants, which a llege an "exclusion" or a failure to "take into 
account" exports of ACP/India equivalent sugar in  ensuring respect of the European Communities' 
export subsidy commitments, and not a failure to resp ect the terms of the Footnote.  Consequently, for 
the European Communities, these cl aims were also outside the terms of reference of the Panel 
7.46 The Complainants were of the view that  the European Communities was confusing 
Footnote 1 with "the measure at issue" and was attempting to redefine the measure at issue as 
                                                      
391 See the Appellate Body Report in Korea – Dairy  in para. 120: "(...) The request must:  (i)  be in 
writing;  (ii)  indicate whether consultations were held;  ( iii)  identify the specific measures at issue;  and  (iv)  
provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly.  In its 
fourth requirement, Article 6.2 demands only a summary – and it may be a brief one – of the legal basis of the 
complaint;  but the summary must, in any event, be one that is 'sufficient to present the problem clearly'.  It is not enough, in other words, that 'the legal basis of the complaint' is summarily identified;  the identification must 
'present the problem clearly'." 
392 European Communities' reply to Panel question No. 4. 
393 Footnote 1 to Section II, Part IV of the EC's Sc hedule is hereafter called the "Footnote 1" or the 
"ACP/India sugar Footnote", the precise content of which is discussed in paras. 7.167-7.196 hereafter.  WT/DS265/R 
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 Footnote 1 itself.  Nowhere in their panel request s did the Complainants cite Footnote 1 as being a 
"measure at issue".  Rather, the European Comm unities was informed by the Complainants' panel 
requests that the exports in excess of reduction commitments arose from the subsidized export of 
C sugar and ACP/India equivalent sugar.  Austra lia noted that the Eur opean Communities' first 
written submission deliberately avoided claims of inconsistency arising fro m the export subsidies 
granted to ACP/India equivalent sugar.  Inst ead, the European Communities had redefined the 
measure as the Footnote, and referred exclusively to  Footnote 1 in relation to ACP/India equivalent 
sugar.  Australia added that in the fourth and fift h paragraphs of its panel request, Australia identified 
the measures at issue as the subsidies on sugar in excess of the European Communities' reduction 
commitments and elaborates on the nature of the me asures in paragraphs 6-7 of that request.   
7.47 According to the Complainants, the European Communities is using Footnote 1 as a rebuttal 
argument to the Complainants' claims of inconsistency.   The Complainants added that it is perfectly in 
order for any complainant to anticip ate such an argument in its first written submission or to respond 
to such arguments in its rebuttal submission.  Su ch issues are not connected to Article 6.2 of the DSU  
and to the requests for establishment of a panel.  Finally, the Complainants reiterated that the 
European Communities is confusing "claims", wh ich must be made in the panel request, and 
"arguments", which are developed during the panel proceeding.  The Complainants claimed that the 
European Communities exceeds its subsidy reduction commitments, inter alia , by granting export 
subsidies to ACP/India equivalent sugar.  The Co mplainants argued that Footnote 1 does not exempt 
the European Communities from its obligations unde r Articles 3.3, 8, 9.1(a) and 9.1(c) of the 
Agreement on Agriculture  or, alternatively, that it does not apply to the exports of a quantity of 
EC sugar that is equivalent to the quantity of sugar imported from the ACP countries and India.  The 
Complainants' argument regarding the scope of a pplication of Footnote 1 is thus a subsidiary 
argument supporting their legal claims that the Eu ropean Communities is exceeding its export subsidy 
reduction commitments.   
(ii) Assessment by the Panel 
7.48 The Panel recalls the content of the Complainan ts' panel requests and the distinction between 
claims and arguments.  The Compla inants' claim is that the Europ ean Communities is exporting sugar 
(C sugar and ACP/India equivalent sugar) in excess of the European Communities' commitment level.  
For the Complainants, the Europ ean Communities' commitment level is indicated in Section II, 
Part IV of the EC Schedule for sugar, that is 1, 273,500 tonnes in 2001 and the following years.   
7.49 In the Panel's view, the European Communities is using Footnote 1 as a rebuttal argument  to 
the Complainants' claims that th e European Communities is acting inconsistently with Articles 3 and 
8 of the Agreement on Agriculture .  The European Communities is arguing that its level of 
commitment includes an additional 1.6 million tonnes of ACP/India equivalent sugar as provided for 
in Footnote 1.   
7.50 In the Panel's view, what constitutes a Memb er's "commitment level", for the purpose of 
Article 10.3, is both an issue of legal interpretation and a matter of evidence.  Whether or not an entry 
in a Member's schedule, such as the European Communities' Footnote 1, could compose part of that 
Member's overall commitment level is a legal issue for which both sides have submitted 
argumentation.  It is for the Panel to decide whethe r the "commitment level" referred to in Articles 3, 
8, 9.2(b)(iv) and 10.3 is exclusively composed of the export subsidies that had to be reduced (in the 
case of the EC sugar 1,273,500 tonnes) or whet her Members are also entitled to maintain, for 
instance, ad hoc "limitations" on export subsidization.    
7.51 The European Communities argues that a correct interpretation of Articles 3, 8 and 9 of the 
Agreement on Agriculture  and the European Communities' Footnote 1 would lead to the conclusion  WT/DS265/R 
 Page 127 
 
 
 that the European Communities' Footnote 1 is a component of its overall export subsidy 
commitments.  The Complainants disagree. 
7.52 In the Panel's view, when the European Co mmunities made reference to Footnote 1 as 
evidence and in support of its argument that its level of commitment was not limited to 1,273,500 tonnes but, rather, should include the 1.6 million tonn es mentioned in Footnote 1, the Complainants 
had the right to challenge such arguments as well as the scope of the European Communities' 
commitment; the Complainants were entitled to use rebuttal arguments to challenge the conclusions 
drawn by the European Communities from Footnote 1.  Again the Panel recalls that the Complainants' 
claims are not that the EC's Schedule contains a WTO inconsistent entry (Footnote 1) or that the 
European Communities' categorization of its  subsidies is inconsistent with the Agreement on 
Agriculture  but rather that the European Communities is exporting subsidized sugar in quantities 
above the European Communities' scheduled commitment levels specified in Section II, Part IV of its 
Schedule. The Panel additionally notes that in th eir panel requests the three complaining parties 
mentioned the issue of subsidies to exports of prod ucts either as "equivalent to the quantity of raw 
sugar imported under pref erential arrangements"
394, or "for quantities of approximately 1.6 million 
tonnes of sugar which are additional to the budgeta ry outlays and quantities of subsidised exports 
notified by the EC to the Committee on Agriculture395 thereby putting the European Communities on 
notice of the legal and factual matters at issue.  
7.53 For the foregoing reasons, the Panel is of the vi ew that the Complainants' argumentation with 
respect to the scope of the European Communities'  commitment levels, including those relating to the 
nature, legal effect and scope of the European Comm unities' Footnote 1, is within the Panel's terms of 
reference.  
2. European Communities' allegation that th e Complainants are "estopped" from 
pursuing this dispute 
(a) Arguments of the parties 
7.54 The Panel refers to Section IV:D.3 of the descriptive part for a summary of the parties' 
arguments in respect to good faith and estoppel.   The European Communities submits that the 
violations now alleged by the Complainants would have been flagrant and immediately manifest upon 
the conclusion of the WTO Agreement .396  Yet, none of the Complain ants raised any question with 
respect to exports of C sugar until this dispute.  This is interpreted by th e European Communities to 
mean that, for many years after the conclusion of the WTO Agreement , the Complainants continued to 
share the European Communities' understanding that exports of C sugar were not subsidized.  The 
same is true with respect to issues relating to the ACP/India sugar Footnote which have never been 
raised in the Committee on Agriculture and have  never previously been challenged by the 
Complainants.   
7.55 For the European Communities, the Complainants' silence may be legitimately construed as a 
representation of lack of objections not only wher e there is a "duty to speak", but also in 
circumstances where it is reasonable to expect that  the other parties will speak.  For the European 
Communities, it was reasonable to expect that Memb ers would not challenge the fact that it did not 
include the additional subsidies of the ACP/India s ugar Footnote and C sugar in its base quantity.  On 
the basis of what it considers to be its good fait h expectations, the European Communities submits 
that the Complainants are estopped from bringing this claim. 
                                                      
394 See Brazil and Thailand's ' Panel requests in Annex D to this Panel Report. 
395 See Australia's Panel request in  Annex D to this Panel report. 
396 See European Communities' first written submission, para. 139.  WT/DS265/R 
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 7.56 The European Communities argues that estoppel is a procedural defence, which precludes one 
party from exercising a right vis-a-vis another party, but without modifying the substantive 
obligations of that party.  It adds that estoppel is  a matter of adjectival, rather than substantive, law 
and accordingly the effect of a true estoppel is c onfined to the parties.  The European Communities 
does not contend that its obligations under Article 9.1(c) of the Agreement on Agriculture  have been 
modified by virtue of the principle of estoppel.  Ra ther, the European Communities' contention is that 
the Complainants are precluded from bringing a clai m under that provision and, therefore, that the 
Panel should reject their claims even  if it upheld them in substance. 
7.57 For the European Communities, since estoppe l does not alter the substantive rights of 
Members under the WTO Agreement , but only the exercise of those rights, it may operate exclusively 
between two Members.
397 
7.58 The Complainants respond that, as a matter of  legal principle, the European Communities 
could not infer from silence that other Members sh ared the view that C sugar was not subsidized, 
because they did not have a "duty" to object.  The Co mplainants submit that even if they had been 
silent, their silence on the European Communities' base quantity levels as well as the ACP/India sugar 
Footnote does not amount to a clear and unamb iguous representation upon which the European 
Communities could rely, especially as there was no legal duty upon the Complainants to do so.398   
7.59 For Australia, if the European Communities were  permitted to have recourse to estoppel, it 
would operate to diminish the rights of the Complainants, contrary to the provisions of Articles 3.2 and 19.2 of the DSU .  It is one thing to have a right subj ect to relevant provisions of a covered 
agreement, but entirely another to have that right subject to the operation of a principle which is not 
recognized in the provisions of the covered agreemen t.  Furthermore, Australia argues that it is the 
responsibility of the European Communities to ma ke sure it is acting in accordance with the 
Agreement on Agriculture  and other WTO Agreement s.   
7.60 Finally, the Complainants argue that even if estoppel could be invoked, the European 
Communities does not comply with the basic requirements for invoking estoppel.
399  
(b) Assessment by the Panel 
7.61 The Panel notes that parties and third-parties to this dispute do not seem to agree on the nature 
of the principle on estoppel and its exact parameters.400  Muller and Cottier define it as follows: 
"It is generally agreed that the party invoking estoppel 'must have been induced to 
undertake legally relevant action or abstai n from it by relying in good faith upon clear 
and unambiguous representations by the other State'."401 
7.62 The Black Law Dictionary defines "silence, estoppel by" as follows: 
"Such estoppel arises where person is under duty to another to speak or failure to 
speak is inconsistent with honest dealings.  Silence, to work 'estoppel', must amount 
                                                      
397 See also paras. 4.167-4.170 above.   
398 See also paras. 4.160-4.161 above. 
399 See para. 4.159 
400 Australia's second submission, paras. 142 and 144;  Brazil's second submission, Title G and paras. 
80 and 85;  Thailand's second submission, para. 114;  EC's first submission, paras. 136-138;  and see for 
example:  United States oral statement,  paras. 8-9;  Colombia's oral statement, para. 8;  ACP countries' third 
party submission, paras. 9 and 126;  and ACP countries' oral statement, para. 8. 
401 J.P. Müller and T. Cottier, in Encyclopaedia of Public International Law , Ed. Max Planck Institute, 
North Holland, 1992, p. 116.    WT/DS265/R 
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 to bad faith, and, elements or essentials of  such estoppel include: change of position 
to prejudice of person claiming estoppel; damages if the estoppel is denied; duty and opportunity to speak; inducing person cl aiming estoppel to alter his position; 
knowledge of facts and of rights by pers on estopped; misleading of party claiming 
estoppel; reliance upon silence of party sought to be estopped."
402  
7.63 In the Panel's view, it is far from clear whether the principle of estoppel is applicable to 
disputes between WTO Members in relation to thei r WTO rights and obligations. The principle of 
estoppel has never been applied by any panel or the Appellate Body.  Estoppel is not mentioned in the 
DSU  or anywhere in the WTO Agreement .   
7.64 If estoppel, as a general principle of law, were applicable to disputes between WTO 
Members, Members would still have to comply with the DSU  and would thus have to find a way to 
comply in good faith with both the provisions of the DSU  and those of estoppel.  The Panel recalls 
that in EC – Hormones , the Appellate Body made clear that even if there were a precautionary 
principle in general international law, WTO obligations remained binding on Members: "We 
accordingly agree with the finding of the Panel that  the precautionary principle does not override the 
provisions of Articles 5.1 and 5.2 of the SPS Agreement ".403 
7.65 If estoppel were considered as a customary rule of interpretation or if it were comprised in the 
good faith principle reflected in Article 3.10 of the DSU , such a principle would have to be read 
"harmoniously" with the other principles of the WTO dispute settlement system, including the quasi-
automaticity of its process and the fact that the initiation of the dispute settlement mechanism is self-
regulating.  On several occasions, the Appella te Body has insisted that it is "the duty of any treaty 
interpreter to read all applicable provisions of a treaty in a way that gives meaning to all of them, 
harmoniously".404 
7.66 The Panel also recalls that the Appellate Body  has clearly established that initiation of WTO 
dispute settlement procedures does not require the demonstration of any specific legal or economic 
interest.405  I n  Mexico – Corn Syrup (Article 21.5 – US)406 the Appellate Body ruled that the first 
sentence of Article 3.7 of the DSU : 
"… reflects a basic principle that Members should have recourse to WTO dispute 
settlement in good faith, and not frivol ously set in motion the procedures 
contemplated in the DSU .  We recall that, when we examined the language of 
Article 3.7 of the DSU  in our Report in  European Communities – Bananas ,  we 
stated that: 
'… a Member has broad discretion in deciding whether to bring a 
case against another Member under the DSU .  The language of 
Article XXIII:1 of the GATT 1994 and of Article 3.7 of the DSU  
suggests, furthermore, that a Member is expected to be  largely self-
                                                      
402 Black's Law Dictionary, Sixth Edition, 1991, p. 963. 
403 Appellate Body Report on EC – Hormones , para. 125. 
404 Appellate Body Report on Korea – Dairy , para. 81.  The Appellate Body also referred to the 
Appellate Body Report on Argentina – Safeguard Measures on Imports of Footwear , para. 81.  See also 
Appellate Body Report on US – Gasoline , p. 23;  Appellate Body Report on Japan – Alcoholic Beverages II , p. 
12;  and Appellate Body Report on India – Patents (US) , para. 45. 
405 Appellate Body Report on EC – Bananas III , para. 142. 
406 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , para. 73 citing Appellate Body 
Report on Korea – Dairy , para. 135. WT/DS265/R 
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 regulating   in deciding whether any such action would be 'fruitful'.  
(emphasis added)' "
407 
7.67 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 a Member  does so in good faith, having duly exercised its 
judgement as to whether or not recourse to that panel would be "fruitful".   
7.68 This is in line with GATT jurispruden ce on this matter.  In the GATT dispute on EEC – 
Import Restrictions  , the panel concluded that:  
"The Panel ... recognized that restrictions  had been in existence for a long time 
without Article XXIII ever having been invoked by Hong Kong with respect to the 
products concerned, but concluded that th is did not alter the obligations which 
contracting parties had accepted under GATT provisions.  Furthermore the Panel 
considered it would be erroneous to interp ret the fact that a measure had not been 
subject to Article XXIII over a number of years,  as tantamount to its tacit acceptance 
by contracting parties  ...."408 (emphasis added)   
7.69 In the Panel's view, Article 3.7 of the DSU  neither requires nor authorizes a panel to look 
behind that Member's decision or to question its ex ercise of judgement (unl ess there is evidence of 
bad faith).409  Under WTO jurisprudence, the fact that a Member does not complain about a measure 
at a given point in time, cannot by itself deprive that Member of its right to initiate a dispute at some later point in time if that Member considers in good fa ith that it is fruitful to do so.  This seems to be 
confirmed by the WTO dispute cases such as in EC – Bananas III (Article 21.5 – EC/Ecuador )
410 and 
in Guatemala – Cement II ."411 
7.70 Moreover, assuming arguendo  that estoppel could be invoked in WTO dispute settlement 
proceedings, the Panel is of the view that the presen t situation is not one for which estoppel could find 
application.  The Panel examines hereafter the requirements for its application. 
7.71 The conditions for estoppel have been summed up by the panel in Argentina – Poultry:  
"[T]he essential elements of estoppel are:  '( i) a statement of fact which is clear and 
unambiguous; (ii) this statement must be  voluntary, unconditional, and authorized; 
(iii) there must be reliance in good faith upon  the statement … to the advantage of the 
party making the statement'."412  
7.72 In Guatemala – Cement II , the panel considered that: 
"[E]stoppel is premised on the view that wh ere one party has been induced to act in 
reliance on the assurances of another party, in such a way that it would be prejudiced 
were the other party later to change its  position, such a change in position is 
'estopped', that is precluded."413  
                                                      
407 Appellate Body Report on EC – Bananas III , para. 135. 
408 GATT Panel Report on EEC – Quantitative Restrictions on Certain Products from Hong Kong,  
BISD 30S/129, para. 28. 
409Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US)  , paras. 72-74. 
410 Panel Report on EC – Bananas III (Article 21.5 – EC/Ecuador) , para. 4.11. 
411 Panel Report on  Guatemala – Cement II , para. 5.148. 
412 Panel Report on Argentina – Poultry , para. 7.20. 
413 Panel Report on Guatemala – Cement II , para. 8.23.  WT/DS265/R 
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 7.73 In the Panel's view, Brazil's and Thailand's silence concerning the European Communities' 
base quantity levels as well as with respect to the ACP/India sugar Footnote does not amount to a 
clear and unambiguous representation upon which the European Communities could rely, especially 
considering that, in the Panel's view, there was no legal duty upon the Complainants to alert the 
European Communities to its alleged violations.  Fu rthermore, it is not possible to identify any facts 
or statements made by the Complainants where they have admitted that the EC measure was WTO 
consistent or where they have promised that they  would not take legal action against the European 
Communities.  In the Panel's view the "silence" of some of the Complainants cannot be equated with 
their consent to the European Communities' violati ons, if any.  Moreover, the Complainants' silence 
cannot be held against other WTO Members who, today, could decide to initiate WTO dispute 
settlement proceedings against the European Comm unities.  In other words, even if the three 
Complainants had remained completely silent on this  issue, their silence could not be considered a 
commitment binding on other Members to the extent  that it would contradict the provisions of the 
Agreement on Agriculture  or which could remove the European  Communities' allege d inconsistencies 
with its WTO obligations. 
7.74 The Appellate Body has clearly established that WTO Members must comply with their WTO 
obligations in good faith414 and that the WTO Agreement  must be interpreted in good faith.415  In the 
Panel's view both the European Communities and the Complainants have acted in good faith in the 
initiation and conduct of the present dispute procee dings.  The European Communities is entitled to 
defend its sugar regime and has done so.  The Compla inants were entitled to initiate the present WTO 
proceedings as they did and at no point in time have they been estopped, through their actions or 
silence, from challenging the EC sugar regime  which they consider WTO inconsistent.  
7.75 In the Panel's view, if it were to conclude  that the Complainants are now estopped from 
challenging the EC sugar regime or its alleged ex cessive export production of subsidized sugar, the 
Panel would be acting contrary to  Articles 3.2 and 19.2 of the DSU  which provide that panels and the 
Appellate Body are prohibited from adding to or  diminishing Members' rights and obligations.416  
3. The amicus curiae  of WVZ 
(a) Factual background 
7.76 As referred to in paragraph 2.20 above, on 24 May 2004, the Panel received an unsolicited 
"amicus curiae " brief from the Wirtschaftliche Vereinigung Zucker (hereafter "WVZ"), the 
association of German sugar producers and beet growers, which submitted that C sugar does not benefit from export subsidies, in essence, because the European Communities' intervention price does 
not cover the average total cost of producing A,  B and C sugar, in the European Communities.  
                                                     
 
414 Appellate Body Report on Mexico – Corn Syrup (Article 21.5 – US) , para. 47;  Appellate Body 
Report on US – Offset Act (Byrd Amendment) , para. 296 (and 298);  Appellate Body Report on US – Shrimp , 
para. 158;  and Appellate Body Report on US – FSC , para. 166. 
415 Appellate Body Report on US – Offset Act (Byrd Amendment) , paras. 296-297 and Appellate Body 
Report on US – Hot-Rolled Steel , para. 101 (and 193). 
416 Article 3.2 of the DSU  is as follows:  "The dispute settlement system of the WTO is a central 
element in providing security and predictability to the multilateral trading system.  The Members recognize that 
it serves to preserve the rights and obligations of Me mbers under the covered agreements, and to clarify the 
existing provisions of those agreem ents in accordance with  customary rules of in terpretation of public 
international law. Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations 
provided in the covered agreements."  Article 19.2 of the DSU  is as follows:  "In accordance with paragraph 2 of 
Article 3, in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agr eements."  See also the Appellate Body Report on India – 
Patents (US) , paras. 46-47. WT/DS265/R 
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 7.77 Following the recommendation of the Appellate Body in US – Shrimp  in the context of 
amicus curiae  briefs that "the exercise of the panel's di scretion could, of course, and perhaps should, 
include consultation with the parties to the dispute"
417, and with a view to ensuring due process, the 
Panel invited the parties on 27 May 2004 to make comments on the amicus curiae  brief of WVZ by 
1 June 2004.418  
7.78 The Complainants requested in their comments that the Panel reject the document submitted 
by WVZ on the grounds of inaccuracy of the facts and analysis advanced by WVZ, late timing of the document and due process considera tions, and they further contende d that this submission addressed 
issues that have already been argued at length by th e parties.  In its third communication relating to 
the amicus curiae  brief, Brazil claimed that there was evid ence that a breach of confidentiality had 
occurred (the Panel discusses the issue of the breach  of confidentiality in the following section of the 
Panel Report).  The European Communities informed  the Panel that it did not wish to provide 
comments. 
7.79 In their comments on the amicus brief, the Comp lainants challenged in detail the allegations 
made by WVZ as being utterly unfounded, inter alia  because producers received much more than the 
intervention price and because the calculations made by WVZ were not based on accurate data or the 
proper interpretation of the data. 
(b) Assessment by the Panel 
7.80 First, the Panel wishes to recall that it does not consider that amicus curiae  briefs can be taken 
into account in a manner that would circumvent  the parties' rights and obligations under the DSU , the 
Agreement on Agriculture  and the WTO Agreement  generally.
419 
7.81 The Panel notes that the WVZ submission was filed almost two weeks after the Panel's 
second meeting with the parties.  The Panel, as othe r panels before, considers that the timing of the 
amicus curiae  submission plays an important role in the acceptance or rejection of amicus curiae  
briefs.420  In this regard Thailand argued that in acco rdance with the Working Procedures of the Panel 
proceedings, no new arguments or evidence were to be submitted by the parties after the second 
meeting.  However, the Panel recalls that at th e end of the second meeting the Panel asked additional 
legal and factual questions of the parties and the Complainants requested that they be entitled to 
comment on each other's replies to the Panel's quest ions.  The period within which the Panel could 
receive new arguments and evidence was ther efore extended until Wednesday, 2 June 2004.  
However, WVZ comments are not related to the Panel's questions or the parties' comments. 
7.82 The Panel has decided not to consider further the amicus curiae  from WVZ because, inter 
alia, it is based on confidential information and is thus evidence of a breach of confidentiality which 
disqualifies the credibility of the authors.  Brazil in formed every authorized recipient of its submission 
                                                      
417 Appellate Body Report on US – Shrimp , para. 107. 
418 This position of the Appellate Body would s eem to be supported by Article 12.1 of the DSU  
providing that panels need to consult the parties when they decide to add or deviate from the Working 
Procedures in Appendix 3 of the DSU .  Appendix 3 of the DSU  is silent regarding amicus curia e briefs.  
Appellate Body Report on US – Shrimp , para. 105. 
419 The Appellate Body determined in Japan – Agricultural Products II,  that expert advice could be 
taken into account but that it did not relieve the complaining party of making a prima facie case of 
inconsistency.  See Appellate Body Report on Japan – Agricultural Products II  , para. 129. 
420 See Panel Report on US – Softwood Lumber III , where  the panel rejected three unsolicited  amicus 
curiae  briefs because they were presented after th e first substantive meeting, Panel Report on US – Softwood 
Lumber III , para. 7.2; and Panel Report on US – Lead and Bismuth II , where the panel chose not to accept the 
submission because it had been submitted too late and could have unjustifiably delayed the proceedings; Panel 
Report on US – Lead and Bismuth II, para. 6.3.   WT/DS265/R 
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 of the confidential nature of the latter. On 10 June 2004, the Panel therefore requested WVZ to 
identify the source of the information used in its amicus curiae  brief.  WVZ acknowledged that it 
"was able to examine" Brazil's exhibit but refused to  provide the source of its information:  "WVZ is 
not in a position to reveal the source of its inform ation regarding the evidence submitted by Brazil."   
7.83 The Panel regrets this refusal to cooperate which,  regardless of the merits (or lack thereof) of 
WVZ submission, undermines not only elemental fairness to the parties, but also compromises the 
integrity of the dispute settlement system itself by  hindering further openness and the transparency of 
the dispute settlement process. 
7.84 The WTO dispute resolution confidentiality rules apply to WTO Members, the Panel 
members and WTO staff involved in the dispute pro ceedings.  Nevertheless, the Panel considers that 
if the WVZ, though not a party to the proceedings, want ed to be considered a "friend of the court", it 
should have followed an appropriate standard of behaviour towards the Panel and the parties together 
with making every possible effort to respect WTO dispute settlement rules, including confidentiality 
rules. 
7.85 In light of the above, the Panel, having the discr etionary legal authority to accept and consider 
or not unsolicited amicus curiae  briefs submitted by individua ls or organizations, whether 
governmental or non-governmental,421 declines to further consider the amicus curiae  brief submitted 
by WVZ.  
4. Breach of confidentiality 
(a) Factual background422 
7.86 Brazil informed the Panel on 2 June 2004 that the amicus curiae  brief submitted by WVZ, the 
association of German sugar producers, disclosed in formation that Brazil had submitted to the Panel 
in confidence.  Brazil, accordingly, wished to bring the alleged breach of confidentiality to the Panel's 
attention and requested that the Panel "investigat e how the breach occurred" and that it take any 
further action that it deems appropriate, including "mak[ing] a full report of this incident to the 
Dispute Settlement Body."  Thailand and Austra lia supported the comments and request made by 
Brazil in this regard. 
7.87 The Panel noted in a letter to the parties and third parties, dated 4 June 2004, the seriousness 
of the matter at issue, and invited them to co mment on Brazil's allegation, and on the appropriate 
remedy, "if such a breach had in fact occurred".  Such comments were to be submitted by 8 June 2004.  The Panel received responses within this timeframe from Australia, Thailand, the European 
Communities (parties), and from India (third party).   
7.88 The European Communities noted that it attach ed the utmost importance to the strict 
observance by all parties and third parties of  the confidentiality rules set out in the DSU  and in the 
Working Procedures of the Panel.  It shared the con cerns expressed by Brazil, and noted for the record 
that it had treated as strictly confidential all in formation designated as such in these proceedings.  
7.89 Australia observed that the cost of productio n data cited by WVZ was also included in a 
confidential exhibit submitted by Australia
423 and requested that the Panel undertake an investigation 
of the source of the LMC information cited by WVZ.   Australia submitted that in the event that the 
                                                      
421 Appellate Body Reports on US – Shrimp , para. 107 and on US – Lead and Bismuth II , para. 41. 
422 See paras. 2.21 to 2.28 above. 
423 The WVZ quoted LMC figure of costs of production of ***/tonne which is cited in table 2 of 
Exhibit ALA-1, p. 8.  WT/DS265/R 
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 Panel establishes a breach of confidentiality on the pa rt of any party to this dispute, specifically in 
reference to the LMC data designated as confidential by Brazil and Australia, that the Panel record the 
breach of confidentiality in its report, in the context of Article 3.10 of the DSU .  Australia further 
considered that any unauthorized use or citati on of information which has been designated as 
confidential by a party to a dispute should automa tically constitute grounds  for rejection of an amicus 
submission.   
7.90 Thailand supported the comments and re quests made by Brazil and Australia. 
7.91 On 10 June 2004, the Panel, by letter, request ed information from WVZ "with respect to the 
exact source[s] (documents, websites, etc.) used for the data referred to " in its document and a 
clarification as to the use of the euro currency in such data.   
7.92 The Panel received a response from WVZ on 15 Ju ne 2004 in which WVZ indicated that it 
had been "able to examine" an attachment to Braz il's submission.  According to WVZ, this document 
was not designated as confidential.  It also indicat ed that WVZ was "not in a position to reveal the 
source of its information regarding the evidence s ubmitted by Brazil." It did not discuss the currency 
of such data. 
7.93 Comments on the response from WVZ were receive d from Brazil on 18 June 2004 in which 
Brazil reiterated its request that the Panel summar ily reject the WVZ amicus brief and report the 
incident to the Dispute Settlement  Body.  Furthermore, Brazil submitted that the cover and every page 
of all hard copies of the exhibit in question provided to the Panel, the parties and third parties, were 
stamped manually, in block letters, "CONFIDENTIAL".  Brazil had stated in its cover letters, that its 
submissions, including its two exhib its, were confidential.  The recipients of electronic copies were 
also put on notice as to the confidential nature of all its submissions.  Every authorized recipient of 
Brazil's submission was thus made aware of the confidential nature of the documents. 
7.94 Brazil also submitted that it had, to the best of  its knowledge, confirmed with LMC, that the 
total cost of production figures referred to in the amicus curiae  brief of WVZ appear only in the LMC 
report commissioned by Brazil which, again, were su bmitted to the Panel as a confidential document 
in one of its exhibits. Moreover, Brazil noted  that the data referred to by WVZ in its amicus curiae  
brief do not appear in the December 2003 report refe rred to in WVZ's footnote 2, or in any other LMC 
report, which had been made available to the public. 
(b) Assessment by the Panel 
7.95 On the issue of confidentiality, the Panel r ecalls that, in addition to its emphasis on the 
confidentiality of Members' oral and written subm issions to the panels and the Appellate Body, 
Article 18.2 of the DSU  provides explicitly that Members must  respect the confidentiality of any 
information designated as such by another Member in the context of the settlement of a dispute: 
"Written submissions to the panel or th e 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 di spute from disclosing statements of its 
own positions to the public. Members sh all treat as confidential information 
submitted by another Member to the panel or  the Appellate Body which that Member 
has designated as confidential ... ."  
7.96 The Panel recalls that the Complainants ha d explicitly designated the said LMC Report as 
confidential.  The Panel also wishes to r ecall that on a number of occasions throughout the 
proceedings of this Panel it strongly emphasized and reminded parties and third parties of the 
confidential nature of the DSU  proceedings.  WT/DS265/R 
 Page 135 
 
 
 7.97 This is not the first time that an amicus curiae  brief, submitted in the context of a WTO 
dispute settlement proceeding, has cont ained confidential information.  In Thailand – H-Beams , an 
industry association submitted an amicus curiae  brief which cited Thailand's confidential submission.  
The Appellate Body on the basis of its own examination of the facts believed that there was  prima facie evidence that the association received, or had access to, the appellant's submission in that appeal 
and saw no reason to accept the written brief submitted.  The Appellate Body returned the brief to its 
sender.
424 Other breaches of confidentiality have also been reported.425  
7.98 The Panel has come to the conclusion that a breach of confidentiality did occur in the 
framework of these proceedings.  The Panel is theref ore concerned and deeply deplores this breach of 
confidentiality and the disregard of a requirement imposed by the DSU  and the Panel's Working 
Procedures.  The Panel considers th at it has used its best endeavour s to investigate the alleged breach 
of confidentiality. However, the Panel has not b een able to determine the source of the breach.  
7.99 The Panel hereby reports the incident to the Dispute Settlement Body. 
7.100  Having examined the procedural issues releva nt to the present dispute, the Panel now 
proceeds to examine the Compla inants' substantive claims. 
C. ORDER OF ANALYSIS BY THE PANEL  
7.101  In light of Article 21.1 of the Agreement on Agriculture , Article 3 of the SCM Agreement426 
and the relevant jurisprudence, the Panel shall fi rst examine the consistenc y of the challenged export 
subsidies on sugar, an agricultural product, first under the Agreement on Agriculture427 as the 
Complainants have argued their claims under the Agreement on Agriculture  first. 
7.102  The Complainants have submitted that the Eu ropean Communities is exporting subsidized 
sugar in excess of its commitment levels contrary to Articles 3, 8, and 9 of the Agreement on 
Agriculture .  The parties disagree as to what constitu tes the European Communities' commitment 
level.  While the Complainants argue that the Eu ropean Communities' quantity commitment level is to 
be determined with reference to its entry in Sec tion II of Part IV of its Schedule, the European 
Communities submits that its commitment comprises two components: one component is its entry in 
Section II of Part IV of its Schedule and the othe r component includes the additional quantity of 1.6 
million tonnes provided for in Footnote 1 (the ACP/Indi a sugar Footnote) to Section II, Part IV of its 
Schedule.  The Panel must thus determine, fi rst, what constitutes the European Communities' 
commitment level for the purpose of Articles 3 and 8 of the Agreement on Agriculture . 
7.103  Moreover, the determination of the European  Communities' quantity commitment level is 
crucial to the operation of the special rule, provided for in Article 10.3 of the Agreement on 
                                                      
424 Appellate Body Report on Thailand – H-Beams , para. 74. 
425 See for instance the Panel Report on US – Underwear , para. 6.3;  Panel Report on EC – Poultry , 
para. 191; and Panel Report on US – Steel , para. 9.41. 
426 Article 21.1 of the Agreement on Agriculture  provides that: "The provisions of GATT 1994 and of 
other Multilateral Trade Agreements in Annex 1A to the WTO Agreement  shall apply subject to the provisions 
of this Agreement."  Article 3 of the SCM Agreement  provides that:  3.1 Except as provided in the Agreement on 
Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: (a) subsidies  
contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, 
including those illustrated in Annex I; (b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.  3.2 A Member shall neither grant nor maintain 
subsidies referred to in paragraph 1." 
427 In Canada – Dairy (Article 21.5 – New Zealand and US) , para. 123, the Appellate Body stated that 
Article 3.1 of the SCM Agreement  "indicates that the WTO-consistency of an export subsidy for agricultural 
products has to be examined, in the first place, under the Agreement on Agriculture ." WT/DS265/R 
Page 136  
 
 Agriculture , invoked by the Complainants. When Article  10.3 is invoked by a complaining Member, 
and it is proven that exports actually exceed the ch allenged Members' commitment level, it is for that 
exporting Member to demonstrate that its exports are not subsidized .  Based on the Panel's 
conclusions on the European Communities' commitm ent level for sugar and the Panel's conclusions 
on the application of Article 10. 3, the Panel will then proceed to assess whether the European 
Communities' exports of sugar exceed the European  Communities' commitment level, inconsistently 
with Articles 3 and 8 of the Agreement on Agriculture .  
7.104  In Section D.2 below, the Panel examines firs t whether the ACP/India sugar Footnote relating 
to 1.6 million tonnes of sugar can be considered as part of the European Communities' commitment 
level.  In Section D.3, the Panel addresses the Eur opean Communities' argument that participants in 
the Uruguay Round (now Members of the WTO), have "agreed" to the inclusion of Footnote 1 in 
Section II of Part IV of the European Communities'  Schedule.  Finally, once the Panel has determined 
the European Communities' commitment level, it will be able, in Section E, to determine whether 
Article 10.3 of the Agreement on Agriculture  can find application in the present dispute where the 
Complainants have claimed violations of Articles 3 and 8 of the Agreement on Agriculture .  If this is 
the case, the Panel will examine whether the Co mplainants have made a prima facie factual 
demonstration of the quantitative aspect of their cl aims, namely that the European Communities has 
exported quantities of sugar in excess of its quantity commitment level;  if it is  so, the Panel will then 
determine whether the European Communities has demonstrated, pursuant to Article 10.3 of the 
Agreement on Agriculture,  that its excess exports of sugar, are not subsidized . 
7.105  The Panel recalls the factual description of the EC sugar regime in Section III above.  
D. T
HE EUROPEAN COMMUNITIES ' EXPORT SUBSIDY COMMITMEN T LEVELS FOR SUBSIDIZED 
EXPORTS OF SUGAR   
1. Introduction 
7.106  The Complainants consider that the Eur opean Communities' commitment levels for 
subsidized exports of sugar are as specified in Section II of Part IV of the EC Schedule CXL428, 
entitled:  
"Part IV: AGRICULTURAL PRODUCTS: COMMITMENTS LIMITING 
SUBSIDISATION  (Article 3 of the Agreement on Agriculture ) 
SECTION II:  Export Subsidies : Budgetary Outlay and Quantity Reduction 
Commitments." 
7.107  Under the line entitled "Sugar" for 2000, the following quantity is specified:  
"1,273,500 tonnes" 
Besides the term Sugar, a footnote (1) is inscrib ed and at the bottom of the page one can read: 
 
"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." 
7.108  The Panel assesses hereafter what  the commitment level of the European Communities is with 
respect to exports of sugar pursuant to Articles 3, 8 and 9 of the Agreement on Agriculture . 
                                                      
428 See Annex C, also provided as Exhibit EC-1 and Exhibit COMP-16.  WT/DS265/R 
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 2. What is the European Communities' commitment level in light of  the ACP/India sugar 
Footnote? 
(a) Arguments of the parties 
7.109  Further to their claims429, the Complainants underline that, in every marketing year since 
1995, the European Communities' total exports of sugar have consistently exceeded its scheduled 
commitment levels.  In particular, during the ma rketing year 2001-2002, the European Communities 
exported 4.097 million tonnes of sugar which was well in excess of the European Communities' 
scheduled commitment level for that  year, i.e. 1,273,500 tonnes. 
7.110  In response, the European Communities submits that its level of reduction commitment is not 
1,273,500 tonnes only.430  The European Communities argues th at a correct interpretation of the 
Footnote leads to the conclusion that the Footnote is one of the two components of the European 
Communities' export subsidy commitments.431  For the European Communities, the first sentence 
confirms that exports of an "e quivalent" amount of ACP/Indian sugar are 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.  The second sentence, in the European 
Communities' view, expresses the "average of export"  of ACP/India "equivalent" sugar in the base 
period 1986-1990.  The second sentence is not a simple statement of fact or a narration of particular 
circumstances.  Rather, the European Communities c ontends, it operates in precisely the same way as 
the other component of the European Communities'  commitments:  it is a ceiling, or limitation on 
subsidization, and a limited authoriza tion to provide export subsidies.   
7.111  Consequently, the European Communities submits th at it has acted consistently with Article 8 
of the Agreement on Agriculture  since it has provided subsidies only in conformity with the 
Agreement on Agriculture  and with the commitments as specified in its schedule.  Further, the 
European Communities considers th at it has respected the commitments it has undertaken to limit 
subsidization on A and B sugar and ACP/India "e quivalent" sugar, and therefore, the European 
Communities has acted consistently with Article 3 of the Agreement on Agriculture .  Moreover, since 
the European Communities has not pr ovided export subsidies in ex cess of the commitment levels set 
out in its Schedule, it has acted consistently with Articles 3 and 8.432  
7.112  The Complainants counter that all export subsidies under the Agreement on Agriculture  are 
subject to reduction.  The Complainants reason that , as sugar is a product "specified" in the European 
Communities' Schedule, the European Communities is under the obligation to reduce its budgetary 
outlays and subsidized sugar exports in accordan ce with its scheduled commitments.  If Footnote 1 
was part of the European Communities' export s ubsidy commitments, export subsidies provided for 
by the said Footnote should have been reduced. 
7.113  On the other hand, the European Communities c onsiders that, overall, its export subsidies on 
sugar have been reduced and it is therefor e complying with Articles 3 and 8 of the Agreement on 
Agriculture .  The European Communities also argues that Article 3.3 incorporated the export subsidy 
commitments into the GATT, but did not prescribe any form for such commitments.  In Footnote 1 
the commitment has taken the form of a limit on subsid ization in the form of a ceiling level contained 
in a footnote to a Member's Schedule. 
                                                      
429 See para. 7.106 above 
430 See paras. 4.30-4.31 above. 
431 See paras. 4.191-4.192 above. 
432 See para. 4.193 above. WT/DS265/R 
Page 138  
 
 7.114  The Complainants submit that Members could not exempt themselves from their obligations 
under the Agreement on Agriculture  by including reservations in th eir Schedule of Concessions that 
would subsequently be accorded the same, or  greater weight, than any provision of a WTO Agreement  
with which the schedule text might directly conflic t such as with the fundamental provisions of the 
Agreement on Agriculture .  If the differences between the terms of a schedule and the terms of the 
Agreement on Agriculture  cannot be reconciled by interpretati on through Articles 31 and 32 of the 
Vienna Convention , a conflict exists.  The Complainants submit that GATT and WTO jurisprudence 
endorsed by the Appellate Body establishes that WTO Members could incorporate in their Schedule 
of Concessions only acts yielding rights, not acts di minishing obligations.  Therefore the Footnote 
was legally invalid.  Moreover, 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 and WTO law.    
7.115  With respect to the Complainants' alleged c onflicts between the ACP/India sugar Footnote 
and Articles 3 and 8 of the Agreement on Agriculture , the European Communities responded that 
when properly interpreted, the Footnote coul d not be considered to conflict with the Agreement on 
Agriculture .  For the European Communities, the Panel was not obliged to declare the Footnote, 
which was part of a validly concluded treaty, invalid.  The European Communities notes that under general public international law, one part of a tr eaty could rarely render another part of the same 
treaty without legal effect.  
7.116  Subsidiarily, the Complainants argue that the terms of the Footnote do not mean what the 
European Communities intends to draw from this Footnote.  The Complainants submitted that the 
terms of the Footnote applied exclusively to im ports of raw "sugar of ACP and Indian origin".
433 The 
Footnote thus contemplates exclus ively the re-export of sugar of ACP or Indian origin.  Moreover, the 
Footnote does not mention, and could not be interpre ted to cover, "equivalent " exports. Thus, even if 
the Panel were to find that Members could exem pt themselves from their obligations under the 
Agreement on Agriculture  by inserting footnotes in their Schedules of Concession, the Panel would 
have to conclude that the footnote inserted by  the European Communities did not exempt it from 
those obligations in respect of the quantities of s ugar equivalent to sugar of  ACP and Indian origin.434   
7.117  The European Communities replied that it was well known to all parties at the time of 
conclusion of the WTO Agreement , that the European Communities did not grant export refunds on 
the re-export of sugar of ACP/Indian origin, but rath er to a quantity equivalent to such imports.  The 
European Communities had made its intentions clear  in two letters, when submitting draft schedules 
and associated documents to all participants in th e negotiation, reiterating its objective to have the 
footnote accepted by the other negotiating parties.435   
7.118  The European Communities argued that particip ants in the Uruguay Round could negotiate 
departures from the reduction formula agreed in the Modalities Paper, and that the Footnote 
constituted one such departure.  For the European Communities, the Complainan ts had agreed to this 
Footnote during the Uruguay Round negotiations.  In this context, the European Communities 
considered that, by virtue of Article 16 of the Vienna Convention ,436 the Complainants had consented 
                                                      
433 See para. 4.215 above. 
434 See also para. 4.215 above. 
435 See also para. 4.217 above. 
436 Article 16 of the Vienna Convention reads as follows:  
  "Exchange or deposit of instruments of ra tification, acceptance, approval or accession 
 
 Unless the treaty otherwise provides, instruments of ratifi cation, acceptance, approval or 
accession establish the consent of a St ate to be bound by a treaty upon: 
 (a) their exchange between  the contracting States;  WT/DS265/R 
 Page 139 
 
 
 to be bound by the terms of the treaty Footnote cont ained in the European Communities' Schedule, by 
ratifying the WTO Agreement . 
7.119  The Complainants responded that they did no t "agree" that this Footnote entitled the 
European Communities to export an additional 1.6 million tonnes of subsidized sugar.  For the 
Complainants, even their alleged silence at the ti me of the conclusion of the Uruguay Round could not 
be considered to be an acceptance.  They adde d that the European Communities cannot find anything 
in the Modalities Paper which would support its argumentation. 
(b) Assessment by the Panel 
(i) Introduction 
7.120  In the present dispute, parties disagree on th e European Communities' commitment level for 
exports of subsidized sugar.  In light of the par ties' arguments, the Panel n eeds to determine what can 
compose a Member's "commitment level" for the purpose of Article 3 of the Agreement on 
Agriculture  in light of the European Communities' argumen t that its commitment is composed of its 
specific entry in Section II, Part IV of its Sche dule (1,273,500 tonnes of sugar) as well as of an 
additional 1.6 million tonnes relating to ACP/India s ugar contained in Footnote 1 to the European 
Communities' Schedule.  The Complainants claim that this Footnote reduces and contradicts, and thus 
conflicts with, the European Communities' fundamental obligations under the Agreement on 
Agriculture  and as such does not modify the EC's commitmen t level specified in Section II, Part IV of 
the European Communities' Schedule .  
7.121  In the Panel's view, what constitutes a Memb er's "reduction commitment level" for the 
purpose of Article 10.3 of the Agreement on Agriculture  or the "reduction commitment within the 
meaning of Article 9 or the "commitment levels" within the meaning of Article 3.3 or the 
"commitment as specified in a Member's schedul e" within the meaning of Article 8 of the Agreement 
on Agriculture  is an issue of legal interpretation, for which there is no burden of proof as such.437  It is 
for the Panel to decide whether the "commitment levels" or the "reducti on commitment levels" are 
                                                                                                                                                                     
 (b) their deposit with the depositary; or  
 (c) their notification to the contracting States or to the depositary, if so agreed." 
 
437 The Panel recalls the Appellate Body's conclusion in EC – Hormones , para. 156, that "Panels are 
inhibited from addressing legal claims falling outside their terms of reference.  However, nothing in the DSU  
limits the faculty of a panel freely to use arguments submitted by any of the parties - or to develop its own legal 
reasoning - to support its own findings and conclusion s on the matter under its consideration.  Recently in EC – 
Tariff Preferences , para. 105, the Appellate Body clarified that the burden of proof is relevant when dealing 
with "evidentiary" issues but not with "legal" interpretatio n. Therefore, it is always for the panel to provide the 
appropriate legal interpretation independently of what is put forward by any party. 
 
"Consistent with the principle of jura novit curia (7) it is not the responsibility of the European 
Communities to provide us with the legal interpretation to be given to a particular provision in 
the Enabling Clause ;  instead, the burden of the European Communities is to adduce sufficient 
evidence to substantiate its assertion that the Drug Arrangements comply with the requirements of the Enabling Clause." (footnotes omitted) 
 
FNT 7: " The principle of  jura novit curia  has been articulated by the International Court of Justice as 
follows: It being the duty of the Court itself to ascertain and apply the re levant law in the given 
circumstances of the case, the burde n of establishing or proving rules of international law cannot be 
imposed upon any of the parties, for the law lies within the judicial knowledge of the Court. 
(International Court of Justice, Merits, Case Concer ning Military and Paramilitary Activities in and 
against Nicaragua (Nicaragua v. United States of America), 1986 ICJ Reports, p. 14, para. 29 (quoting 
International Court of Justice, Merits, Fisheries Ju risdiction Case (United Kingdom of Great Britain and 
Northern Ireland v. Iceland), 1974 ICJ Reports, p. 9, para. 17))" WT/DS265/R 
Page 140  
 
 composed exclusively of the commit ments for export subsidies that have  to be reduced (in the case of 
the EC sugar 1,273,500 tonnes) or whether Memb ers are also entitled to maintain, for instance, ad hoc 
"limitations" on export subsidization not subject to  reduction which would therefore be part of the 
overall commitment level of a Member. 
7.122  To resolve the issue before it, the Panel w ill therefore have to examine the relationship 
between terms of (and commitments contained in) a Me mber's Schedule, in this dispute the content of 
Footnote 1 (on ACP/India sugar), and the provisions of the Agreement on Agriculture .  In particular, 
the Panel needs to assess whether it is possible to  interpret harmoniously the terms of the Agreement 
on Agriculture  together with those of Footnote 1 of Section II, Part IV of the European Communities' 
Schedule.  If this is not possible, the Pane l will have to resolve such a conflict.   
7.123  For the Panel to assess whether there is a conflic t between Footnote 1 to Section II of Part IV 
of the European Communities' Schedul e, and Articles 3, 8 and 9 of the Agreement on Agriculture , the 
Panel must first determine the extent and the scope  of Members' obligations under those provisions.  
Second, the Panel will need to examine what Memb ers are entitled to do in their Schedules and how 
terms of Members' Schedules should be interpreted.  Thirdly, the Panel will examine the nature of the 
commitment, if any
438, included in Footnote 1.  The Panel will then discuss the relationship between 
the European Communities' obligations under Articles 3, 8 and 9 of the Agreement on Agriculture  and 
Footnote 1 with a view to assessing whether the two sets of rights and obligations can be read 
harmoniously or whether they conflict.  The Panel will then be able to conclude on the European 
Communities' commitment level for exports of s ugar for the purposes of the present dispute.  
(ii) The obligations of the Agreement on Agriculture with respect to export subsidies – Articles 3, 
8 and 9 of the Agreement on Agriculture  
7.124  In order to assess the Complainants' claims that  the European Communiti es exceeded its level 
of commitments for exports of subsidized sugar,  and the parties' disagreement on the European 
Communities' level of commitment for exports of s ubsidized sugar, the Panel interprets first the 
provisions of the Agreement on Agriculture  dealing with Members' obligations with respect to exports 
subsidies on agricultural products. 
7.125  The Panel notes first that Article 3 does not define the terms "commitment level", nor do 
Articles 9 and 10.3 of the Agreement on Agriculture  define the term "reduction commitment" level.  
Moreover, Article 8 does not define what can constitu te "commitments as specifi ed in that Member's 
Schedule".   
7.126  Since, pursuant to Article 31 of the Vienna Convention439, the ordinary meaning of the terms 
do not inform the Panel sufficiently, the Panel pr oceeds to the examination of the "context" of 
Articles 3, 8, 9 and 10 of the Agreement on Agriculture , so as to allow the Panel to assess what can 
comprise a "Member's commitment level" for the purpo ses of Articles 3.3, or a Member's "specified 
commitment" within the meaning of Article 8 of the Agreement on Agriculture , and a Member's 
"reduction commitment" for the purpose of Articles 9 and 10.3 of the Agreement on Agriculture .  The 
Panel thus examines Members' obligations with r espect to export subsidies, as reflected in those 
provisions. 
                                                      
438 As a subsidiary argument, the Complainants have submitted that a good faith interpretation of 
Footnote 1 does not lead to the conclusion that the ACP/India sugar Footnote contains such a limitation or 
ceiling on subsidization.  Australia's second  written submission, paras. 161-162. 
439 Article 31.1 and 31.2 of the Vienna Convention  provide that: "A treaty shall be interpreted in good 
faith in accordance with the ordinary m eaning to be given to the terms of th e treaty in their context and in the 
light of its object and purpose.  2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes (...)"  The text of Articles 31, 32 and 33 of the Vienna 
Convention  can be found in footnote 431 hereafter.  WT/DS265/R 
 Page 141 
 
 
 7.127  Article 8 of the Agreement on Agriculture  on "Export Competition Commitments" contains a 
general prohibition  on export subsidies and provides that: 
"Each Member undertakes not to provide export subsidies otherwise than in 
conformity with this Agreement and with  the commitments as specified in that 
Member's Schedule." 
7.128  The commitments that are specified in Part IV , Section II, of a Member's Schedule describe 
for each product or group of prod ucts concerned, the maximum quantities in respect of which export 
subsidies, as defined in Article 1(e) of the Agreement on Agriculture , may be provided, as well as the 
associated maximum levels of budgetary outlays.  These commitments are made an integral part of the GATT 1994 under Article 3.1 of the Agreement on Agriculture .  The products which are subject to 
reduction commitments and in respect of which expor t subsidies may be used within the specified 
limits are commonly referred to as "scheduled produc ts".  Other products, not specified in Schedules, 
are referred to as "non-scheduled products".   
7.129  The export subsidies listed in paragraph 1 of Article 9 of the Agreement on Agriculture , 
which had also served as the basis for establis hing export subsidy reduction commitments in the 
Uruguay Round negotiations, are subject to the following specific prohibitions
 set out in Article 3.3 of 
the Agreement on Agriculture , the first of which relates to "scheduled products":  
"Subject to the provisions of par agraphs 2(b) and 4 of Article 9 , a Member shall not 
provide export subsidies listed in paragr aph 1 of Article 9 in respect of the 
agricultural products or groups of products specified in Section II of Part IV of its 
Schedule  in excess of the budgetary outlay and qua ntity commitment levels specified 
therein and shall not provide such subsidies in respect of any agricultural product not 
specified in that Section of its Schedule." (emphasis added) 
7.130  It may also be noted that the first terms of Article 3.3 of the Agreement on Agriculture  make 
clear that the final reduction commitment levels  are binding beyond the end of the implementation 
period referred to in Articles 9.2 and 9.4 of the Agreement on Agriculture .  Article 3.3 thus 
complements the provisions of Article 9.2. 
7.131  The Panel notes also that Article 3.1 of the Agreement on Agriculture  provides that "export 
subsidy commitments in Part IV of each Me mber's Schedule constitute commitments limiting 
subsidization."  Article 3.3 of the Agreement on Agriculture  requires that, with respect to agricultural 
products specified in Section II of Part IV of its schedule, "a Member shall not provide export 
subsidies … in excess of the budgetary outlay and quantity commitment levels specified therein."  
Article 3.3 of the Agreement on Agriculture  makes clear that the commitments are those specified  in a 
Members' Schedule.  
7.132  Article 3.3 of the Agreement on Agriculture  requires that the export subsidies listed in 
Article 9.1 of the Agreement on Agriculture  can only be provided in accordance with a Member's 
Schedule.  Therefore, a Member must not provide export subsidies on scheduled agricultural products 
beyond its budgetary and quantity commitment levels set out in its Schedule and shall not provide 
export subsidies on products not specified in its Schedule.  As mentioned, Article 8 of the Agreement 
on Agriculture  similarly provides that Members shall not "p rovide export subsidies otherwise than in 
conformity with this Agreement and with the comm itments as specified in that Member's Schedule."  
7.133  Article 9.1 of the Agreement on Agriculture  describes specific  types of export subsidies 
"subject to reduction commitments" and provides for schedules specifying commitments to reduce 
budgetary outlays for subsidies and quantities of e xports receiving subsidies ("The following export 
subsidies are subject to reduction commitments under this Agreement").  The Panel also notes that WT/DS265/R 
Page 142  
 
 Section II of Part IV is entitled "Budgetary Outlay and Quantity Reduction Commitments . "   I n  t h e  
Panel's view, Article 9.1 of the Agreement on Agriculture  makes clear that in the absence of a specific 
exemption contained in that Agreement , all export subsidies coming within the definitions of 
Article 9.1(a) – 9.1(f) have to be subject to reduction commitments.  Specifically, in accordance with Article 9.2(b)(iv) of the Agreement on Agriculture , at the end of the implementation period, the 
Schedule must  provide for budgetary outlay and quantity commitments no greater than 64 and 
79 per cent of their respective base period levels.
440  This is the case for Members who took advantage 
of the flexibility of Article 9.2(b) whic h was the case of the European Communities.441 Therefore, 
export subsidies contained in Section II, Part IV of a Member's Schedule ought to have been subject 
to the reduction commitments provided for in Article 9 of the Agreement on Agriculture . 
7.134  In sum, in the Panel's view, Articles 8 and 3 of the Agreement on Agriculture  make it clear 
that Members may not provide export subsid ies other than in conformity with the Agreement on 
Agriculture  and - not "or" -  Members' Schedules.  In pa rticular, Article 3 of the Agreement on 
Agriculture  provides that export subsidies are only possible for products listed in Section II, Part IV of 
Members' Schedules and only for amounts at or be low the maximum level of commitment provided 
for in a Member's schedule.  Through the appli cation of Articles 3, 9.1 and 9.2(b)(iv) of the 
Agreement on Agriculture , all WTO-consistent export subsidi es on scheduled products have been 
subject to reduction commitments.   
7.135  The Panel notes also that Article 3.3 of the Agreement on Agriculture  contemplates that a 
Member may exclude an agricultural product entirel y from Part IV, Section II of its Schedule, but 
does not contemplate that when an agricultural prod uct is included in its Sc hedule, subsidies provided 
to that product do not have to be reduced.   
7.136  In the Panel's view, this is in  line with the Preamble of the Agreement on Agriculture  – as 
legal context to Articles 3, 8 and 9 – which in  its third and fourth paragraphs provide: 
"Recalling  further that 'the above-mentioned long-term objective is to provide for 
substantial progressive reductions in agri cultural support and protection sustained 
over an agreed period of time, resulting in correcting and preventing restrictions and 
distortions in world agricultural markets'; 
Committed  to achieving specific binding commitments in each of the following areas:  
market access;  domestic support;  export competition;  and ... " 
7.137  In the Panel's view, to comply with Article 3.3 of the Agreement on Agriculture , a Member 
that exports a scheduled product must comply with two distinct requirements:  (1) its subsidized 
exports must be within the quantity limitation specified in its schedule; and (2) its corresponding 
budgetary outlays must also be within its commitmen ts.  The Panel considers that Article 3.3 (and 
Article 9.2(b)(iv)) makes it clear that the level of commitment of export subsidies on specified 
products must be scheduled both in terms of quantity and in terms of  budgetary outlays, as the level of 
reduction of any such export subsidies apply to bot h their quantity and to their budgetary outlays:  "a 
Member shall not provide export subsidies … in excess of the budgetary outlay and quantity 
commitment levels specified [in its  Schedule]." (emphasis added).   
                                                      
440 Article 9.2(f) of the Agreement on Agriculture  provides that: "In any of the second through fifth 
years of the implementation period, a Member may provide export subsidies listed in paragraph 1 above in a 
given year in excess of the corresp onding annual commitment levels in re spect of the products or groups of 
products specified in Part IV of the Member's Schedule, provided that:  (iv) the Member's budgetary outlays for 
export subsidies and the quantities benefiting from such subsidies, at the conclusion of the implementation 
period, are no greater than 64 per cent and 79 per cent of the 1986-1990 base period levels, respectively.  For developing country Members these percentages shall be 76 and 86 per cent, respectively."   
441 See G/AG/N/EEC/20/REV.1, dated 9 March 2000, at p. 2.  WT/DS265/R 
 Page 143 
 
 
 7.138  The European Communities counters that export subsidies do not have to be expressed both 
in terms of budgetary outlays and quantity.442  The Panel notes that if the EC's Schedule did not 
specify both of these limitations, it could export a subsidized scheduled product in excess of its 
commitment level and remain in compliance with Article 3.3 of the Agreement on Agriculture , 
because the challenging Member will be unable to demonstrate that the European Communities' 
exports do not exceed either  of the two limitations.  In the Panel's view, if Article 3.3 of the 
Agreement on Agriculture  did not impose an obligation to have both a budgetary outlay and a quantity 
commitment level, then it would be effectively im possible, after the conclusion of the implementation 
period, to ensure that export subsidies never exceed the two levels set out in Article 9.2(b)(iv) of the 
Agreement on Agriculture  which includes both.  
7.139  For the European Communities the obligation to schedule both types of commitments was 
only set out in paragraph 11 of the Modalities Pape r, from which, the Members could "negotiate 
departures".443  As evidence of such Members' practi ce, the European Commu nities suggests that 
Australia and New Zealand negotiated such departures from the Modalities Paper.444  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.  New Zealand did not specify any quantitative limits but only scheduled reductions in budgetary outlays.   
7.140  After examining Australia's Schedule
445, the Panel is of the view that Australia has scheduled 
both forms of reduction commitments, budgetary outlay as well as quantity, in  respect of a single 
product group, i.e. "other milk products", benefiting its sub-category of fats and non-fats.  Turning to 
New Zealand's Schedule446, the Panel concludes that Member s which have undertaken reduction 
commitments covering all Annex 1 products have scheduled both the budgetary outlay, and the 
                                                      
442 European Communities' second written submission, para. 128.  See also European Communities' 
reply to the Panel question No. 29. 
443 And the European Communities add that Footnote 1 is a negotiated departure.  
444 See the Modalities Paper, Exhibit EC-27. 
445 The Panel considers that the pr oduct category "other milk pro ducts" has been subjected to a 
budgetary outlay commitment, while the volume of "other milk products" has been expressed  in terms of its fat, 
and solid non fat, content prior to the scheduling of the corresponding quantity reduction commitment.  While 
the quantity reduction commitments have been expressed taki ng account of fat content, the Panel considers that 
they relate to the same product group, i.e. "other milk products". The data and the explanatory notes contained 
in Supporting Table 11 of document G/AG/AGST/AUS support the Panel's view. Further, the manner in which 
these two forms of reduction commitments  are integrated in the scheduling table, as well as in Supporting Table 
11, leaves no doubt as to the Panel's conclusion that Australia has scheduled both forms of reduction 
commitments, budgetary outlay as well as quantity, in re spect to a single product group, i.e. "other milk 
products".      
446 The Panel considers that an indication with respect to the quantity commitment level is not missing.  
Instead, it is specified as "not applicable" for all impl ementation years, except for th e last year 2000, where the 
specified amount is clearly indicated as "0.00", thus implying a 100 per cent reduction of the volume of subsidized agricultural exports.  Further, the reduction commitment relates, not to the individual product 
categories identified during the Uruguay Round, but to "all
 agricultural products described in Annex 1 of the 
Agreement on Agriculture ".  Quite apart from the fact that it may not  be feasible, from the statistical point-of-
view, to obtain a single figure expressing a quantity commitment level for all  agricultural products, given the 
variety of measurement units and conversion factors involved,  the Panel appreciates that the nature of the export 
incentive schemes reported by New Zealand during the base period did not lend itself to the breakdown required by the Modalities Paper.  Seeking further guidance from the Schedule of the only other Member of the WTO, 
Panama, which has undertaken a reduction commitment in Section II of Part IV, on an aggregate  basis, the 
Panel finds, again, that:  (a) the products covered are "todos
 los productos descritos en el Anexo 1 del Acuerdo 
sobre la Agricultura"; and that (b) the quantity commitment level is shown as "no aplicable"  except for the last 
implementation year, 2003, where the amount is clearly specified as "0".  WT/DS265/R 
Page 144  
 
 quantity reduction commitments, in a consistent and uniform manner, by clearly specifying a figure 
with respect to the last implementation year. 
7.141  In the Panel's view, Australia's and New Zeal and's scheduled reduction commitments cannot 
be assimilated to examples of "negotiated depart ures" from the Modalities Paper, as claimed by the 
European Communities.  
7.142  On the basis of the evidence submitted to it, the Panel, therefore, concludes that the European 
Communities has not substantiated its assertion that th ere are other situations in which a Member has 
undertaken commitments in Section II of Part IV of  its Schedule that did not contain both budgetary 
outlays and
 quantity commitment levels.   
7.143  Therefore the Panel concludes that the Agreement on Agriculture  makes it clear that export 
subsidies are only possible for products listed in Sec tion II, Part IV of Members' Schedules and only 
for amounts at or below the maximum level of co mmitment provided for in a Member's Schedule.  
Moreover, all WTO-consistent expor t subsidies must have been speci fied in a Member's Schedule, 
both in terms of quantity and in terms of budgetary outlays and all WTO-consistent export subsidies 
on scheduled products must have been subject to  reduction commitments during the implementation 
period.   
(iii) The interpretation of terms included in WTO Members' Schedules 
7.144  One of the issues before the Panel is whethe r the European Communities' commitment level 
with respect to export subsidies on sugar can lega lly include two components:  the first component 
being the commitment levels expressed in the table on export subsidies (which have decreased during 
the implementation period of the Agreement on Agriculture  and has remained fixed since 2001); the 
second component being the commitment levels expressed in Footnote 1 to the EC's Schedule in 
respect of ACP/India sugar.  For the Complainan ts, Footnote 1 on ACP/India sugar is inconsistent 
with the Agreement on Agriculture  and should be ignored when determining the European 
Communities' commitment level.   
7.145  In order for the Panel to determine the Eur opean Communities' commitment level, the Panel 
must assess the legal value and effect of Footnote 1 contained in Section II of Part IV of the EC's 
Schedule and to what extent the content of su ch a Footnote can legally modify the European 
Communities' obligations under the Agreement on Agriculture  with respect to export subsidies.447  
Before assessing the legal value and effect of  Footnote 1, the Panel examines how one should 
interpret provisions contained in Members' Schedules, in particular  when such scheduled provisions 
seem to contradict basic obligations contained in  a WTO multilateral trade agreement, such as the 
Agreement on Agriculture .   
Provisions of a Member's Schedule s hould be interpreted as treaty provisions  
7.146  As mentioned above, Article 8 of the Agreement on Agriculture  makes it clear that Members 
must respect both the provisions of the Agreement on Agriculture  and the provisions of their 
Schedules.  The Panel notes first that scheduled commi tments are made an integral part of the GATT 
1994 under Article 3.1 of the Agreement on Agriculture .   
7.147  In EC – Computer Equipment , the Appellate Body concluded that provisions of a Member's 
schedule must be interpreted as treaty provisions: 
                                                      
447 The Panel notes first that none of the parties have argued that footnotes per se  cannot contain 
commitments. The Complainants have raised objection to the content of Footnote 1 and the interpretation 
thereof provided by the European Communities.   WT/DS265/R 
 Page 145 
 
 
 "Tariff concessions provided for in a Me mber's Schedule -- the interpretation of 
which is at issue here -- are reciprocal and result from a mutually-advantageous negotiation between importing and exporting Members.  A Schedule is made an 
integral part of the GATT 1994 by Article II:7 of the GATT 1994.  Therefore, the concessions provided for in that Schedule are part of the terms of the treaty.  As such, 
the only rules which may be applied in in terpreting the meaning of a concession are 
the general rules of treaty interpretation set out in the Vienna Convention ."
448 
7.148  Therefore, provisions of a Members' Schedule mu st be interpreted pursuant to Article 3.2 of 
the DSU  and Articles 31, 32 and 33 of the Vienna Convention .449   
                                                      
448 Appellate Body Report on EC – Computer Equipment , para. 84. 
449 Articles 31, 32 and 33 of the Vienna Convention  read as follows:  
 
"Article 31 – General rule of interpretation 
 
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the 
terms of the treaty in their context and in the light of its object and purpose. 
 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, 
including its preamble and annexes: 
 (a) any agreement relating to the tr eaty which was made between all the parties in connection with the 
conclusion of the treaty; 
 (b) any instrument which was made by one or more parties in connection with the conclusion of the 
treaty and accepted by the other parties as  an instrument related to the treaty. 
 3. There shall be taken into account, together with the context: 
 
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the 
application of its provisions; 
 
(b) any subsequent practice in the application of the treaty which establishe s the agreement of the 
parties regarding its interpretation; 
 
(c) any relevant rules of international law app licable in the relations between the parties. 
 
4. A special meaning shall be given to a term if it is established that the parties so intended.  
Article 32 – Supplementary means of interpretation 
 Recourse may be had to supplementary means of interpretation, including the preparatory work of the 
treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the 
application of article 31, or to determine the meaning when the inte rpretation according to article 31: 
 
(a) leaves the meaning ambiguous or obscure; or 
 (b) leads to a result which is manifestly absurd or unreasonable. 
 
Article 33 – Interpretation of treaties authenticated in two or more languages 
 
1. When a treaty has been authenticated in two or more languages, the text is equally authoritative in 
each language, unless the treaty provides or the partie s agree that, in case of divergence, a particular 
text shall prevail. 
 WT/DS265/R 
Page 146  
 
 7.149  The primary purpose of treaty interpretation is to identify the common  intention of the 
parties.
450  Importantly, in EC – Computer Equipment,  the Appellate Body clarified that although 
unilaterally proposed and bilaterally negotiate d, tariff concessions still represent the common 
agreement of all Members and are thus multilateral ob ligations; it also concluded that "indeed, the fact 
that Members' Schedules are an integral part of the GATT 1994 indicates that, while each Schedule 
represents the tariff commitments made by one Member, they represent a common  agreement among 
all Members."451 (underlining added) 
7.150  The Panel believes that this is true for all WTO scheduled commitments, whether pure market 
access concessions or any other commitments.  WTO Members' scheduled commitments, whether 
initially negotiated bilaterally or multilaterally, are multilateralized when made part of the WTO 
Agreement , and thus, they should be interpreted accordingly.   
Effective treaty interpretation  
7.151  The requirement that a treaty be interpreted in  "good faith" pursuant to Article 31.1 of the 
Vienna Convention  can be correlated with the principle of  "effective treaty interpretation", according 
to which all terms of a treaty must be given a meaning.452  On several occasions, the Appellate Body 
has emphasized the importance of the principle of ef fectiveness whereby "an interpreter is not free to 
adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or 
inutile".453 
7.152  In Korea – Dairy , the Appellate Body concluded that: 
"In light of the interpretive princi ple of effectiveness, it is the duty of any treaty 
interpreter to 'read all applicable provisions of a treaty in a way that gives meaning to 
all of them, harmoniously .'454  An important corollary of this principle is that a treaty 
                                                                                                                                                                     
2. A version of the treaty in a language other than on e of those in which the te xt was authenticated shall 
be considered an authentic text only if th e treaty so provides or the parties so agree. 
 
3. The terms of the treaty are presumed to have the same meaning in each authentic text. 
 4. Except where a particular text prevails in acco rdance with paragraph 1, when a comparison of the 
authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not 
remove, the meaning which best reconciles the texts, having regard to the object and purpose of the 
treaty, shall be adopted." 
450 See Appellate Body Report on EC – Computer Equipment , at para. 84. 
451 The Appellate Body in EC – Computer Equipment  stated in para. 109:  "Tariff negotiations are a 
process of reciprocal demands and concessions, of 'give and take'.  It is only normal that importing Members 
define their offers (and their ensuing obligations) in terms which suit their needs.  On the other hand, exporting Members have to ensure that their corresponding rights are described in such a manner in the Schedules of 
importing Members that their export interests, as agreed in the negotiations, are guaran teed.  There was a special 
arrangement made for this in the Uruguay Round.  For this purpose, a process of verification of tariff schedules took place from 15 February through 25 March 1994,  wh ich allowed Uruguay Round participants to check and 
control, through consultations with their negotiating part ners, the scope and definitio n of tariff concessions."  
Citing MTN.TNC/W/131, 21 January 1994.   
452 See the Appellate Body Report on US – Gasoline , p. 23.  See also the Appellate Body Reports on 
Japan – Alcoholic Beverages II , p. 12, on US – Underwear , p. 16; on Argentina – Footwear (EC) , paras. 81 and 
95; on Korea – Dairy , para. 81; on US – Section 211 Appropriations Act , para. 338; and on US – Offset Act 
(Byrd Amendment) , para. 271. 
453 Appellate Body Report on US – Gasoline , at p. 23 
454 (footnote original ) We have emphasized this in Appellate Body Report, Argentina – Safeguard 
Measures on Imports of Footwear , WT/DS121/AB/R, circulated 14 December 1999, para. 81.  See also 
Appellate Body Report,  United States – Gasoline , supra , footnote 12, p. 23;  Appellate Body Report,  Japan –  WT/DS265/R 
 Page 147 
 
 
 should be interpreted as a whole, and, in pa rticular, its sections and parts should be 
read as a whole."455 (underlining added, footnote omitted) 
7.153  In Canada – Dairy , the Appellate Body made it clear ag ain that a treaty interpreter cannot 
lightly assume that a WTO Member projected no demonstrable purpose on a specific provision of its schedule: 
"In interpreting the language in Canada's Schedule, the Panel focused on the verb 
'represents' and opined that, because of the u se of this verb, the notation was no more 
than a ' description ' of the 'way the size of the quo ta was determined'.  The net 
consequence of the Panel's inte rpretation is a failure to gi ve the notation in Canada's 
Schedule  any  legal effect as a 'term and condition'.  If the language is  merely   a 
'description' or a 'narration' of how the quantity was arrived at, we do not see what 
purpose it serves in being inscribed in the Schedule.  The Panel, in other words, acted 
upon the assumption that Canada projected no identifiably necessary or useful 
qualifying or limiting purpose in inscribing the notation in its Schedule.  The Panel 
thus disregarded the principle of effectiveness in its interpretive effort ."
456 (emphasis 
added) 
7.154  The Panel considers, therefore, that in the interpretation of Footnote 1 to Section II, Part IV of 
the EC's Schedule it must use its best endeavours to give due meaning to the said Footnote and respect 
the principle of effective treaty interpretation.  
(iv) The issue of "conflict" between provisions of a Member's Schedule and provisions of the 
Agreement on Agriculture  
7.155  The Panel recalls that in international law, there is a presumption against conflicts when 
treaties have the same membership.457  This principle has been recognized by the WTO jurisprudence 
when dealing with intern al conflicts within the WTO Agreement  which includes Members' Schedules.  
The WTO jurisprudence has maintained the general principle that there is a conflict only when two 
provisions are mutually exclusive, that is when only one provision "applies" because it is not possible 
for a single measure to be cons istent with bot h provisions.458  
                                                                                                                                                                     
Alcoholic Beverages , supra , footnote 41, p. 12;  and Appellate Body Report,  India – Patents , supra , 
footnote 21, para. 45. 
455 Appellate Body Report on Korea – Dairy , para. 81. 
456 Appellate Body Report, Canada – Dairy , para. 135 (footnote omitted)(emphasis added). 
457 "... [T]echnically speaking, there is a conflic t when two (or more) treaty instruments contain 
obligations which cannot be complied with simultaneously. ...  Not every such divergence constitutes a conflict, 
however. ... Incompatibility of contents is an essen tial condition of conflict." (Encyclopedia of Public 
International Law  (North-Holland 1984), p. 468. See also Ian Sinclair, Vienna Convention , 1984, at p. 97.)" … a 
conflict of law-making treaties arises only where simulta neous compliance with the obligations of different 
instruments is impossible. ... There is no conflict if the obligations of one instrument are stricter than, but not 
incompatible with, those of another, or if it is possibl e to comply with the obligations of one instrument by 
refraining from exercising a privilege or discretion accorded by another. For, in such a case, it is possible for a State which is a signatory of both treaties to comply with both treaties at the same time.  (…) The presumption 
against conflict is especially reinfo rced in cases where separate agreements are concluded between the same 
parties, since it can be presumed that  they are meant to be consistent wi th themselves, failing any evidence to 
the contrary." (Jenks, Op. Cit, )  
458 In the WTO context, see the Panel Report on Indonesia – Automobile at paras.14.29-14.36 and 
14.97 to 14.99; the Appellate Body Reports on Guatemala –  Cement I  at para. 60; on US – Hot Rolled Steel , 
paras. 55-62.  Recently in EC – Tariffs Preferences , para. 88, the Appellate Body seems to have expanded the 
concept of conflicts to include situations where a provis ion gives a right while another one gives an obligation. WT/DS265/R 
Page 148  
 
 7.156  The Panel is also aware of the WTO jurispr udence that has established the relationship 
between provisions of a WTO agreement and provisions  of a Member's Schedule.  For instance, the 
Appellate Body in EC – Bananas III
459 concluded, as the GATT panel report on US – Sugar460, that: 
"The market access concessions for agricultu ral products that were made in the 
Uruguay Round of multilateral trade negotiati ons are set out in Members' Schedules 
annexed to the Marrakesh Protocol, and are an integral part of the GATT 1994.  By 
the terms of the Marrakesh Protocol , the Schedules are 'Schedules to the GATT 
1994", and Article II:7 of the GATT 1994 provides that "Schedules annexed to this Agreement are hereby made an integral part  of Part I of this Agreement'.  With 
respect to concessions contained in the Schedules annexed to the GATT 1947, the 
panel in United States - Restrictions on Importation of Sugar  ("United States - Sugar 
Headnote ") found that: 
... Article II permits contracting parties to incorporate into their 
Schedules acts yielding rights under the General Agreement but not 
acts diminishing obligations under that Agreement." 
7.157  The same principle was reiterated in EC – Poultry
461 and in Chile – Price Band System .462  In 
the Panel's view, GATT and WTO jurisprudence indi cate that WTO Members may use entries in their 
schedules of concession to clarify and qualify  the "concessions" they individually agree to assume in 
their Schedules but not to reduce or conflict  with the obligations they have assumed under the GATT  
or the WTO Agreement , including the Agreement on Agriculture . 
7.158  The Panel notes that the jurisprudence cited a bove deals with tariff concessions and this 
includes market access commitments within the meaning of Article 1(g) of the Agreement on 
Agriculture .  The "export subsidy commitments" contain limitations on subsid ization, constituting 
exceptions to the Article 8 general prohibition, and are incorporated into the Agreement on 
Agriculture  through Article 3.1 of the Agreement on Agriculture .  The Panel recalls also that contrary 
to tariff concessions, export subsidy commitments are not renegotiable under Article XXVIII of the 
GATT 1994.  Therefore, export subsidy commitment s are different from tariff and other market 
access concessions.  However, in the Panel's view, the principle that scheduled commitments cannot 
overrule or conflict with the basic obligations contained in a WTO multilateral trade agreement, 
unless explicitly authorized, remains valid and appl icable to export subsidy commitments scheduled 
in Section II, Part IV of Members' Schedules. 
7.159  The Panel believes that this same princi ple is recognized in Article 8 of the Agreement on 
Agriculture .   
                                                      
459 Appellate Body Report on EC – Bananas III , para. 154. 
460 GATT Panel Report on US – Sugar , paras. 5.2-5.3. 
461 The Appellate Body Report on EC – Poultry , para. 98 stated: "In United States - Restrictions on 
Imports of Sugar , the panel stated that Article II of the GATT permits contracting parties to incorporate into 
their Schedules acts yielding rights under the GATT, but not acts diminishing obligations under that Agreement.  
In our view, this is particularly so with respect to the principle of non-discrimination in Articles I and XIII of the 
GATT 1994.  In EC – Bananas , we confirmed the principle that a Member may yield rights but not diminish its 
obligations and concluded that it is equally valid for the market access conce ssions and commitments for 
agricultural products contained in the Schedules annexed to the GATT 1994.   The ordinary meaning of the term 
"concessions" suggests that a Member may yield or waive some of its own rights and grant benefits to other Members, but that it cannot unilaterally diminish its own obligations.". 
462 The Appellate Body Report on Chile – Price Band System , para. 272 stated: " We have observed in 
a previous case that "[t]he ordinary meaning of the term 'concessions' sugg ests that a Member may yield rights 
and grant benefits, but it cannot diminish its obligations".  A Member's Schedule imposes obligations on the 
Member who has made the concessions."  WT/DS265/R 
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 7.160  In this respect, the Panel notes that Article 8 of the Agreement on Agriculture  covers various 
types of commitments in the context of the implementation period; commitments limiting subsidization (Article 3.1), and commitments relati ng to limitations on the extension of the scope of 
export subsidization (Article 9.3). 
7.161  At the same time, Article 8 makes clear that a Member must at all times comply with the 
Agreement on Agriculture  (and its Schedule).
463  Therefore, a Members' Schedule cannot provide for 
non-compliance with provisions of the Agreement on Agriculture .  Provisions in Members' Schedules 
relating to commitments authorized by the Agreement on Agriculture  may therefore only qualify such 
commitments to the extent that the said qualificati on does not act so as to contradict or conflict with 
the Members' obligations under the Agreement on Agriculture . 
7.162  In US – FSC , the Appellate Body recognized the diffe rence between the rule-based provisions 
contained in the Agreement on Agriculture  and the more narrow reduction commitments contained in 
Members' Schedules. 
"The word 'commitments' generally co nnotes 'engagements' or 'obligations'.464  Thus, 
the term 'export subsidy commitments ' refers to commitments or obligations relating 
to export subsidies assumed by Members under provisions of the Agreement on 
Agriculture , in particular, under Articles 3, 8 and 9 of that Agreement. (...) 
We also find support for this interpretation of the term "export subsidy commitments" 
in Article 10 itself, which draws a distinc tion, in sub-paragraphs 1 and 3, between 
'export subsidy commitments' and ' reduction commitment levels '.465  In our view, the 
terms 'export subsidy commitments' and 'r eduction commitments' have different 
meanings.  ' Reduction  commitments' is a narrower  term than 'export subsidy 
commitments' and refers only to commi tments made, under the first clause of 
Article 3.3, with respect to scheduled  agricultural products.  It is only with respect to 
scheduled  products that Members have undertaken , under Article 9.2(b)(iv) of the 
Agreement on Agriculture , to reduce  the level of export subsidies, as listed in 
Article 9.1, during the implementation period of the Agreement on Agriculture .466  
The term 'export subsidy commitments' has a wider  reach that covers commitments 
and obligations relating to both scheduled and unscheduled  agricultural products."467 
(underlining added) 
7.163  The Panel is of the view that the "wider" e xport subsidy obligations provided for in the  
Agreement on Agriculture  cannot be deviated from in a Member's Schedule containing narrower 
commitments.  Members may include in their Schedules reduction commitments as well as other 
specific types of commitments which, by their nature, are narrower and thus cannot be used to circumvent the broader rule-based export subsidy commitment of the Agreement on Agriculture .   
7.164  As discussed in paragraphs 7.127-7.134 above, commitments with respect to export subsidies 
are thus strictly regulated under the Agreement on Agriculture .  Among other disciplines, Article 3 
provides that export subsidies must be expressed bot h in terms of budgetary outlays and in terms of 
                                                     
 
463 The Panel recalls the wording of Article 8 of the Agreement on Agriculture: "Each Member 
undertakes not to provide export subsidies othe rwise than in conformity with this Agreement and with the 
commitments as specified in that Me mber's Schedule." (emphasis added) 
464 (footnote original ) The New Shorter Oxford English Dictionary, supra, footnote 148, p. 452. 
465 (footnote original ) The term "reduction commitments" also ap pears in the chapeau to Article 9.1. 
466 (footnote original ) Article 9.2(b)(iv) provides that, with respect to scheduled products, the budgetary 
outlay and quantity commitment levels must, by the end of the implementation period, not exceed certain threshold levels, expressed as a percentage of the 1986-1990 base period levels. 
467 Appellate Body Report on US – FSC , paras. 144-147. WT/DS265/R 
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 quantities; moreover, to be consistent with the Agreement on Agriculture , all such export subsidies 
must have been subject to reduction commitments pursu ant to Articles 3 and 9.1 (and 9.2(b)(iv)).     
7.165  Having these guidelines in mind and reca lling the Appellate Body ruling in Korea – Dairy  
that it is "the duty of any treaty interpreter to 'read all app licable provisions of a treaty in a way that 
gives meaning to all of them, harmoniously'
468"469, the Panel needs to see whether the content of 
Footnote 1 of the EC's Schedule on the one ha nd, and the European Communities' obligations 
pursuant to Articles 3, 8 and 9 of the Agreement on Agriculture  on the other hand, can be read 
"harmoniously" or whether the content of Footnote 1 – being inconsistent and conflicting with the 
European Communities' basic obligations under the Agreement on Agriculture  – should be considered 
without any legal effect and would thus not enla rge or otherwise modify the commitment level 
specified in Section II, Part IV of the European Communities' Schedule.   
7.166  The Panel proceeds first to the interpretation of  Footnote 1 to assess whether, as suggested by 
the European Communities, it provides for a WTO- consistent limitation of 1.6 million tonnes for 
export subsidies corresponding or equivalent to th e amount of imports of ACP/Indian origin.   
(v) Interpretation of the European Communities' Footnote 1 on ACP/India sugar:  
7.167  Footnote 1 to the entry for sugar in the Eu ropean Communities' export subsidy commitments 
reads as follows: 
"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." 
7.168  The Panel refers to the European Comm unities' interpretation of Footnote 1: 
"Both sentences of the footnote are relevant  in order to fully understand the EC's 
commitments.  The footnote is numbered (1 ) and is found next to the term 'sugar' in 
the column entitled "description of products",  thus applying to the full entry.  The 
first sentence has two elements to it.  First,  it confirms that exports of an equivalent 
amount of ACP/Indian sugar were not incl uded in the quantities and outlays reported 
by the EC for the base period level (1986-1990) which served as a basis for the 
figures set out in the table.  Since the footnot e applies to the entire entry, it applies to 
both the base outlays and base quantities.  That  is, it indicates the basis for the base 
quantity and outlay levels.  The EC made th is clear in the supporting tables which all 
participants in the negotia tions were required to submit.
470  Indeed, Australia 
explicitly accepts that ACP equivalent sugar was excluded from the supporting 
tables.471  The second element of the first sentence makes it clear that exports of the 
quantity of ACP/India sugar imported shall not be counted against the commitments 
made on the base period levels (this is the logical concomitant of the non-inclusion of these exports in the base period).  
                                                     
 
468 (footnote original ) We have emphasized this in Appellate Body Report, Argentina – Safeguard 
Measures on Imports of Footwear , WT/DS121/AB/R, circulated 14 December 1999, para. 81.  See also 
Appellate Body Report,  United States – Gasoline , supra , footnote 12, p. 23;  Appellate Body Report,  Japan – 
Alcoholic Beverages , supra , footnote 41, p. 12;  and Appellate Body Report,  India – Patents , supra , 
footnote 21, para. 45. 
469 Appellate Body Report on Korea – Dairy , para. 81. 
470 (footnote original ) Exhibit EC–5. 
471 (footnote original ) Australia's first written submission, Annex 1, paras. 4 and 5.  WT/DS265/R 
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 It is the second sentence which is vital to understanding the footnote (and which is 
entirely ignored by the Complainants).  It expresses the "average of export" of 
ACP/India equivalent sugar in the pe riod 1986-1990.  This sentence cannot be 
disregarded.  It is deprived of meaning if it is considered as merely a statement of fact or a narration of particular circumstances.
472  The reference to the period 1986-1990 
(which was the base period for the reducti on commitments) is telling.  If, as the 
Complainants would have it, the footnote is simply an exclusion, there would be no need to insert the second sentence, and no  reason to refer to the 1986-1990 base 
period.  The reference to the base period indicates that the EC was committing itself, 
as it had done for the other component of its e xports of sugar, to limit its exports to a 
level established on the basis of the exports made in the base period.  It operates in 
precisely the same way as the other component of the EC's commitments – it is a limited authorisation to provide export subsidies. 
Therefore, according to a proper interpretation of the footnote the EC has articulated 
its subsidy commitments in two components.   One component sets limits which are 
subject to reduction, and the second component  (the footnote) sets a fixed ceiling.  
Overall, the EC has reduced its export subsidies on sugar."
473  
Footnote 1 does not contain any "limitation"  on export subsidies of ACP/India sugar  
7.169  The Panel does not agree with the European Communities' interpretation of Footnote 1.  
Firstly, the ordinary meaning of the terms of th e Footnote does not indicate any "limitation on export 
subsidies for sugar" to 1.6 million tonnes.  The Panel therefore fails to see any commitment "limiting 
subsidization".  
7.170  The Complainants highlight a number of in consistencies between: (a) the European 
Communities' assertion before this Panel that Foot note 1 in the European Communities' Schedule has 
legal effect and constitutes a "commitment", a nd that, overall, the European Communities has 
subjected all export subsidies on sugar to reduction commitments474; and (b) the European 
Communities' own notification practice to omit the data relating to export subsidies of ACP/India 
"equivalent" sugar, as well as its responses to re quests for clarification, in the Committee on 
Agriculture.   The Complainants submit that, if th e European Communities had been of the view that 
it had assumed export subsidy reduction commitments in respect of sugar of ACP and Indian origin, it 
would have provided statistics on the export of such s ugar in its notifications, or explained why it did 
not notify the exports of sugar that it claimed to be covered by its reduction commitments.   
7.171  The European Communities does not reconcile the inconsistencies highlighted by the 
Complainants.  Instead, the European Communities su stains that it has consistently interpreted the 
Footnote in the same manner since 1995, based on the application of the Vienna Convention rules of 
interpretation. The European Communities insists th at it has undertaken to limit subsidization in 
respect of ACP/India equivalent sugar and th at it has reduced its overall commitment on export 
subsidies on an annual basis.  
                                                      
472 (footnote original ) See, for instance, the Appellate Body Report in Canada – Dairy at para. 135.  In 
that case, the Appellate Body admonished the panel for failing to give meaning to a condition in Canada's goods 
schedule which the panel had considered was no more than a "description". 
473 European Communities' first written submission, paras. 167-169. 
474 European Communities' oral statement at the first substantive meeting of the Panel, para . 31. WT/DS265/R 
Page 152  
 
 7.172  The European Communities s uggests that the evidence
475 demonstrates that it has considered 
and treated 1.6 million tonnes as a "cap" on the amount of exports which can benefit from export 
subsidies as ACP/India equivalent sugar.  For th e European Communities, the sugar CMO is managed 
in order to respect this limit, which forms an integr al part of the regulatory structure of the regime.  
Indeed, since the export refunds are maintained  at the difference between the world and the 
Community price (and thus the Community authorities have limited control over the evolution of the 
amount of individual refunds) the limits imposed by the WTO Agreements  are respected through the 
control of the quantity of products which may be exported with the benefit of a refund (see Article 
27(14) of Regulation 1260/2001).476  The Commission verifies on a weekly basis that the export 
refunds granted stay within the limits set out in the WTO Agreement which permits the Commission 
to ensure that export refunds are not grante d which might exceed the EC’s export subsidy 
commitments.   
7.173  The Panel recalls the Appellate Body's reliance, in Korea – Various Measures on Beef , on 
statements and notifications by Memb ers before the Committee on Agriculture477, as evidence of a 
Member's consistent treatment  of its commitments under the Agreement on Agriculture .   
7.174  The Panel first observes that the EC notifica tions to the Committee on Agriculture do not 
suggest that Footnote 1 constitutes a limitation on subsidization.478  The European Communities, 
rather, appears to argue that Footnote 1 exem pts it from any export subsidy reduction commitment 
with respect to sugar of ACP and Indian origin.  Indeed, since the entry into force of the WTO 
Agreement, the European Communities has consistent ly indicated, in Footnote 5 to its Table ES:1 
notifications to the Committee on Agri culture, that the information presented:479 
"Does not include exports of sugar of  ACP and Indian origin on which the 
Community has no reduction commitments." 
7.175  The Panel also notes that, during the review process (25-26 June 1998 and 17-18 November 
1998) undertaken by the Committee on Agri culture pursuant to Article 18 of the Agreement on 
Agriculture , the European Communities stated, inter alia , that: 
"Exports of ACP and Indian sugar are e ligible to receive export refunds.  As 
mentioned in the EC's Schedule, no reduc tion commitment is made on this category 
of sugar."480 
and "As indicated in footnote 1 of the table on export subsidies contained in Part IV, 
Section II of Schedule CXL, the EC is not undertaking any reduction commitment on 
exports of ACP or Indian sugar.  Con sequently, any financial assistance is not 
                                                     
 
475 See European Communities' first submission, table 10.  The Panel notes that Australia raised the 
issue of the statistical inaccu racy of the tables cited by the European Communities, Australia's oral statement at 
the first substantive meeting, para. 54 and Australia's or al statement at the second Panel meeting, para. 51.  
476 European Communities' first submission, paras. 175-184. 
477 Appellate Body Report on Korea – Various Measures on Beef , paras . 103-105.   
478 The Panel recalls that the practice of a Member may be relevant in the interpretation of that 
Members' schedule.  See the Appellate Body report on EC – Computer Equipment , para. 92. 
479 Exhibit COMP-17, Footnote (5) to Table ES:1 notifications. 
480 See G/AG/R/15, p. 59.  See also G/AG/R/17.  WT/DS265/R 
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 reported to the WTO.  For information, these exports amount to approximately 
1.6 million tonnes per year." 481 
7.176  The Panel must assume that the European Communities has been complying with the 
notification requirements adopted by the Committee on Agriculture482, and is thus puzzled by the fact 
that the European Communities has not reported the amounts of actual subsidized quantities and 
budgetary outlays corresponding to exports of sugar of  ACP and Indian origin.  In the Panel's view, 
therefore, the European Communities' notificati on practice since the entry into force of the WTO 
Agreement  suggests that the European Communities has not assumed a commitment to limit 
subsidization of sugar of ACP or Indian origin .  Importantly, this implies that the European 
Communities itself has not "treated" the Footnote as a commitment specified in its Schedule.  This is 
inconsistent with the European Communities' claim that it has indeed assumed ceiling level 
commitments, with respect to the volume of subsidized exports of sugar of ACP and Indian origin.483    
7.177  Background documents compiled by the Secretar iat on the basis of Members' Schedules and 
notifications commented on by Members lend support to the Panel's analysis.484  No commitment, 
whether in the form of budgetary outlays, or quantit y, reduction commitment, ha s ever been recorded, 
or reflected in any way, in relation to sugar of  ACP and Indian origin.  The European Communities 
has not availed itself of the opportunity to update the information contained in such documents in 
order to clarify that its export subsidy commitmen ts for sugar were articulated in two distinct 
components.  Since the fixed ceiling and the fixed quantity commitments have never been accounted 
for in the summary tables in respect of EC sugar, th e implications are, in the Panel's opinion, that the 
"understanding" of WTO Members, of the Comm ittee on Agriculture, was that the Footnote was not a 
commitment assumed by the European Communities.   Moreover, the Panel understands that the 
European Communities has not reacted, nor objected, to the data presented in the Secretariat papers. 
7.178  The Panel, therefore, does not find any eviden ce that the European Communities itself was of 
the view, during the entire implementation period, th at ACP/Indian sugar was another "component" of 
its commitments.  Cumulated with the inconsistenc y of the European Communities' statements before 
the Committee on Agriculture and this Panel485;  the inconsistency between the information contained 
in its notifications and its assertions before the Panel486;  the Panel concludes that the Footnote has 
never been "treated" or considered by the me mbers of the Committee on Agriculture, nor by the 
European Communities487, as a "commitment" "specified" in the European Communities' Schedule. 
7.179  The Panel is of the view that the ordinary m eaning of the terms indicates that the European 
Communities is not making a commitment limiting s ubsidization on exports of  sugar of ACP/India 
origin.  On the contrary, the terms of Footnote 1 indicate that the European Communities is making a 
                                                      
481 See G/AG/R/17, p. 29:  This reply was provided in response to the US query regarding the 
application of internal EC prices less transportation co sts to imported sugar, and a query regarding the prices 
applying to imported sugar, which is refined in Europe.  The United States sought information as to whether this 
financial assistance was reported to the WTO, and as to the magnitude of such financial assistance.  After 
hearing the EC reply, the United Stat es stated that it assumed that "no re duction commitment" did not mean that 
the EC had no commitment at all as regards export subsid ization of agricultural product s.  To the extent that 
WTO rules exist on the subject, the United States hoped to see more information on sugar exports under the EC financial support programme in future. 
482 See G/AG/2. 
483 European Communities', first written submission, paras. 174-186. 
484 See documents G/AG/NG/S/5, G/AG/NG/S/5/Rev.1, TN/AG/S/8. 
485 Underlined by the Complainants in para. 4.198 above. 
486 See para. 4.199 above. 
487 Despite the European Communities' assertions to the contrary referred to in paras. 4.204 to 4.207 
above. WT/DS265/R 
Page 154  
 
 statement that exports of subsidized sugar of ACP/ Indian origin will not be subject to the reduction 
commitments provided for in Articles 3, 9.1 and 9.2(b)(iv) of the Agreement on Agriculture .   
Footnote 1 does not provide for any commitment for sugar "equivalent" from ACP/India 
 
7.180  The Panel is also of the view that the ordinary meaning of the terms of Footnote 1 does not 
provide that an amount of subsidized sugar "e quivalent" to the amount of sugar imported from 
ACP/India will be maintained for export.  In the Pa nel's view, the Footnote appears to require that the 
sugar exports excluded from export reduction commitments actually be  sugar of ACP and Indian 
origin , as stated in Footnote 1.  Payment of export s ubsidies on an equivalent amount of sugar sourced 
from the European Communities does not  come within the terms of the Footnote.  For the European 
Communities, the second sentence makes it clear that it was dealing with exports and therefore, since 
it does not export or re-export ACP/India sugar as such , it could only be exports equivalent to what it 
imports from ACP/India.  The European Communities adds that Members were aware at the time of 
the Uruguay Round that it was exporting a quantity of sugar equivalent to what it imports from those 
countries.488  The Panel notes, however, that the Europ ean Communities today considers that it needs 
to use wording different from what  it used when it scheduled its footnote, and a wording different 
from what it used in its cover letter when the EC  Ambassador transmitted the said EC's Schedule – 
which seems to indicate that the European Comm unities did not choose the most appropriate/clear 
wording at the time.489  
7.181  The European Communities490 and some of the third parties491 referred to the linkages 
between the Cotonou Agreement492 and the Sugar Protocol493 on the one hand and the EC sugar 
                                                      
488 See European Communities' first written submission, para. 198: "(...) As the EC has already noted, it 
was well known to all parties that the EC did not grant ex port refunds only on the re-export of sugar originally 
of ACP/Indian origin, but granted export refunds for a quan tity equivalent to such exports. This is reflected in 
the drafting of the footnote, which, in the second senten ce, refers to the "average of export" (as opposed to 
import) as being 1.6 million tonnes, which is a reference to exports, and certainly not ACP/India raw sugar 
imported, refined, and subsequently exported but an equi valent quantity of ACP/India sugar.  The term "export" 
in "average of export" (in the second sentence) must ha ve the same meaning as "exports" in the first sentence. 
Consequently, it is clear that the footnote cove rs refunds on exports equivalent to imports." 
489 See Exhibit EC-6 letter from Ambassador Tran Van-Thinh, EC Permanent Representative to the 
GATT to Director-General of the GATT which refers to "sugar corresponding to its imports of sugar from ACP 
countries and India."  See Australia's reply to Panel ques tion No. 19 where Australia states that the "EC actually 
changed the wording from the letters it cites which refer to 'sugar corresponding to its imports of sugar from 
ACP countries and India' to the actual wording in the Footnote.  See European Communities' first written 
submission, paras. 199-201.   
490 European Communities' replies to Panel questions Nos. 14 and 19;  European Communities' second 
written submission, para. 111;  European Communities' oral  statement, second meeting, paras. 99-104;   and 
Exhibit EC-7. 
491 See para. 5.2 above. 
492 The Partnership Agreement between the African, Ca ribbean and Pacific Grou p of States (ACP) and 
the European Communities and its member States signed in Cotonou on 23 June 2000, Official Journal L 320 (23 November 2002). 
493 The Sugar Protocol is included in the Cotonou Agreement between the European Communities and 
the ACP countries.  It was formerly part of the various Lomé Conventions.  It covers the agreement between the European Communities and a number of sugar-producing ACP countries for exports of raw cane sugar by the 
latter to the former at fixed quantities (1,294,700 tonnes (white sugar equivalent) and prices guaranteed to be no 
lower than the EC intervention price. In 1975, the Euro pean Communities granted a preferential trade regime to 
ACP nations within the framework of cooperation agreements. Trade preferences, commodity protocols and 
instruments of trade cooperation were part of the four successive Lomé Conventions (1975-2000).  Under the 
Cotonou Agreement signed in June 200 0, trade preferences were extended for eight further years (until the 
beginning of 2008) and the ACP and European Communities agreed on a new trade regime and on the concept 
of Economic Partnership Agreements.  Four agricultural products, including sugar, were the subject of protocols  WT/DS265/R 
 Page 155 
 
 
 regime (including the ACP/India equivalent sugar) on the other hand;  they added that Members were 
aware since the 1970s that the Footnote related to a quantity of exports equivalent to the quantity of 
sugar it imports from ACP countries a nd India and that this portion of its subsidized e xports should be 
entitled to differential treatment which is, according to the European Communities, articulated in the 
ACP/India Footnote.   
7.182  The Panel agrees with the Complainants that, pur suant to the Sugar Protocol and the EC/India 
Agreement494, the quantity of sugar to be provided by th e ACP and India is not contingent on export 
by the European Communities of that sugar or its equivalent.  Moreover, the amount of sugar covered 
by the Sugar Protocol is 1,294,700 tonnes while the Foot note refers to 1.6 milli on tonnes.  In addition, 
the Sugar Protocol as included in the Cotonou Ag reement, obliges the European Communities to buy 
certain quantities of sugar from selected ACP countries and India, but does not oblige the European 
Communities to subsidize re-exports of ACP/India equi valent sugar.  Finally, in the Sugar Protocol, 
the pricing arrangement for purchase of sugar from ACP countries and India is not linked in any way 
to exports of "ACP/India equivale nt" sugar, nor, indeed, to the provision of export subsidies by the 
European Communities.  The Panel is of the view  that the Sugar Protocol, even if considered 
"context" within the meaning of Article 31.2 of the Vienna Convention  for the interpretation of 
Footnote 1, does not support the European Communities' argument. 
Conclusion  
7.183  In sum, the Panel considers that the ordinary meaning of the terms of Footnote 1 does not 
indicate any commitment or concessions constituting a limitation on export subsidization or any other 
type of commitment authorized by the Agreement on Agriculture  which could in any way enlarge or 
otherwise modify the European Commu nities' commitment level specified in Section II, Part IV of its 
Schedule.  Rather, Footnote 1 constitutes a unilate ral statement by the European Communities that, 
with regard to exports of ACP/India sugar, it is not making any reduction commitment.  Moreover, 
Footnote 1, if it were to constitute such a lim itation on subsidization, w ould only benefit sugar of 
ACP/Indian origin per se , contrary to the European Communities' suggestion that 1.6 million tonnes 
of sugar refer to an amount "equivalent" to th e amount imported from ACP countries and India.  
7.184  Therefore, the Panel concludes that the ordina ry meaning of the terms of Footnote 1 does not 
authorize an additional 1.6 million tonnes of s ubsidized sugar to be exported corresponding or 
equivalent to the amount of impor ts from ACP and India.  The c ontent of Footnote 1 therefore does 
not enlarge or otherwise modify the European Co mmunities' quantity commitment level specified in 
Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay 
commitment of €499.1 million per year, with effect since marketing year 2000/2001.   
Can the ACP/India Footnote be regarded as a second component of the European 
Communities' commitment level that would not be  subject to reduction per se  but that would 
form part of the overall European Communitie s' commitment level which has been reduced?  
7.185  Assuming arguendo  that the Footnote could be interpreted as providing for a "limitation on 
subsidization in the form of a ceiling" for a maxi mum of 1.6 million tonnes, the Panel proceeds now 
to determine whether the said Footnote, as interpre ted by the European Communities, could be WTO 
consistent and part of the Eur opean Communities' overall commitmen t level with respect to export 
subsidies on sugar. 
                                                                                                                                                                     
annexed to the Lomé Conventions.  The sugar protocol has been maintained as such, without modification, 
throughout the four Lomé Conventions and Cotonou Agreement. 
494 Agreement between the EEC and the Republic of India on Cane Sugar, Official Journal L 190, 
23 July 1975, pp. 36-37. WT/DS265/R 
Page 156  
 
 7.186  The Panel has reached the conclusion that all export subsidies scheduled pursuant to 
Articles 3 and 8 of the Agreement on Agriculture  must have been subject to reduction commitments.  
The European Communities argues that although th e ACP/India sugar Footnote acts as a ceiling on 
subsidization and is not subject  to any reduction commitment, the European Communities' overall 
commitment on export subsidies to sugar has been reduced.  According to the European 
Communities, export subsidies provided for in its Sche dule are not inconsistent and in conflict with 
Article 9.1 and 9.2(b)(iv) of the Agreement on Agriculture , being of the opinion that Article 9.2(b)(iv) 
is outside the Panel's terms of reference. 
7.187  The Panel disagrees with the European Communities.   The Panel recalls that the possibility of 
maintaining export subsidies is an exception to the general prohibition against export subsidies 
contained in Article 8 of the Agreement on Agriculture .  As discussed in paragraphs 7.133-7.135, 
WTO-consistent export subsidies that  could be maintained if and when  scheduled, had to be subject to 
reduction commitments.  In other words, export s ubsidies that were not subject to any reduction 
commitment could not be maintained, and are prohib ited pursuant to Article 8 as interpreted in light 
of Articles 3 and 9 of the Agreement on Agriculture .   
7.188  Moreover, Article 9.1 defines a nd lists export subsidies which must  be subject to reduction.  
Article 9.1(a) reads as follows: 
"The following export subsidies are subj ect to reduction commitments under this 
Agreement:  
(a) the provision by governments or their agencies of direct 
subsidies, including payments-in-kind, to a firm, to an industry, to 
producers of an agricultural prod uct, to a cooperative or other 
association of such producers, or to  a marketing board, contingent on 
export performance." 
7.189  In this context, Article 9.1(a) seems to cove r the type of export subsidy provided for in the 
ACP/India sugar Footnote.  Indeed, the European  Communities does not deny that its exports of 
ACP/India equivalent sugar benefit from export subs idies;  its argument is essentially that the 
European Communities is entitled to provide such e xport subsidies.  In the Panel's view, if the 
European Communities claims that it is entitled to maintain such export subsidies, the said export 
subsidies must have been subj ect to reduction commitments. 
7.190  The Panel considers that Footnote 1 to Section II of Part IV of the EC's Schedule attempts to 
reduce and modify the European Communities' obligati on pursuant to Articles 3, 8, 9.1 and 9.2(b)(iv) 
of the Agreement on Agriculture.   In the Panel's view, the content of Footnote 1 is fundamentally 
inconsistent with the basic provisions of the Agreement on Agriculture , as Footnote 1, on the one 
hand, and Articles 3, 8 and 9 of the Agreement on Agriculture , on the other hand, are mutually 
inconsistent.  Therefore, the content of Footnote  1 contradicts and conflicts with the European 
Communities' basic obligations contained in Articles 9.1, 9.2(b)(iv), 3 and 8 of the Agreement on 
Agriculture .  Consequently, it is not possible to interp ret harmoniously Footnote 1 and the European 
Communities' basic obligations relating to export subsidies contained in the Agreement on 
Agriculture .   
7.191
 The Panel finds, therefore, that the content of  Footnote 1 is of no legal effect and does not 
enlarge or otherwise modify the European Comm unities' quantity commitment level specified in  WT/DS265/R 
 Page 157 
 
 
 Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay 
commitment of €499.1 million per year, with effect since 2000/2001.495  
The ACP/India Footnote does not contain any budgetary outlays so it cannot consist of an 
export subsidy consistent with the Agreement on Agriculture  
7.192  The Panel is also of the view that since the ACP/India sugar Footnote does not contain any 
reference to budgetary outlays, it cannot be consid ered as a component of a scheduled export subsidy 
commitment.  The European Communities is of the view that Article 3.3 does not require that all 
export subsidy commitments contain both quantity and budgetary outlays reduction commitments.  As 
mentioned before, the Panel disagrees with the European Communities in this regard.  In 
paragraphs 7.137-7.142 the Panel has reached the co nclusion that all export subsidy commitments are 
to be expressed both in terms of volume and in  terms of budgetary outlays, but the European 
Communities' Footnote does not contain any such budgetary outlay commitment.   
7.193  The European Communities adds that Footnote 1 contains a " de facto  budgetary limit of 
1.6 million multiplied by the average export refund which can be  granted within the first component 
of the EC's commitments " because the refunds for both types of sugar must be the same.  In the Panel's 
view, what the European Communities describ es as a "budgetary limit" does not arise from a 
commitment it has assumed in its Schedule but from its own practice of according the same subsidies 
to A and B sugar and to ACP/India equivalent suga r.  The European Commun ities therefore describes 
it as a " de facto " limit.496   
7.194  The Panel considers that there is nothing in the ordinary terms of the Footnote which 
expresses a legally binding commitment that the per unit subsidization of  exports of ACP/India 
equivalent sugar shall not exceed that for exports of  A and B sugar.  Moreove r, on this construction, 
the budgetary outlay commitment level cannot be pr edicted beforehand.  It can only be known in 
retrospect once the European Communities has finished  granting export refunds for a particular year.  
The Panel notes that the purpose of the requirement that reduction commitments be expressed both in 
terms of quantity and budgetary outlays is to ensu re transparency so that Members know in advance 
what level of export subsidies will be provided on  a yearly basis.  Limitations resulting from a 
Member's own domestic law or practices and unknown future events are therefore not compatible 
with the Agreement on Agriculture .   
7.195  The Panel also notes that the European Comm unities' Council Regulati on No. 1260/2001 at 
issue in this case, explicitly recognizes that "the Agriculture Agreement provides for export support to 
be reduced, in terms of both the quantities covered and the level  of the subsidies involved."497 
7.196  Therefore, the Panel concludes that the ACP/I ndia sugar Footnote cannot be reconciled with 
the requirements of Article 3.3 that reduction commi tments be expressed both in terms of quantity and 
of budgetary outlays.  The content of Footnote 1 is thus inconsistent and conflicts with the 
requirements of Articles 3 and 8 of the Agreement on Agriculture .  Accordingly, the content of 
Footnote 1 is of no legal effect and does not enla rge or otherwise modify the European Communities' 
quantity commitment level specified in Section II, Pa rt IV of its Schedule to be 1,273,500 tonnes of 
                                                      
495 The Panel agrees with the European Communities that Article 9.2(b)(iv) was not raised as a claim 
but as an argument (see para. 4.19 above) but this does not preclude the Panel from referring to 
Article 9.2(b)(iv) as context to Article 3.3 and with a view to understanding the scope of the European 
Communities' commitment. 
496 See also para. 4.192 above. 
497 European Communities' Regulation No. 1260/2001,   Preamble, recital (10) (emphasis added). WT/DS265/R 
Page 158  
 
 sugar per year, or its budgetary outlay commitment  of €499.1 million per year, with effect since 
2000/2001.
498 
(vi) Conclusion on the legal value and effect of the ACP/India sugar Footnote 
7.197  The Panel is therefore of the view that, even if it were to be considered as including a 
commitment limiting subsidization to 1.6 million tonn es of ACP/India equivalent sugar, which it does 
not, the content of Footnote 1 to Section II, Part IV  of the EC's Schedule is inconsistent and conflicts 
with Articles 3, 8, 9.1 and 9.2(b)(iv) of the Agreement on Agriculture  and as such cannot be read 
harmoniously with the provisions of the Agreement on Agriculture : it does not provide for any 
budgetary outlays, and subsidies provided to ACP/Indi a equivalent sugar have not been subject to any 
reduction.  Footnote 1 cannot therefore constitute a second component of the European Communities' 
overall commitment level for export subsidies on sugar.   
7.198  Consequently, the Panel finds that the content of  Footnote 1 is of no legal effect and does not 
enlarge or otherwise modify the European Comm unities' quantity commitment level specified in 
Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay 
commitment of €499.1 million per year, with effect since 2000/2001. 
3. Was the European Communities authorized to deviate from the Agreement on 
Agriculture 's basic obligations through a negot iated departure from the Modalities 
Paper? 
(a) Arguments of the parties499 
7.199  For the European Communities, Footnote 1 is a negotiated departure from the Modalities 
Paper.  The European Communities insists that export subsidy commitments, like tariff concessions, 
were the subject of detailed (and often very di fficult) negotiation during the Uruguay Round.  The 
European Communities' commitments, while appli cable to its exports, represent the negotiated 
balance of the varied interests of all  participants in the Uruguay Round.  In challenging the Footnote, 
the Complainants are trying to unsettle that balan ce.  For the European Communities, the claims and 
objections which the Complainants make in this proceeding were as available to them during the 
verification process as they are now.  Had they been raised during the verification process, and 
considered valid, the Members concerned could have negotiated a different balance of concessions.   
7.200  Moreover, in the context of its claim that the Co mplainants are acting inconsistently with their 
good faith obligation pursuant to Article 3.10 of the DSU , the European Commun ities argues that the 
Complainants were undeniably aware, by virtue, inter alia , of the very inclusion of the Footnote in the 
European Communities' export subs idy commitments (both in their draft and final form), of the 
existence of the European Communities' intended treatment of ACP/India sugar.  The European 
Communities provides correspondence in which the Eu ropean Communities' Ambassador is allegedly 
making clear that the European Communities neve r intended and never undertook any commitment to 
reduce its export subsidies of equivalent ACP/I ndia sugar and this was known and accepted by the 
other Members.  The European Communities adds al so that the Complainants never challenged the 
European Communities during the verification proc ess. Although the Complainants may have been 
silent at the time, today they deny  concluding any such agreements. 
                                                      
498 The European Communities draws a third analogy between the Footnote and the case of 
incorporated products, for which only one form of commitment (budgetary) was scheduled, as specifically 
envisaged in the Modalities Paper. Moreover, the Panel fails  to recognize any similarity between the content of 
Footnote 1 and "incorporated products".  The only provision of the Agreement on Agriculture  dealing with 
"incorporated" agricultural products is Article 11, which is of no relevance to the present dispute. 
499 See also paras. 4.207 et seq above.  WT/DS265/R 
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 7.201  The European Communities also argues that the Modalities Paper authorized Members to 
deviate from the Modalities Paper. 
7.202  The Complainants emphasized that the Europ ean Communities does not cite any relevant 
provision of the Modalities Paper that would have permitted it to adopt a lesser obligation than that 
expressed in the language of paragra phs XI and XII of that text.  Nor does the European Communities' 
assertion found support in Annexes 7 or 8 of the M odalities Paper.  Indeed, the Modalities Paper is 
predicated on basic multilateral commitments.  The reduction commitments are multilateral in nature 
and do not constitute negotiated concessions.  Unlike the access co mmitments, they were 'self-
contained' in regard to the balance of concessions.  
(b) Assessment by the Panel  
7.203  The Panel reviewed the evidence presented by th e parties in the context of the ACP/India 
Footnote and notes that at the earlier stages of the negotiations of the EC Schedule, Footnote 1 was 
not included in the first drafts and that there was no reference to sugar from the ACP countries and 
India.500  In the March 1992 EC Draft Schedule, there was no footnote.501  In the December 1992 EC 
Draft Schedule, a footnote was included but it was not the present ACP/India Footnote.502  It read:  
"the EC reserves the right to maintain flexibilit y of outlay and budgetary commitments." It would 
seem that at each stage, contracting parties specif ically rejected the European Communities' exclusion 
of ACP/India sugar from its sugar subsidy base as witnessed by the G-8 Technical Discussions on Agriculture Schedules in 1992 and bilateral meeti ngs between the European Communities and other 
countries (including Australia).
503  
7.204  The Panel notes that to support its conclusion that Members "did not object" or that they even 
"agreed" to the inclusion of the European Commun ities' Footnote, the European Communities relies 
on the fact that the cover letter signed by the Eu ropean Communities' Ambassador transmitting the 
European Communities' draft schedule underlined  the absence of any reduction commitment for 
ACP/India sugar.  For the European Communities, its  intentions were made clear.  In a letter of 
4 March 1992, providing the suppor ting tables on which the European Communities' export subsidy 
commitments were based, the European Communities stated: 504 
"On export competition, the Community has not included the volume of sugar 
corresponding to its imports of sugar from ACP countries.  The Community will not take commitments on this part of its sugar exports." 
7.205  The European Communities pres ented evidence that in December 1993 Australia was asking 
whether "ACP [sugar] would still be made without commitments, in relation to export 
commitments".
505  In doing so, the European Communities seems to imply that Australia was aware 
that ACP sugar would not be subject to reduction commi tments and would therefore have agreed to it.  
                                                      
500 Exhibit EC-5, EC Letter of 4 March 1992;  and European Communities' first written submission, 
Table 11.   
501 Exhibit EC-5, EC Letter of 4 March 1992;  and European Communities' first written submission, 
Table 11.   
502 Exhibit EC-4 on Draft schedule of commitments on 16 December 1992. 
503 Exhibit ALA-3, ALA-5, ALA-8, Australia’s Oral Statement to the first substantive Panel meeting, 
paras. 60-66, and Australia’s replies to the Panel's questi ons Nos 16 and 17 and EC-7: List of Bilateral Meeting 
EC/other participants: Australia re quests on 17 December 1992 that ACP sugar be included in reduction 
commitments.  
504 Exhibit EC–5, EC Letter of 4 March 1992;  and European Communities' first written submission, 
Table 11.   
505 Exhibit EC–8, EC Commission: minutes of th e meeting with Australia of 3 December 1993. WT/DS265/R 
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 However, Australia produced evidence that it had subsequently asked the European Communities to 
include commitments on all EC export subsidies on sugar.
506  
7.206  Soon after, the European Communities reiterated in  a letter addressed to the Director General 
of the GATT and to the Chairman of the TNC that it did not intend to make commitments with regard 
to ACP/India sugar.  On 14 December 1993 the European Communities subm itted a revised version 
of its Schedule and for the first time inserted a footnote in the draft Schedule to this effect.507  The 
cover letter again contained the statement: 508 
"On export competition, the European Communities have not indicated the volume 
and the budget outlays for sugar correspondi ng to its imports of sugar from ACP 
countries and India. The European Communitie s will not take commitments on this 
part of its exports."     
7.207  The same Footnote was included in the fina l version of the European Communities' 
Schedule.509  The European Communities considers therefore, that since Footnote 1 was adopted as 
proposed by the European Communities, without obj ection from the Complainants, it is legally valid 
and binding.  The European Communities also insi sts on the fact that a first draft Schedule of 
commitments on 16 December 1992 and a revised draft on 14 December 1993 were circulated to all 
participants in the Uruguay Round.   The other participants had ampl e opportunity to react to these two 
drafts and many did so, including the Complainants .  None of them, however, raised any question 
with respect to Footnote 1 to Section II, Part IV of the EC's Schedule.  The European Communities' 
Schedule, like those of the other participants , was submitted on 25 March 1994, following a process 
of verification which allowed all participan ts to check and control the commitments.510  Again, none 
of the Complainants, or any other participant, formally objected to the said Footnote. 
7.208  The Panel examines the evidence produced by Aust ralia and notes that the latter did not seem 
to accept this " fait accompli ".  Australia noted in a summary statement on 31 January 1994 that the 
above-mentioned EC offer contained a number of rema ining outstanding items, including the fact that 
the EC sugar commitments in the EC's Schedu le did not include export subsidy reduction 
commitments for sugar exports subsidized by direct  export restitutions (corresponding to imports of 
ACP/India sugar).511   The Panel notes that on 23 Februa ry 1994 Australia and the European 
Communities issued a Joint Communiqué from the "Australia-European Commission Ministerial 
Consultations"512 which reported on the consultations and which, according to the European 
Communities, illustrated that the European Comm unities and Australia had "settled outstanding 
                                                      
506 Exhibit ALA-5, Australia's Letter of 10 December 1993 to EC (page 4). The Panel notes that the EC 
submitted the same document in Exhibit EC-24 but the Pane l notes that the page which referred to sugar as an 
issue for which Australia was requiring settlement was not reproduced.  In its Interim Review comments the European Communities informed the Panel that this omission was inadvertent. 
507 Exhibit EC-6, EC Letter of  14 December 1993 to GATT. 
508 Exhibit EC–6, EC Letter of  14 December 1993 to GATT. 
509 Exhibit EC–9, Export Subsidy in Schedule LXXX-EC. See also Exhibit EC–1 and Exhibit COMP-
16 on Schedule CXL. 
510 See Appellate Body Report on EC–Computer Equipment , paras. 109-110. The Appellate Body 
emphasized that tariff commitments "represent a common agreement among all Members" and that "any 
clarification of the scope of tariff concessions that may be required during the negotiations is a task for all 
interested parties".  
511 Exhibit ALA-8, UR-Aus summary statement 31 January 1994 where Australia outlined that the EC 
offer of 14 December 1993 has a number of outstanding issues, including that it  "does not include subsidies by 
direct export restitutions (corresponding to its imports  of sugar from ACP countries and India) which is 
inconsistent with the Final Act and open to challenge" (page 2). 
512 Australia-European Commission Ministerial Consultations, 23 February 1994, Joint Communiqué.  WT/DS265/R 
 Page 161 
 
 
 items".513  For Australia, this Press Communiqué does not  include all outstanding or settled issues 
between the parties and, in any case, this Press Comm uniqué does not have the status of a record of 
settlement of negotiations.514 
7.209  Then , the European Communities wrote to th e Deputy Director of the GATT in March 1994 
that it would make some changes to its Schedul e (though not necessarily all the changes requested by 
the contracting parties).515  The European Communities nonetheless continued to include the Footnote 
in its Schedule and from 1995 onwards  notified to the WTO Committee on Agriculture that the data 
on its subsidized exports "does not include exports  of sugar of ACP/Indian origin on which the 
Community has no reduction commitment."516 
7.210  The Panel also examined ev idence produced by the Europ ean Communities arguing that 
Australia was aware that ACP/India sugar had not been included in the reduction commitments made 
by the European Communities.517  The Panel considers that the fact that Australia knew and made 
public its knowledge that ACP/Indi a sugar had not been made part of the reduction commitments does 
not mean that Australia agreed with the situation.   The evidence and submissions produced by all 
parties show that the Complainants did not agree to any European Communities' deviations from the 
Agreement on Agriculture .  On the contrary, Australia presented evidence that it had objected to such 
exclusion from the very beginning of its bilatera l discussions with the Euro pean Communities, while 
the other Complainants assert that they had never agreed to such an insertion and deviation from the 
Agreement on Agriculture .   
7.211  In this respect, the Panel refers to the findings of the panel in EC – Bananas (Article 21.5 – 
EC) stating that silence or failure to challenge a measure by a Member does not create the 
presumption that said Member has agreed that th e measure at stake is consistent with the WTO 
Agreement.   The Panel held: 
"We agree with the European Communities that there is normally no presumption of 
inconsistency attached to a Member's measures in the WTO dispute settlement system.  At the same time, we also are of the view that the failure, as of a given point 
in time, of one Member to challenge another Member's measures cannot be 
interpreted to create a presumption that th e first Member accepts the measures of the 
other Member as consistent with the WTO Agreement. "
518 
7.212  In the Panel's view, even assuming that th e participants in the Uruguay Round were 
authorized to negotiate departures from the Moda lities Paper which is not clear, such negotiated 
departure would only be relevant to the extent th at it is reflected in the European Communities' 
Schedule and is WTO consistent.519   The acknowledgment of the existence of Footnote 1 or the 
absence of agreement to the inclusion of said F ootnote does not, for the Panel, equal acquiescence on 
the part of the interested parties.  The Panel recalls that in Canada – Dairy , the Appellate Body 
considered the negotiations which took place with re gard to Canada's and the United States' respective 
                                                      
513 European Communities' second oral statement, para. 94. 
514 Australia's second written submission, para. 84. 
515 Exhibit ALA-7, EC Letter of 25 March 1994 to GATT. 
516 See paras. 7.174-7.178. 
517 Exhibit EC–12, Australian brochure on July 1994, page 38; and Exhibit EC 14-ABARE Report, 
page 39. 
518 Panel Report on EC – Bananas III (Article 21.5 – EC ), para. 4.13. 
519 The Panel recalls inter alia  that pursuant to Articles 3.2 and 19.2 of the DSU panels "cannot add to 
or diminish rights and obligations provided in the covered agreements".  WT/DS265/R 
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 Schedules and highlighted that though Canada's  commitment had been made unilaterally, they were 
the result of lengthy negotiations :
520  
"In considering 'supplementary means of inte rpretation', we observe that the 'terms 
and conditions' at issue were inco rporated into Canada's Schedule after lengthy 
negotiations between Canada and the United States , regarding reciprocal market 
access opportunities for dairy products.  Both Canada and the United States agree that 
those negotiations  failed to produce any agreement between them."521  
7.213  Unlike the situation highlighted by the Appellate Body in Canada – Dairy , the parties to the 
present dispute did not negotiate the inclusion of the Footnote and did not agree or come to an understanding on the value of such exclusion.  There is no evidence of any relevant exchanges 
between the parties or any other form of negotiati on, let alone agreement on this subject matter.   
7.214  Moreover, the Panel is also of the view that  a departure from the basic obligations of the 
Agreement on Agriculture , in the form of a footnote in the EC's Schedule, could not be considered a 
"waiver" agreed to by the Uruguay Round participants.   
7.215  Under the WTO, waivers are strictly regulated and subject to the procedures of Article IX:4 
of the WTO Agreement , including annual reporting to the General Council.  This is obviously not the 
case with Footnote 1 to the European Communities' Schedule, Section II, Part IV.  Already under the 
GATT, the panel in US - Sugar Waiver stated: 
"The Panel took into account in its examina tion that waivers are granted according to 
Article XXV:5 only in 'exceptional circumstan ces', that they waiv e obligations under 
the basic rules of the General Agreemen t and that their terms and conditions 
consequently have to be interpreted narrowly."
522 
7.216  In the Panel's view, the evidence and explanati ons submitted by the Complainants sufficiently 
refute the presumption, if any, that silence or l ack of challenge would ha ve amounted to agreement 
that Footnote 1 was in conformity with the WTO Agreement  or constituted an agreed departure from 
the European Communities' basic obligations of the Agreement on Agriculture .   
7.217  The Panel bears in mind, as highlighted by the Appellate Body in EC – Hormones , that the 
duty to make an objective assessment of the facts under Article 11 of the DSU  is, among others, "an 
obligation to consider the evidence presented to a pa nel and to make factual findings on the basis of 
that evidence"523 and the fact that according to the Appella te Body it is "generally within the 
discretion of the panel to decide which evidence it chooses to utilize in making findings."524 
7.218  The Panel has examined all the evidence presented to it and has made use of its discretion. In 
doing so, the Panel takes into account that the Co mplainants have maintained their opposition to 
Footnote 1 since the inclusion of the Footnote in  the EC Schedule, as evidenced by correspondence 
and continuous opposition to the EC sugar regime throughout the years.  Furthermore, the Panel 
considers that Australia and the other Complainan ts, even if they were aware of the purported 
exclusion of ACP/India equivalent sugar from the European Communities' reduction commitments 
and remained silent, could not in any event have ag reed to such an exclusion on behalf of the WTO 
                                                      
520 In addition, the commitment did not limit access to the quota as such and did not diminish the rights 
of the United States.  See Panel Report on Canada – Dairy , footnote 530 to para. 7.155. 
521 Appellate Body Report on Canada – Dairy , para. 139 (footnotes omitted). 
522 GATT Panel Report on US – Sugar Waiver , para. 5.9. 
523 Appellate Body Report on EC –Hormones , para. 133. 
524 Appellate Body Report on EC – Hormones , para. 135.  WT/DS265/R 
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 membership as it would have nullified or impaired the rights of WTO Members, other than the 
Complainants.  If the Panel were to sanction su ch a proposition it would be acting contrary to 
Articles 3.2 and 19.2 of the DSU  which deny panels the authority to "add to or diminish the rights and 
obligations provided in th e covered agreements". 
7.219  The Panel notes finally the distinction between the present dispute and the situation prevailing 
in the EC – Bananas III  dispute where the WTO-inconsistent measures challenged were "required" by 
the Lomé Convention some of which benefited from a WTO waiver.525  In the present dispute, the 
EC/ACP Waiver authorizes the European Communities to adopt measures inconsistent with Article I 
of the GATT 1994 in favour of imports of suga r from ACP countries but the Cotonou Agreement or 
Sugar Protocol do not require the European Commun ities to subsidize exports of sugar imported from 
the ACP countries, even less so if this is inconsistent with the Agreement on Agriculture . 
7.220  The Panel concludes therefore that particip ants in the Uruguay Round and WTO Members did 
not agree to the European Commun ities' inclusion of Footnote 1 as an agreed departure to the 
European Communities' basic obligations under the Agreement on Agriculture . 
4. Conclusion on the European Communities' co mmitment level for exports of subsidized 
sugar 
7.221  The Panel is therefore of the view that, even if it were to be considered to include a 
commitment limiting subsidization for 1.6 million t onnes of ACP/India equivalent sugar, which it 
does not, Footnote 1 to Section II, Part IV of the EC's Schedule is inconsis tent and conflicts with 
Articles 3, 8 and 9 of the Agreement on Agriculture  and as such cannot be read harmoniously with the 
provisions of the Agreement on Agriculture .  The content of Footnote 1 cannot constitute a second 
component of the European Communities' overall co mmitment level for export subsidies on sugar.  
Moreover, Footnote 1 cannot constitute an agreed departure from the European Communities' basic 
obligations under the Agreement on Agriculture . 
7.222  The Panel finds, therefore, that the content of  Footnote 1 is of no legal effect and does not 
enlarge or otherwise modify the European Comm unities' quantity commitment level specified in 
Section II, Part IV of its Schedule to be 1,273,50 0 tonnes of sugar per year, or its budgetary outlay 
commitment of €499.1 million per year, with effect since 2000/2001.   
E. IS THE EUROPEAN COMMUNITIES EXPORTING SUBSIDIZED SUGAR IN QUANTITIES EXCEEDING 
ITS LEVEL OF COMMITMENT CONTRARY TO ARTICLES 3, 8 AND 9 OF THE AGREEMENT ON 
AGRICULTURE  ? 
1. The burden of proof of Article 10.3 of the Agreement on Agriculture 
7.223  The Panel recalls that the Complainants have claimed that the European Communities is in 
breach of Articles 3 and 8, alleging that the European Communities is subsidizing and exporting a scheduled product, in casu  sugar, in amounts exceeding its scheduled commitment level.  
7.224  In this context, the Complainants have i nvoked the application of Article 10.3 of the 
Agreement on Agriculture
526  
7.225  Article 10.3 of the Agreement on Agriculture  provides special rules on burden of proof: 
                                                      
525 Waiver decision WT/MIN(01)/15. 
526 See Section IV.C above. WT/DS265/R 
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 "Any Member which claims that any qua ntity exported in excess of a reduction 
commitment level is not subsidized must establish that no export subsidy, whether 
listed in Article 9 or not, has been grante d in respect of the quantity of exports in 
question." 
7.226  With regard to Article 10.3, the Appellate Body in Canada – Dairy (Article 21.5 – New 
Zealand and US II)  has stated that: 
"Consistent with the usual rules on burden of  proof, it is for the complaining Member 
to prove the first part of the claim, namely that the responding Member has exported an agricultural product in quantities that exceed the responding Member's quantity commitment level.  
(...) The significance of Article 10.3 is that , where a Member exports an agricultural 
product in quantities that exceed its quantity commitment level, that Member will be 
treated as if it has granted WTO- inconsistent   export subsidies, for the excess 
quantities, unless the Member presents adequate evidence to "establish" the 
contrary."
527  
7.227  Article 10.3 is such that once the Complainan ts have factually proven that the European 
Communities is exporting sugar in quantities exceeding its commitment levels, there is a shift in the 
burden of proof and it is then for the European Communities to prove that the sugar it exports in quantities exceeding its commitment level is "not" subs idized.  "Article 10.3 thus acts as an incentive 
to Members to ensure that they are in a positi on to demonstrate compliance with their quantity 
commitments under Articles 3.3 and 8 of the Agreement on Agriculture .  This reversal of the usual 
rules on the burden of proof obliges the European  Communities to "bear the consequences of any 
doubts concerning the evidence of export subsidization."
528   
7.228  The Panel notes the European Communities' argument that "the [C]omplainants would 
impose an impossible task of identifying all the c onceivable export subsidies that it does not grant."529   
7.229  In the Panel's view, this is not the Europ ean Communities' task.  Instead, the European 
Communities must provide prima facie evidence that excess exports of sugar are not subsidized.  A 
respondent (as the European Communities is in the pr esent dispute) should be able to, or may be able 
to, make a demonstration that the measure is not  caught by one or other of the definitions in 
Article 9.1(a) to (f) of the Agreement on Agriculture .  The respondent should also be able to 
demonstrate that the challenged measure is not  a "subsidy contingent upon export performance" 
within the meaning of Article 1(e) of the Agreement on Agriculture . The European Communities 
should be aware of its obligations under the Agreement on Agriculture  and should also be cognisant of 
its subsidies programmes.  This general principl e is recognized also in Article XVI:4 of the WTO 
Agreement  which provides that "Each  Member shall ensu re the conformity of its laws, regulations 
and administrative procedures with its obligations  as provided in the annexed Agreements".  The 
requirements of Article 10.3 of the Agreement on Agriculture  are based on the assumption that 
Members are aware of the subsidies they provide to their own producers.  If there are, in fact, no 
subsidies, the European Communities should be able to make this demonstration. 
                                                      
527 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 72 
and 74; see also paras. 67 to 75 of the same Appellate Body Report.  
528 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 74. 
529 European Communities' reply to the Panel question No. 4.  WT/DS265/R 
 Page 165 
 
 
 2. The application of the special rule on the burden of proof to this dispute530 
(a) The quantitative aspect 
7.230  In the present dispute, the Complainants have  provided prima facie evidence that since 1995, 
the European Communities has been exporting sugar in quantities exceeding its commitment level.  In 
particular, while the European Communities' e xport subsidies commitment level was for 1,273,500 
tonnes of sugar for the 2000/2001 marketing y ear, its actual sugar exports amounted to 4,097,000 
tonnes, that is some 2,823,500 tonnes in excess of its commitment level.531  
(b) The subsidization aspects of the claim 
7.231  Having reached the conclusion that the Europ ean Communities has exceeded its commitment 
level for exports of subsidized sugar every year since 1995 and in particular in the marketing year 
2000/2001, the Panel now proceeds to examine the European Communities' argumentation that its 
excess exports of sugar are not subsidized.  The Pa nel agrees with the Compla inants that the essential 
fact is that the total quantity of sugar exported by the European  Communities exceeds its commitment 
level for sugar.  The Panel understands that sugar in excess of the European Communities' 
commitment level is essentially composed of AC P/India equivalent sugar and C sugar.  The 
Complainants argue that ACP/India equivalent sugar,  and C sugar, are respectively subsidized within 
the meaning of Article 9.1(a) and (c) of the Agreement on Agriculture .  The Panel therefore proceeds 
to examine the Complainan ts' arguments in turn.  
3. Has the European Communities demonstrated that its exports of ACP/India equivalent 
sugar are not subsidized? 
(a) Arguments of the parties532 
7.232  The Complainants claim that in each of the last five years, the European Communities' total 
export of sugar exceeds its commitment levels. For in stance, the Complainants argue that during the 
marketing year 2001-2002, the European Commun ities had exported 1,725,100 tonnes of ACP/India 
equivalent sugar alone: such subsidized exports  were in excess of the European Communities' 
scheduled commitment level of 1,273,500 tonnes.   
7.233  The Complainants recalled that, if the Europ ean 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.  The 
Complainants submitted that the European Co mmunities granted export subsidies listed in 
Article 9.1(a) of the Agreement on Agriculture  to exports of ACP/India equivalent sugar.  The export 
refunds granted to ACP/India equiva lent sugar were the same per un it as the export refunds granted to 
A and B quota sugar and thus these payments clear ly 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", w ithin the meaning of Article 9.1(a) of the Agreement 
                                                      
530 See also the parties' arguments with respect to the burden of proof in paras. 4.25-4.35 above. 
531 EC sugar commitment levels as stated in Section II of Part IV of the European Communities' 
Schedule CXL of the EC-15. Actual export quantities taken from "Notification concerning export subsidy 
commitments (Tables ES:1 to ES:3). It is noted that  the EC notifications of its commitment levels were 
expressed as "white sugar equivalent" and its notified total exports are expressed in "product weight basis".  Any resulting differentiations in variables will not have an ef fect on the Panel's analysis of the EC's commitments 
and exportation beyond its commitment levels because the amount of act ual exports will still be well above 
commitment levels regardless of any change as a result of any calibration between "white sugar equivalent" and "product weight basis" figures.   See also Annex C. 
532 See also paras. 4.175-4.180 above. WT/DS265/R 
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 on Agriculture .  Consequently, the European  Communities acted inconsistently with its obligations 
under Articles 3.3 and 8 of the Agreement on Agriculture . 
7.234  The European Communities does not deny that AC P/India equivalent sugar benefits from the 
same level of export refunds  per unit as A and B s ugar do.  It claims essentially that the amount of 
ACP/India equivalent sugar that it exports is incl uded in its commitment level pursuant to Article 3.3 
of the Agreement on Agriculture .  
(b) Assessment by the Panel  
7.235  The Panel recalls that the European Communiti es does not deny the Complainants' allegation 
that ACP/India equivalent sugar benefits from the same level per unit of export refunds as A and B 
sugar do;  the European Communities does not refute either the Complainants' claim that exports of 
ACP/India equivalent sugar are subsidized w ithin the meaning of Article 9.1(a) of the Agreement on 
Agriculture  which reads as follows: 
"The following export subsidies are subj ect to reduction commitments under this 
Agreement:  
(a) the provision by governments or their agencies of direct subsidies, including 
payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to 
a cooperative or other association of such  producers, or to a marketing board, 
contingent on export performance." 
7.236  The Panel recalls that "a prima facie case is one  which, in the absence of effective refutation 
by the defending party, requires a panel, as a matter of  law, to rule in favour of the complaining party 
presenting the prima facie case".
533  
7.237  Pursuant to Article 10.3 of the Agreement on Agriculture , the Panel reaches the conclusion 
that the European Communities has not demonstrated that its exports of ACP/India equivalent sugar 
are not subsidized, as the evid ence indicates that exports of what the European Communities 
considers to be ACP/India equivalent sugar r eceive export subsidies within the meaning of 
Article 9.1(a) of the Agreement on Agriculture .    
7.238  The Panel concludes that since 1995, the Eur opean Communities has been exporting what it 
considers to be ACP/India equivalent sugar with export subsidies in quantities exceeding its 
commitment level of 1,273,500 tonnes.  In doi ng so the European Communities has been acting 
inconsistently with Articles 3 and 8 of the Agreement on Agriculture .  
4. Has the European Communities demonstrated  that its exports of C sugar are not 
subsidized? 
(a) Introduction 
7.239  The Panel recalls that since 1995 the European Co mmunities' total exports of sugar far exceed 
its commitment levels.  In particular, since the marketing year 2000/2001, the European Communities' 
commitment level is for 1,273,500 tonnes of sugar while  its total exports of sugar for that same year 
were 4,097,000 tonnes (some of which were ACP/ India equivalent sugar already found to be 
inconsistent with Articles 3 and 8 of the Agreement on Agriculture .) 
                                                      
533 Appellate Body Report on EC – Hormones , para. 104.  WT/DS265/R 
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 7.240  In Canada – Dairy (Article 21.5 – New Zealand and US II) , the Appellate Body interpreted 
Article 10.3 of the Agreement on Agriculture  to mean that "where a Member exports an agricultural 
product in quantities that exceed its quantity commitment  level, that Member will be treated as if it 
has granted WTO- inconsistent   export subsidies, for the excess quantities, unless the Member presents 
adequate evidence to 'establish' the contrary."534  The Panel has already reached the conclusion that 
the European Communities' exports of its ACP/Indi a equivalent sugar are inconsistent with its 
obligations under Articles 3 and 8 of the Agreement on Agriculture.535  The Panel examines hereafter 
whether the European Communities has proven satisfact orily that its exports of C sugar are not and 
were not subsidized in any manner.   
(b) Arguments of the parties536 
7.241  The Complainants argue that the European Co mmunities has created a legal framework that: 
(i) encourages the overproduction of sugar;  (ii) seg regates the export market for C sugar completely 
from the domestic market by imposing sanctions for fa ilure to export such sugar;  and (iii) generates 
the profits and capital used to fund the below produc tion cost exports of that sugar.  This legal 
framework contemplates various payments with in the meaning of Article 9.1(c) of the Agreement on 
Agriculture  in relation to C sugar produc tion and exports.  The Complainants mainly contend that 
EC sugar producers receive a payment as evidenced by  the fact that C sugar is being exported at 
prices that do not reflect its proper value because th e price received does not cover its average total 
cost of production. Accordingly, C sugar is receivi ng a payment.  The Complainants also refer to 
payments by way of below cost of production sales of C beet to C sugar producers.  Under the above 
analysis, the Complainants argue that C beet, an inpu t in C sugar, priced at below cost of production, 
serves as a payment resulting in an export subs idy as defined by Article 9.1(c) of the Agreement on 
Agriculture .  
7.242  The European Communities responds essentially that C sugar does not involve any payment 
within the meaning of Article 9.1(c) of the Agreement on Agriculture .  It argues that export sales of 
C sugar into the world market is the only form  of alleged payment that is brought by the 
Complainants before the Panel within the Panel's te rms of reference and finds that cost of production 
is not a relevant benchmark for such a payment in  this dispute.  The European Communities argues 
further that world market prices should be the rele vant benchmark in this dispute and, accordingly, 
does not find any payments.  In addition to arguing that the other forms of alleged payment that the 
Complainants have put forward are outside the Pane l's term of reference, the European Communities 
claims that the alleged payments do not offer any benefits to EC sugar producers.537 
7.243  The Complainants argue that there is a dem onstrable link between the payments and the 
governmental action in the present dispute. They argue  that the payments that allow C sugar to be 
produced below its cost of production arise from gove rnmental action regulating the entire EC sugar 
industry.  They claim that EC sugar producers can make the below cost of production sales of C sugar 
for export by way of their participation in th e government regulated domestic market.  The 
Complainants argue further that all the payments received for C sugar are on the export since C sugar 
is a product that must be exported.  The Europ ean Communities responds that the benefits to the 
EC sugar industry from the EC sugar regime would exist regardless of the export of C sugar and are 
not contingent on the production or exportation of C sugar.   
                                                      
534 Appellate Body on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 73. 
535 See para. 7.238 above. 
536 See also Section IV.D. of this Panel Report. 
537 See paras. 4.44 and 4.51 above. WT/DS265/R 
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 (c) Assessment by the Panel 
(i) The Panel's understanding of the EC sugar regime 
7.244  Council Regulation (EC) No. 1260/2001 sets out ru les to promote and protect the EC sugar 
industry.  One main feature of the EC sugar regi me is the establishment of price support for domestic 
sugar including intervention prices fo r sugar, supply controls by way of quotas, domestic market 
supply management, import restricti ons and export subsidization.  Th e EC sugar regime also sets out 
the basic price and the minimum price for beet, import and export licences, levies, export refunds; quotas and import restrictions; and preferential import arrangements.   
7.245  The intervention price (minimum guaranteed price) for sugar is approximately three times the 
price of world market prices.
538  The intervention price operates as a safety net that provides for 
intervention agencies to purchase EC quota sugar at a guaranteed price if sugar prices on the domestic 
market fall below a certain level.  Interven tion purchasing has occurred only once in 25 years539 as the 
regulatory aspects of the EC sugar regime controllin g the amount of sugar sold in domestic markets 
and protection from outside competition enables quot a sugar to be sold at prices well above the 
intervention price.  
7.246  The EC Regulation provides rules for three different categories of sugar, i.e. A and B quota 
sugar and C sugar which is basically excess sugar.  A, B and C sugar are produced, respectively, from 
A, B and C beet, the latter being u sed exclusively to produce C sugar. 
7.247  A basic price for quota beet of standard quality540 is derived from the intervention price of 
white sugar and has been established at €47.67 per tonne.541  The Regulation also establishes 
minimum prices for A and B beet paid by A and B sugar producers to A and B beet growers.  The 
minimum price of A beet has been set at €46.72 per tonne and that of B beet at €32.42 per tonne.542  
Sugar producers are required to pay growers at least the minimum price for A and B beet they process into sugar.  The price paid by the producers for C be et is generally lower than that paid for A and B 
beet.
543  There is no regulated minimum price for C beet.  However, because growers of C beet are 
also growers of A and B beet and because C beet can  only be used in C sugar, which in turn belongs 
to the same production line as A and B quota sugar, the EC sugar regime ensures that the sale of 
under-priced C beet to C sugar producers is an inte gral part of the governmental regulation of the 
sugar market.  Indeed, the production of C beet w ill depend on the needs of C sugar producers (since 
C beet can only be used in C sugar)544.  Moreover, to be competitive  C sugar must be exported at 
world price.  Because of the low world price relative to C sugar cost of production, C sugar producers 
                                                      
538 The intervention price valid for standard quality sugar is €63.19/100 kg for white sugar and 
€52.37/100 kg for raw sugar.  See Article 1 of Council Regulation (EC) No. 1260/2001. 
539 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 5. 
540 For the definition of "standard quality" of beet, see Annex II of the Council Regulation (EC) No. 
1260/2001. 
541 Article 3 of Council Regulation (EC) No. 1260/2001. 
542 Articles 4 and 5 of Council Regulation (EC) No. 1260/2001. 
543 Article 21 of Council Regulation (EC) No. 1260/2001. 
544 The Panel is aware of the fact that strictly speak ing there are no "C sugar producers" as such; there 
are no sugar producers that produce only C sugar.  C sugar is produced by the producers of A and B sugar.  
Therefore "C sugar producers" are EC sugar producers who produce C sugar in addition to A and B sugar.  The 
same is true for C beet.  There are no sugar farmers who grow only C beet.  C beet is grown by farmers of A and 
B beet.  Therefore "C beet growers" are the EC beet farm ers who also grow C beet, in addition to A and B beet.  
In the following section since the Panel examines the spec ific costs of growing or farming of C beet as well as 
the costs of production of C sugar, the Panel refers to C beet growers or farmers and C sugar producers with a 
view to emphasising the Panel's focus on C beet and C sugar.   WT/DS265/R 
 Page 169 
 
 
 exercise pressure on C beet growers so that C beet is sold to C sugar producers at reduced prices.  
Furthermore, various aspects of the sugar regime provide the beet growers with an incentive to 
produce beet beyond their A and B quota levels, as C beet.  The discounted prices for C beet below its cost of production and the incentive for beet grower s to produce C beet serve as an advantage for the 
export production of C sugar.     
7.248  In accordance with Article 15 of the EC Regulation, a basic production levy is charged to 
manufacturers on their production of A and B sugar.
545  The levy charged on A quota sugar is set at 
2 per cent while the levy on B quota sugar is set  at 37.5 per cent.  These levies are used inter alia  to 
fund export refunds given to exported A and B quo ta sugar under the co-financing principle of the 
EC sugar regime.546 The levies charged are split 42 per cent to  sugar producers and 58 per cent to beet 
farmers.547 
7.249  The export refunds under the EC sugar regime  cover the difference between the Community 
intervention price and the export price of EC quota sugar (that is world price).548  Export refunds are 
high, ranging from €443 per tonne of sugar for th e 2001/2002 marketing year and €485 per tonne of 
white sugar for the 2002/3 marketing year.  The expo rt refund is well above the world price offered 
for exported quota sugar, which the EC Commission reports was €280 per tonne of white sugar in the 
marketing year 2001/02.549  Export refunds have been afforded to between 2.5 and 2.6 million tonnes 
of white sugar annually.550 The above price controls and restric tions on the domestic market supply by 
way of quota assignments, strict import controls a nd the obligation to export sugar produced in excess 
of quotas, as well as export refunds on exports of qu ota sugar, result in delivering increased revenue 
to A and B quota holders. Ultimately, the price of A quota sugar is approximately 350 per cent of 
world prices and B quota sugar is priced at approximately 250 per cent of world prices.551   
7.250  The high rate of export refunds to such a signi ficant amount of exported sugar again adds to 
the revenues received by EC sugar producers from quota sugar sales, and may constitute one of the 
source of the spill-over effects of the EC sugar regime into the export production of C sugar. 
(ii) Article 9.1(c) of the Agreement on Agriculture 
7.251  In this dispute the Panel examines whether e xports of C sugar are subsidized within the 
meaning of Article 9.1(c) of the Agreement on Agriculture . 552  Article 9.1(c) requires the 
                                                      
545 See paragraph 3 of Article 15 of the Council Regulation (EC) No. 1260/2001. 
546 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 13; levies only partia lly fund the export refunds for A and B quota sugar. 
547 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 13. 
548 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 20. 
549 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 20. 
550 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 20. 
551 "Sugar in the European Union: sugar production costs and cross-subsidies to C sugar exports" by 
Roger Rose, Exhibit ALA-1, p. 4 
552 Article 9.1(c) of the Agreement on Agriculture  reads as follows: 
 
Export Subsidy Commitments 
 
1. The following export subsidies are subject to reduction commitments under this 
Agreement: (...) (c) payments on the export of an agricultural product that are financed by virtue of 
governmental action, whether or not a charge on the public account is involved, including WT/DS265/R 
Page 170  
 
 demonstration of three elements.  First, it require s that "payments" be made.  Second, that those 
payments be made "on the export of an agricultura l product".  And third, that those payments be 
"financed by virtue of governmental action".   
7.252  The Complainants point to what they consider to be multiple "payments" which would be 
made "on export" and be "financed by virtue of go vernmental action."  The Complainants submit that 
the EC sugar regime involves a series of payments in cluding:  (a) payment in the form of below costs 
C beet sales to C sugar producers/exporters;  (b) pa yment in the form of cross-subsidization resulting 
from the profits made on sales of A and B sugar used  to cover the fixed costs of the production/export 
of C sugar; (c) payment in the form of exports of C sugar below total costs of production;  and 
(d) payments in the form of high prices paid by consumers.
553 
7.253  The Panel examines two of the payments (a) a nd (b) mentioned above. For each of the alleged 
payments, the Panel first examines whether there is  indeed a payment.  Then, the Panel discusses 
whether the alleged payments are "on export" and l astly, whether they are financed by virtue of 
governmental action.  
(iii) Does the sale of C beet to C sugar produ cers constitute a payment on export financed by 
virtue of governmental action? 
Is there a payment?  
7.254  The Complainants argue that, as with milk as an  input for the production of dairy products in 
Canada – Dairy , C beet, as the main input for the production of C sugar, is sold to C sugar 
producers/exporters at prices well below the total av erage cost of production of such C beet and, 
therefore, through this transaction provides C suga r producers with a payment-in-kind within the 
meaning of Article 9.1(c).   
7.255  The European Communities does not deny that C beet  is sold below the total average cost of 
beet growers but does not actually discuss whether sales of C beet to C sugar producers provide a 
payment-in-kind or a transfer of economic resource s in favour of C sugar producers.  In fact, the 
European Communities wrote in its first submission that " Canada – Dairy  stands for the proposition 
that the provision of an agricultural input belo w its average total costs of production constitute a 
"payment" to the processor of that input."554  Although in response to a question by the Panel, the 
European Communities attempts to raise doubts on whet her there is a sufficient "nexus", or degree of 
governmental action involved in the sales of C beet , the European Communiti es' main argument is 
that the matter is outside the Panel's terms of reference.555  The Panel has already dealt with the 
European Communities' procedural objection in paragr aph 7.24 to 7.37, concluding that the parties 
arguments relating to C beet are with in its terms of reference.    
7.256  The Panel examines therefore whether the sales of  C beet to producers of C sugar constitute a 
payment within the meaning of Article 9.1(c) of the Agreement on Agriculture .  
7.257  As recognized by the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand and 
US), Article 9.1(c) does not expressly identify any one criterion to be used in all situations of 
determining the existence of payment.  The Ap pellate Body in that case established that an 
                                                                                                                                                                     
payments that are financed from the proceeds of a levy imposed on the agricultural product 
concerned or on an agricultural product from which the exported product is derived. 
553 See for instance, Australia’s first written submissi on, para. 111-113 and Australia’s replies to Panel 
questions Nos. 46, 47 and 48; see also para. 4.39 above. 
554 European Communities' first written submission, para. 53. 
555 See paras. 7.3 and 7.18 above.  WT/DS265/R 
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 examination of whether a measure involves a paym ent must be determined on a case by case basis and 
by scrutinizing "the facts and circumstances of a disputed measure".556  The Appellate Body decided 
there is no one benchmark that would apply to all s ituations and examinations of the existence of a 
subsidy.557  
7.258  In the first Canada – Dairy  dispute, the Appellate Body conc luded that "the word 'payments' 
[in 9.1(c)] embraces "payments-in-kind"558 and "specifically contemplat es that the export subsidy may 
be granted in a form other than a money payment"559, "including revenue foregone".560  Revenue or 
value may be foregone in instances when the price charged by the producer of the product is less than the product's proper value  to the producer.  In determining the  proper value  to the producer in 
assessing whether a transfer of economic resource has taken place, a "payment" analysis "requires a 
comparison between the price actually charged by the provider of the goods or services … and some 
objective standard or benchmark which reflects the proper value  of the goods or services to their 
provider ... ."
561  The Appellate Body insisted that the standa rd to determine whether there is a transfer 
of economic resources must be objective and based on  "the value of the milk" to the producer.   
7.259  In looking for an appropriate benchmark to  measure the proper value of commercially 
exported milk (CEM milk), the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand and 
US) relied on the cost of production of such milk.  The Appellate Body determined that if the 
producers of milk sell their milk below their total average cost of production, this loss must be financed from some other sources including by virtue of governmental action. 
"Although the proceeds from sales at domestic or world market prices represent two 
possible measures of the value of milk to the producer, we do not see these as the 
only possible measures of this value.  For any economic operator, the production of 
goods or services involves an investment of economic resources.  In the case of a milk producer, production requires an investment in fixed assets, such as land, cattle and milking facilities, and an outlay to meet  variable costs, su ch as labour, animal 
feed and health-care, power and administration.  These fixed and variable costs are 
the total amount which the producer must spend in order to produce the milk and the 
total amount it must recoup, in the long-term, to avoid making losses.  To the extent 
that the producer charges prices that do not recoup the total cost of production, over 
time, it sustains a loss which must be finan ced from some other source, possibly "by 
virtue of governmental action. "
562(emphasis added) 
7.260  For the Appellate Body, the average total co st of production takes best into account the 
"motivations of the independent economic operato r who is making the alleged 'payments'" and the 
value of milk to it.563  If the sale is made at below the to tal cost of production of the domestic 
                                                      
556 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 76. 
557 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 76. 
558 Appellate Body Report on Canada – Dairy , para. 109. 
559 Appellate Body Report on Canada – Dairy , para. 109. 
560 Appellate Body Report on Canada – Dairy , para. 112.  Appellate Body Report on  Canada – Dairy 
(Article 21.5 – New Zealand and US ), para. 73.  Later on in the US – FSC  dispute, at para. 108, the Appellate 
Body clarified the use of the term "revenue forgone": "We held, in  Canada – Milk , that "export subsidies" 
under the Agreement on Agriculture  may involve, not only direct payments, but also " revenue foregone ".  We 
believe, however, that in disputes brought under the  Agreement on Agriculture , just as in cases under 
Article 1.1(a)(1)(ii) of the  SCM Agreement , it is only where a government foregoes revenues that are " otherwise 
due" that a "subsidy" may arise."  Since we are in the pr esent dispute referring to the fact that sales do not 
represent the proper value to producers, we  will use the expression "value foregone". 
561 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 74. 
562 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 87. 
563 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 92. WT/DS265/R 
Page 172  
 
 producers of that product, there is a transfer of economic resources from the producers of the input 
product in favour of the processors/exporters of the said product.  Hence, the Appellate Body 
concluded that the appropriate "ben chmark" to determine the proper value of the milk was the average 
total cost of production of the subject milk.  Hence, the objective sta ndard for identifying the 
existence of payments focused on wh ether the CEM milk was priced at below the cost of its 
production .   
7.261  In the present dispute, similar to that in Canada – Dairy (Article 21.5 – New Zealand and 
US), the Panel is examining whether the producers, he re C beet growers, forego a portion of their 
proper value by way of the below total costs price charged to the producers of C sugar, or in other 
words whether C beet growers transfer economic re sources, discounted C beet, in favour of C sugar 
producers/exporters.    
7.262  In the Panel's view, the situation regardi ng the sale of milk to dairy processors in Canada – 
Dairy (Article 21.5 – New Zealand and US)  is quite relevant and similar to the present matter.  In that 
dispute, the issue was whether sales of CEM milk, se rved as a payment to Canadian dairy processors.  
The Appellate Body examined the industry-wide average total cost of production figure for milk and 
the price at which CEM milk was being sold by the milk producers to the processors.  After 
determining the relevant costs and figures, it found that the price at which CEM milk was being sold to domestic dairy processors was well below the averag e total cost of production of such milk, that is 
below the proper value of CEM milk.
564  The Appellate Body therefore concluded that the below cost 
of production sales of CEM involved payments on the export to Canadian dairy processors under 
Article 9.1(c) of the Agreement on Agriculture .565   The requirement that came along with the 
discounted purchase of CEM was that Canadian dairy processors incorporating CEM milk must, 
under Canadian law, export the resulting dairy product and divert it from the domestic market.  Accordingly, the Appellate Body concluded that such transactions served as payment-in-kind and 
eventually an export subsidy under Article 9.1(c) of the Agreement on Agriculture  by way of value 
foregone.
566   
7.263  In the present dispute, the Complainants are arguing that, as in Canada – Dairy (Article 21.5 
– New Zealand and US) and Canada – Dairy (A rticle 21.5 – New Zealand and US II), one of the 
types of payment allegedly being made in the EC sugar regime involves domestic inputs sold to sugar 
producers at prices that are below the total costs of  production of beet growers.  The Complainants 
argue that C beet (an input) is being sold to suga r producers at prices that do not remotely cover its 
cost of production. 
7.264  The Panel is of the view that in the present dis pute the total cost of production of C beet is an 
appropriate benchmark for determ ining whether the sales of C beet to C sugar producers provide a 
"payment" to the producers of C sugar within the meaning of Article 9.1(c) of the Agreement on 
Agriculture . 
7.265  There is uncontested evidence that C beet is so ld to C sugar producers at prices well below its 
cost of production, showing that the price received for C beet – calculated at 58 to 60 per cent of the 
price for C sugar – was below the total cost of production of that beet throughout the years 1992/93 to 2002/03.
567  In particular, the Pane l refers to the LMC Data568, Datagro report "Considerations over 
                                                      
564 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 120 
and 121. 
565 Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 121. 
566 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 121; see 
also Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 71. 
567 In marketing year 1995/1996 the price of C beet per tonne of C sugar equivalent was ***, while its 
average total cost of production was *** per tonne of C sugar equivalent.  In marketing year 1996/1997 the 
price of C beet per tonne of C sugar equivalent was ***, while its average total cost of production was *** per  WT/DS265/R 
 Page 173 
 
 
 C sugar Production and Exports in the European Communities"569, the Report of the Netherlands 
Economic Institute "Evaluation of the Common Orga nization of the Markets in the Sugar Sector"570, 
Roger Rose's report "Sugar in the European Uni on; Sugar production costs and cross-subsidies to 
C sugar exports"571 and the Oxfam report "The Great EU Suga r Scam:  How Europe's sugar regime is 
devastating livelihoods in the developing world".572  
7.266  The average price received by farmers for C beet during that period ranged from *** to 
*** per cent of its average total cost of production.573  This means that, for at least the 11 most recent 
consecutive years, growers of beet failed to recover between *** and *** per cent of their total cost of 
producing C beet.   
7.267  The European Communities does not contest the cost of production figures and related data 
offered by the Complainants.  When specifically asked  by the Panel for figures related to the cost of 
production, the European Communitie s refused, claiming that such fi gures were not related to its 
defence and that it did not find it necessar y to express any views on the matter.574   
7.268  As stated by the Appellate Body in EC – Hormones , "a prima facie  case is one which in the 
absence of effective refutation by the defending party, requires a panel, as a matter of law, to rule in 
favour of the complaining party presenting the prima facie  case."575  In the Panel's view, the 
uncontested evidence submitted by the Complainants de monstrates prima facie that C beet is sold at 
prices that do not cover its cost of production. 
7.269  When C beet is sold to C sugar producers at rat es that are below its total cost of production, 
there is, in effect, a payment, i.e. a payment-in-k ind, being made to the C sugar producers to the 
extent that the proper value of C beet is not reflected in its price and, hence, involves a "payment" 
within the meaning of Article 9.1(c) of the Agreement on Agriculture  by way of value foregone.   
7.270  The Panel finds, therefore, that the below tota l cost of production sales of C beet to C sugar 
producers involves a payment within the meaning of Article 9.1(c) of the Agreement on Agriculture .   
                                                                                                                                                                     
tonne of C sugar equivalent.  In marketing year 1997/1998 the price of C beet per tonne of C sugar equivalent 
was ***, while its average total cost of production was *** per tonne of C sugar equivalent. In marketing year 
1998/1999 the price of C beet per tonne of C sugar equivalent was ***, while its average total cost of production was *** per tonne of C sugar equivalent.  In marketing year 1999/2000 the price of C beet per tonne of C sugar 
equivalent was ***, while its average total cost of production was *** per tonne of C sugar equivalent.  In 
marketing year 2000/2001 the price of C beet per tonne of C sugar equivalent was ***, while its average total 
cost of production was *** per tonne of C sugar equivalent.  In marketing year 2001/2002 the price of C beet 
per tonne of C sugar equivalent was ***, while its average total cost of production was *** per tonne of C sugar equivalent.  In marketing year 2002/2003 the price of C beet per tonne of C sugar equivalent was ***, while its 
average total cost of production was *** per tonne of C sugar equivalent. The above figures are derived from 
the Datagro Report (Exhibit BRA-1, Table 5, p. 29). C beet prices are usually determined based on 58-60% of C sugar price.  The prices set above are based on the high end estimates (60% of C sugar prices) that beet 
farmers may receive for C beet.  See Commission of th e European Communities: Common Organisation of the 
Sugar Market Description, Exhibit COMP-8, p. 10; NEI Report, Exhibit COMP-2, p. 160; Datagro Report, Exhibit BRA-1, p. 7.
 
568 LMC Data, Exhibit BRA-2, pp. 23 and 54 
569 Datagro Report, Exhibit BRA-1, at pp. 5-7, and Table 5, p. 29.  
570 NEI Report, Exhibit COMP-2, pp. 117-121 and 160. 
571 "Sugar in the European Union: sugar production costs and cross-subsidies to C sugar exports" by 
Roger Rose, Exhibit ALA-1, pp. 1 and 8-12. 
572 Oxfam Briefing Paper 27, August 2002, Exhibit COMP-3.  
573 LMC Data, Exhibit BRA-2, Table 5.15, pp. 23 and 54; Datagro Report, Exhibit BRA-1, Table 5, 
Beet Farming Costs, p. 29. 
574 European Communities' reply to Panel's question No. 32. 
575 Appellate Body report on EC – Hormones , para. 104. WT/DS265/R 
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 Is such payment-in-kind through sales of below-costs C beet made "on the export"?
 
7.271  The Complainants argue that since C beet can  only be used in the processing of C sugar, 
which in turn must be exported, any payments received by C sugar producers are "on the export".576 
7.272  The European Communities does not offer any sp ecific arguments as to C beet and the issue 
of whether such payments to C sugar producers through below-costs-C beet are on the export.  
Instead, the European Communities focuses on the ge neral argument in regard to C sugar (which 
encompasses C beet) that sugar producers are free to choose whether they want to produce C sugar for 
export.577  For the European Communities, even if th e relevant EC measures provide an indirect 
benefit to C sugar, the governmental action which provides these benefits is not contingent upon the 
export of C sugar, since sugar producers may qualify for A and B quota rights and privileges 
regardless of whether they produce C sugar for export.578  
7.273  The Panel is of the view that the European  Communities misinterprets the requirements of 
Article 9.1(c) with respect to "on the export". The European Communities focuses on the fact that 
C sugar production is not required under the EC Regulation and that th e advantages received by sugar 
producers as a result of EC governmental action in regard to A and B sugar would be afforded 
whether or not they produce and export C sugar.  Bu t in the Panel's view, a payment "on export" does 
not need to be contingent upon export.  An anal ysis of Article 9.1(c) would put its emphasis on 
whether the payment in question received is on the ex port, not on whether, as appears to be the case, 
the EC price support as a whole is de facto continge nt upon C sugar being exported.  In other words, 
when identifying whether a payment is on the export  as defined under Article 9.1(c) of the Agreement 
on Agriculture , once a  payment is identified, the focus is on whether this payment  is made on the 
export , and not on whether the source of the paym ent is dependent or contingent on export 
production. 
7.274  The Panel also recalls that in India – Autos  the Panel dealt with the expression " on 
importation" which, in the Panel's view, has simila rities with the expression "on export" with respect 
to the use of the term "on":  
"The Panel turns therefore to consider the ordinary meaning of the phrase 
'restriction…on importation'. An ordinary meaning of the term ' on', relevant to a 
description of the relationship which s hould exist between the measure and the 
importation of the product, includes 'with respect to', 'in connection, association or 
activity with or with regard to' .579  In the context of Article XI:1, the expression 
'restriction… on importation ' may thus be appropriately read as meaning a restriction 
'with regard to' or 'in connection with' the importation of the product.   On a plain 
reading, this would not necessarily be limited to measures which directly relate to the 
'process' of importation.  It might also en compass measures which otherwise relate to 
other aspects of the importation of the product."580 (underlining added) 
7.275  In the Panel's view a payment "on export" n eed not be "contingent" on export but rather 
should be "in connection" with exports.  
7.276  The Panel considers that there is a very cl ose link between C beet production and C sugar 
production, and in the Panel's view decisions by farmer s of C beet whether or not to grow more C beet 
                                                      
576 Brazil's first written submission, para. 57. 
577 European Communities' first written submission, para. 45. 
578 European Communities' first written submission, para. 44.   
579 Webster's New Encyclopedic Dictionary, 1994 ed. 
580 Panel Report on India – Autos , at para. 7.257.  WT/DS265/R 
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 is essentially based on the needs of C sugar producers.  The Panel recalls that C beet can only be used 
in C sugar.581  The Panel is aware that contrary to the situation for A and B beet582, farmers and sugar 
producers are free to negotiate the price for C b eet.  Although EC Council Regulation No. 1260/2001 
does not prescribe how much farmers should be paid for C beet, it is generally agreed in the intra-
trade agreements between farmers and sugar producer s that farmers receive about 60 per cent of the 
price that the sugar producers receive for  C sugar.   Indeed, contracts for C beet tend to follow the 
revenue sharing terms of A and B beet regulated co ntracts, with approximately 58-60 per cent of the 
C sugar price going to C beet growers and 42 per cent to sugar producers.583   
7.277  Sugar producers are free to decide whether or not to produce C sugar but once produced it 
must be exported unless it is carried forward to quot a sugar for the following year (for a quantity up to 
a maximum of 20 per cent of A quota).584  Indeed, "C sugar not carried forward under Article 14 may 
not be disposed of on the Community's internal market and must be exported".585 Because C beet may 
be processed only into C sugar which in turn ( unless carried forward as quota sugar as mentioned 
above) must be exported, payments by way of be low cost of production sales of C beet to C sugar 
producers are " on the export ".  In other words, the payment by way of discounted C beet is only 
afforded to C sugar producers, and ultimately "on the export".  
7.278  This is in line with the Canada – Dairy (Article 21.5 – New Zealand and US ) case. The panel 
in that proceeding found that discounted CEM milk  sold and used for dairy processing was available 
to processors only if CEM milk was used for e xported dairy processing.  Only by effectively 
exporting discounted CEM milk, in the form of pr ocessed dairy products, could producers gain access 
to the subsidized or discounted CEM milk.  Accordingly, the panel, found that the payment through 
discounted milk to the dairy processors is made on the export.586  These panel findings were not 
appealed or otherwise modified by the Appellate Body.587 
7.279  The Panel finds, for the foregoing reasons, that the payments to C sugar producers by way of 
discounted below total cost of production sales of C beet by C beet growers are on the export  within 
the meaning of Article 9.1(c) of the Agreement on Agriculture .  
Is the payment-in-kind through sales of below-cost-C beet " financed by virtue of 
governmental action"  ? 
7.280  The Complainants submit that the Europ ean Communities' governmental actions are 
indispensable to the transfer of resources descr ibed above.  The European Communities' actions 
thereby finance growers to supply C beet to C suga r producers at prices that do not reflect the average 
total cost of production of the beet, and for those pr ocessors, in turn, to provide C sugar to buyers at 
                                                      
581 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 10 and EC Council Regulation No 1260/2001, Articles 19 and 21. 
582 A and B beet farmers are protected via minimum b eet pricing or "basic b eet price".  The pricing 
system for beet establishes the minimum price at which sugar manufacturers may purchase sugar beet from EC 
farmers.  This minimum price is set to at least 58 per cent of the intervention price (€366 per tonne of white 
sugar).  The purpose of the beet (and cane) pricing arrang ements is to ensure a stab le and adequate income to 
beet farmers and a proper distribution of income throughout the sugar industry chain.   
583 Commission of the European Communities: Common Organisation of the Sugar Market Description 
Exhibit COMP-8, p. 10; see also LMC Data, Exhibit BRA-2, pp. 15-16. 
584 C sugar may be carried forward in a limited amount to the next marketing year to be estimated 
against the following years allocated quota under Article 14(1) of the EC Council Regulation No. 1260/2001. 
585 Article 13 of the EC Council Regulation No. 1260/2001. 
586 Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 6.78. 
587 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 79. WT/DS265/R 
Page 176  
 
 world market prices that did not reflect its average total production cost.  In its written submissions or 
oral statements the European Comm unities has not addressed this criteria per se .
588    
7.281  The Panel recalls that a "demonstrable link" an d "clear nexus" between the "financing of the 
payments" and the "governmental action" must be est ablished in order for the payment to qualify as a 
payment "by virtue of governmental action".  The Appellate Body in Canada – Dairy (Article 21.5 – 
New Zealand and US) stated: "The words 'by virtue of ' indicate that there must be a demonstrable link 
between the  governmental action  at issue and the  financing  of the payments, whereby the payments 
are, in some way, financed as a result of, or  as a consequence of, the governmental action."589 
7.282  The Appellate Body clarified the terms "financed  by virtue of governmental action" in the 
second recourse on implementation in Canada – Dairy (Article 21.5 – New Zealand and US II) , when 
it stated: 
"As regards 'governmental action', we held in the first Article 21.5 proceedings that 
'the text of Article 9.1(c) does not place any qualifications on the types of 
'governmental action' which may be  relevant under Article 9.1(c).'590  Instead, the 
provision gives but one example of governmental action that is 'included' in 
Article 9.1(c)—however, this example is merely illustrative.591  Accordingly, we 
stated that Article 9.1(c) 'embraces the full-range' of activities by which governments 
' 'regulate', 'control' or 'supervise' individuals'.592  In particular, we said that 
governmental action 'regulating the supply a nd price of milk in the domestic market' 
might be relevant 'action' under Article 9.1(c).593  Moreover, the governmental action 
may be a single act or omission, or a series of acts or omissions. 
We observe that Article 9.1(c) does not require  that payments be financed by virtue of 
government ' mandate ', or other ' direction '.  Although the word 'action' certainly 
covers situations where government mandat es or directs that payments be made, it 
also covers other situations wh ere no such compulsion is involved. 594" 595  
7.283  As the Panel discussed in paragr aphs 7.247-7.248, the EC  sugar regime regulates the prices at 
which A and B beet is sold to sugar producers.  This  is done to ensure a stable  and adequate income to 
beet farmers and a proper distribution of in come throughout the sugar industry chain.596  While 
Council Regulation No. 1260/2001 requires minimum payments to growers of A and B beet, it 
                                                      
588 See paras. 4.70 to 4.86 to above. 
589 Appellate Body Reports on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 113 and on 
Canada – Dairy (Article 21.5 – New Zealand and US II ), para. 130,. 
590 (footnote original ) Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US) , 
para. 112. 
591 (footnote original ) The example given is "payments that are financed from the proceeds of a levy 
imposed on the agricultural product concerned or on an agricultural product from which the exported product is 
derived". 
592 (footnote original ) Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US) , 
para. 112. 
593 (footnote original ) Ibid. 
594 (footnote original ) Article 9.1(c) of the  Agreement on Agriculture   may be contrasted with 
Article 9.1(e) of the  Agreement on Agriculture ,  as well as with Article 1.1(a)(1)(iv) of the  SCM Agreement ,  
and items (c), (d), (j), and (k) of the Illustrative List  of Export Subsidies (the "Illustrative List") of the 
 SCM Agreement .  In these provisions, some kind of government mandate, direction, or control is an element of 
a subsidy provided through a third party. 
595 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 127 
and 128. 
596 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 5.  WT/DS265/R 
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 permits processors to buy the beet they use to produce C sugar at prices below these minimums.597  
However, because growers of C beet are also grow ers of A and B beet and because C beet can only be 
used in C sugar, which in turn belongs to th e same production line as A and B quota sugar, the 
EC sugar regime ensures that the sale of under-priced C beet to C sugar producers is an integral part 
of the governmental regulation of the sugar market .  Indeed, the production of C beet will depend on 
the needs of C sugar producers (since C beet can only be used in C sugar).  Conversely, to be 
competitive, C sugar must be exported at the world price.  Because of the low world price relative to 
C sugar costs of production, C sugar producers will exer cise pressure on C beet growers so that C beet 
are sold to C sugar producers at reduced prices.  As  further detailed below, C beet growers can use the 
profits made on the sales of A and B beet to cross-subsidize the sale of C beet to C sugar producers at 
prices below the total costs of production of C b eet while still making profits. C sugar producers will 
therefore be willing to pay C beet growers proportionally  to what they receive on the sales of C sugar.  
There is evidence that indeed C beet growers usually  receive some 60 per cent of the price of C sugar 
on the world market (as is  the case with A and B beet).  Again the EC Council Regulation, through its 
complete control over the production and sale of A a nd B sugar and A and B beet, controls and affects 
the production and sales conditions of C beet.  
7.284  The Panel also notes that the EC Council Re gulation No. 1260/2001 prescribes a framework 
for the contracts to be signed by beet growers and sugar processors.  These contracts are known as 
inter-trade agreements.   The prescriptions of the EC C ouncil Regulation No. 1260/2001 provide 
therefore a minimum of protection for the farmer  with respect to produc tion and supply conditions 
(quotas, supply of seed, beet prices, delivery sched ules, etc.) for which EC member States have a 
regulatory role.598 The actual intra-trade agreements are often more detailed than the EC sugar regime 
provides.   
7.285  In answer to a Panel question, the European Communities submits that the availability and the 
cost of C beet may vary greatly between EC regi ons, as well as from one year to another, depending 
on a multiplicity of factors, which do not involve "gove rnment action", or at least the type of action at 
issue in this dispute.  For example, the production of  beet may be affected by climatic conditions and 
diseases to a much greater extent than the produc tion of milk.  Also, the European Communities 
argues that beet farmers are much less specialized than milk farmers.   As a result, the production of 
C beet is as likely to be "financed" by A and B beet  as by other alternative crops, and vice versa.  The 
European Communities argues that what it describ es as the "causal link" between the alleged 
"Government action" and the provision of C beet is no t "tight" enough to consider that sales of C beet 
are "financed by virtue of Government action". 
7.286  The Panel agrees with the Complainants that the European Communities does not provide any 
supporting evidence to substantiate its assertions in regard to causal  links, such as what the income 
from alternative crops might be compared to inco me from price support for A and B beet, what those 
crops might be and whether such crops are also receiving governmental price support. Furthermore, 
evidence submitted shows that gross margins fo r C beet production in major C beet producing 
countries (i.e. France) is higher than the gro ss margin of alternative crops such as wheat.599 More 
importantly, the European Communities fails to explain why large numbers of EC farmers are 
engaged in growing C beet if such production onl y serves to deliver losses.  Farmers make crop 
planting and livestock production decisions on the b asis of expected prices and profits.  Within a 
season, livestock and crop farmers will often cross-fina nce between different sectors, due to yield and 
price movements.  This is as true for dairy cattle  as for beet growing.  However, the European 
Communities also fails to explain why farmers woul d maintain, within a mix of farming activities, 
                                                      
597 Article 21(1), EC Council Regulation  No. 1260/2001. 
598 Point I(b) and Point XIV of Annex III to Regulation 1260/2001 and Annex IV to Regulation 
1260/2001. 
599 NEI Report, Exhibit COMP-2, pp. 162-164. WT/DS265/R 
Page 178  
 
 any sectoral production for which expect ed revenue is persistently less than the cost of production, in 
this case, production of C beet.  
7.287  In the Panel's view, the Complainants have submitted prima facie evidence that C sugar 
producers provide positive incentives fo r growers to plan production above (the processor's) quota, by 
including an amount of C beet in a grower's beet delivery quota, at an average price, or paying a 
higher price of the first slice of over quota beet.  As incentives, C sugar producers may cut next year's 
beet allocation for those growers who fail to meet the sugar producers' requirements, reallocating its 
delivery rights to more reliable growers.   
7.288  The Panel recalls that C beet can only be used in  C sugar.  There is also evidence that C sugar 
producers have incentives  to produce C sugar so as to maintain their share of the A and B quotas as 
well as the ability to profit from sales of C sugar ev en if the prices are below the total cost of 
production (fixed costs plus average va riable costs).  In the Panel's view, beet growers also have an 
incentive to plan production levels above A and B quot a sugar requirements.  C beet growers have an 
incentive to supply as much as is requested by C sugar producers with a view to receiving the high 
prices for A and B beet and their allocated amount of over-quota beet (or C beet).  In this context, the 
Panel recalls that A, B and C beet are part of the same line of production, although the market for A 
and B beet – that is A and B quota sugar – is more lucr ative than that of the C beet – that is C sugar.  
C beet producers can therefore sell below costs thr ough the profits they make in selling A and B beet. 
600 
7.289  As noted by the Panel in paragraphs 7.261-7.263  above, there is a close similarity with the 
situation prevailing with CEM milk in Canada – Dairy (Article 21.5 New Zealand and US II)  where 
the Appellate Body concluded that:   
"where sales in the more re munerative market bear more than their relative proportion 
of shared fixed costs, sales in the other market do not need to cover their relative 
proportion of the shared fixed costs in order to be profitable.  Rather, these sales can be made profitably below  the average total cost of  production.  If the more 
remunerative sales cover all fixed costs, sales in the other market can be made 
profitably at any price above marginal cost.  In these situations, the higher revenue sales effectively ' finance ' a part of the lower revenue sales by funding the portion of 
the shared fixed costs attributable to the lower priced products. (...)"
601 
7.290  The Panel recalls that since C beet can only be used in C sugar602, the proportion of C beet 
production in relation to total beet production ought to correlate closely to the rate of C sugar 
production in proportion to total sugar production. Accordingly, since over the past years C sugar 
represents 11 to 21 per cent of th e overall production of quota sugar,603 C beet must represent a similar 
level of total beet production in the European Co mmunities. Hence, the growing of C beet is not 
incidental but rather an integral part of th e governmental regulation of the sugar market.  
7.291  The Panel is of the view that a significant percen tage of farmers of C beet  are likely to finance 
sales of C beet below the costs of production as a r esult of participation in the domestic market in 
selling high priced A and B beet.  The Panel considers that, through EC Council Regulation No. 
1260/2001, the European Communities controls virtua lly every aspect of domestic beet and sugar 
supply and management.   In particular, the EC Regulation fixes the price of A and B beet that renders 
                                                      
600 See NEI Report, Exhibit COMP-2, pp. 159-164 fo r discussion on the incentives and intentional 
farming of C beet. 
601 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 140. 
602 See Article 21 of the EC Council Regulation No. 1260/2001.  
603 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38.  WT/DS265/R 
 Page 179 
 
 
 it highly remunerative to farmers/growers of C beet.  Government action also controls the supply of A 
and B beet (and sugar) through quotas.  The im position by government of financial penalties on 
producers of C sugar that divert C sugar into the domestic market is anothe r element of governmental 
control over the supply of beet and sugar.  Fu rther, the degree of government control over the 
domestic market is emphasized by the fact that the EC Sugar Management Committee overviews, 
supervises and protects the EC domestic sugar through, inter alia , supply management.604  In sum, the 
European Communities controls both the supply and the price of sugar in the internal market.  This 
controlling governmental action is "indispensable" to the transfer of resources from consumers and 
tax payers to sugar producers for A and B quota s ugar and, through them, to growers for A and B 
quota beet.605   
7.292  The Panel finds, for the foregoing reasons, that  C sugar producers receive payments on export 
financed by virtue of governmental action  through various governmental actions as specified above, 
within the meaning of Article 9.1(c) of the Agreement on Agriculture .  
Conclusion  
7.293  Therefore, the Panel finds that C sugar produ cers receive payment on export by virtue of 
governmental action through sales of C beet below the total costs of production to C sugar producers.  
Pursuant to Article 10.3 of the Agreement on Agriculture , the Panel finds that the European 
Communities has not demonstrated that exports of  C sugar that exceed the European Communities' 
commitment levels since 1995 and in particular si nce the marketing year 2000/2001, have not been 
subsidized.  Consequently, the European Communiti es is acting inconsistently with Articles 3 and 8 
of the Agreement on Agriculture . 
(iv) Does the cross-subsidization resulting from the EC sugar regime constitute a payment on 
exports by virtue of governmental action? 
Does the cross-subsidization from the EC regime constitute a payment ? 
7.294  The Panel notes, in analyzing the alleged payments  in this case, that there is an intellectual 
challenge stemming from the fact that the producers of A, B and C sugar are the same companies and 
that the production of all three classifications of sugar is made in a continuous line of production.  
Were the producers of C sugar different from thos e of A and B sugar, and were they receiving 
"economic resources" from the producers of A and B s ugar in order to produce C sugar, the analysis 
would appear more straightforward.  The Panel also  notes that any alleged payments in the production 
of sugar, wherever they take place, derive fro m the high prices paid for A and B quota sugar on the 
EC domestic market.  For these reasons, the Panel con centrates its analysis of C sugar on the issue of 
cross-subsidization. 
7.295  The Complainants submit that the advantages th at exporters of C sugar receive through the 
transfer of economic resources that result from the EC sugar regime (which allows them to produce 
and export C sugar at above average variable cost but below average total cost of production) are 
payments.  The Complainants argue that the EC sugar regime's combination of guaranteed 
intervention prices, production quotas, export refund s and import restraints all limit the quantity of 
quota sugar that may be sold in the internal market and directly results in the high domestic prices for 
A and B quota sugar.  The Complainants also argue that the EC sugar regime and the high 
administered above-intervention price paid for domes tic EC sugar result in an eventual payment to 
EC sugar exporters within th e meaning of Article 9.1(c).606  Specifically, they submit that the high 
                                                      
604 Articles 42 and 43 of the EC Council Regulation No. 1260/2001.  
605 Appellate Body Report on Canada – Dairy , para. 120. 
606 Brazil's first written submission, para. 45. WT/DS265/R 
Page 180  
 
 prices result in covering the fixed costs to produ ce the exported C sugar, hence, serving as a subsidy 
to C sugar producers.
607 
7.296  The European Communities argues that some of  the measures cited by the Complainants, 
such as import tariffs or safeguard measures, ar e not subsidies.  Other measures, such as the 
intervention price and the production quotas, are i ndeed typical domestic price support mechanisms, 
and are already subject to the European Commun ities' domestic support re duction commitments under 
the Agreement on Agriculture .  Therefore, the question of whether these measures provided export 
subsidies to C sugar does not even arise.  
7.297  The Panel acknowledges, as was stated by the Appellate Body in Canada – Dairy 
(Article 21.5 – New Zealand and US ), that normal economic operators must cover their total costs of 
production and if they do not, this may be evidence that they receive an advantage of some sort:  
"For any economic operator, the produc tion of goods or services involves an 
investment of economic resources.  In the case of a milk producer, production requires an investment in fixed assets, such as land, cattle and milking facilities, and an outlay to meet variable costs, such as labour, animal feed and health-care, power 
and administration.  These fixed and variable costs are the total amount which the 
producer must spend in order to produce the milk and the total amount it must recoup, in the long-term, to avoid making losses.  To the extent that the producer charges prices that do not recoup the total cost of production, over time, it sustains a loss 
which must be financed from some other source, possibly "by virtue of governmental action".
608   
7.298  The Panel recalls that in the ordinary course of business, a private business or economic 
operator would make the decision to produce and sell a product, not only to recover the total cost of 
production, but also with the objective of making profits.  The Panel is of the view that export sales below total cost of production cannot be sustained unless they are financed from some other source, possibly "by virtue of governmental action".
609   
7.299  The Panel recalls that the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand 
and US)  determined that the appropriate "benchmark" to assess the proper value  of the subject good, 
considering the facts and circumstances of the disput e, was the average total cost of production of the 
CEM milk. In determining the  proper value  to the producer, a payment analysis "requires a 
comparison between the price actually charged by the provider of the goods or services … and some objective standard or benchmark which reflects the proper value  of the goods or services to their 
provider...".
610  In that dispute the Appellate Body, in search of an objective standard that would 
establish the proper value of milk to the milk produc er, found that the average total cost of production 
took best into account the "motivations of the independent economic opera tor who is making the 
alleged 'payments'" and the value of milk to it.611  The Appellate Body used this benchmark as it 
answered the "crucial question, name ly, whether Canadian export production  has been given an 
advantage".612 (emphasis added) 
                                                      
607 The Complainants submit that the subsidy, as defined in Article 9.1(c) of the Agreement on 
Agriculture, takes shape by way of the coverage of costs serving as a payment on exports which is the result of 
financing by governmental action.  
608 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 87. 
609 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 87. 
610 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 74. 
611 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 92. 
612 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 84.  WT/DS265/R 
 Page 181 
 
 
 7.300  The Panel recalls that the Appellate Body in Canada – Dairy (Article 21.5 – New Zealand 
and US)  looked at why dairy farmers could make such below cost of production sales, and why they 
were able to do so without making a loss, indeed while making a profit.  In reviewing the Canadian 
dairy regime the Appellate Body found that profits from domestic milk were spilling over to allow the 
sale of CEM milk at discounted prices – through governmental price controls.613 
7.301  The evidence submitted shows that C sugar prices have been well under its average total cost 
of production every year, from 1992/1993 to 2002/2003.614  In marketing year 2000/2001, the price 
per tonne of C sugar, based on the London Daily Price615, was €222.32, while the total cost of 
production for that sugar was *** per tonne.616 617  This data illustrates that the price charged for 
C sugar does not even remotely cover its cost of production.618  
7.302  Referring to publicly available information, th e European Communities considers that, as a 
general rule, sugar producers operate at a profit. 619  In the Panel's view, profits are only possible if 
                                                      
613 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II),  paras.136-146. 
614 Datagro Report, Exhibit BRA-1, Table 5, p.29 and Table B-15; "Sugar in the European Union: 
sugar production costs and cross-subsidies to C sugar exports" by Roger Rose, Exhibit ALA-1, pp. 8-10; LMC Data, Exhibit BRA-2, Table 5.15, p. 54; Oxfam Briefing Paper 27, August 2002, Exhibit COMP-3, pp. 1, 8-9; 
EC Court of Auditors Special Report No 20/2000, Exhibit COMP-1, p. 35; NEI Report, Exhibit COMP-2, 
Table 7.3, p. 113. 
615 The London Daily Price is a spot  price for EC sugar and, hence,  may represent a more accurate 
indication of the premium that EC sugar receives. See LMC Data, Exhibit BRA-2, p. 23.  
616 Ibid. 
617 In marketing year 1995/1996 the price per tonne of C sugar was ***, while total cost of production 
for that sugar was *** per tonne.  In marketing year 1996/1997 the price per tonne of C sugar was ***, while 
total cost of production for that sugar was *** per tonne.  In marketing year 1997/1998 the price per tonne of C sugar was ***, while total cost of production of that sugar was *** per tonne.  In marketing year 1998/1999 
the price per tonne of C sugar was ***, while total cost of production of that sugar was *** per tonne.  In 
marketing year 1999/2000 the price per tonne of C sugar was ***, while total cost of production of that sugar was *** per tonne.  In marketing year 2001/2002 the price per tonne of C sugar was *** while total cost of 
production of that sugar was *** per tonne.  In 2002/2003 the price per tonne of C sugar was ***, while the 
total cost of production for that sugar was *** per tonne.  See Datagro Report, Exhibit BRA-1, Table B. 15. 
618 The EC has not contested the Comp lainants' evidence that C sugar is sold at prices that give the 
producers a positive contribution to net income even though those prices are approximately *** per cent below 
average total cost of production.  Accordingly, the eviden ce clearly establishes that a "significant proportion" of 
EC producers –and one hundred per cent of those producing C sugar – make export sales of C sugar at prices 
below the average total cost of production. 
619 European Communities' reply to Panel question 68.  The Panel also notes the non-refuted evidence 
submitted by the Complainants.  Most, if not all, of  EC sugar producers operate on a profitable basis, 
particularly those companies that operate in the relativ ely more efficient C sugar producing regions.  [For 
example, reported profits for 2002-03 were €31 million and €315 million for Royal Cosun and Sudzucker, 
respectively (a substantial part of Sudzucker's profit would have been earned through its 85 per cent equity in St 
Louis Sucre).  In the same year, Danisco reported a profit of DKK1017 million. (€139 million). The Associated British Foods group that includes British Sugar as a subsidiary reported a profit of ₤176 (€264 million).  
According to the Financial Times (15 April 2004, p.24) profits for the Associated British Foods subsidiary 
appears likely to be higher in 2003-04 than in 2002-03, with high sugar yields accounting for much of an increase in profit for the firs t half of the year from ₤73 million to ₤85 million.  In 2002-03 St Louis Sucre's 
profit was €132 million.  The most representative measure of return to capital available on a common basis is 
the return to shareholders' funds. Profit as a percentage of shareholders funds for 2002-03 was 6.4, 14.2, 7.5 and 36.2 for Royal Cosun, Sudzucker, Danisco and St Louis Sucre, respectively.  To the extent that the value of 
sugar quotas is included in the reported value of capital, these figures will understate the true contribution of 
quota sugar profits to rates of return.  Only for St Louis Sucre is the issue addressed sp ecifically for sugar quotas 
in the accounts.  There, it is stat ed that the value of sugar quotas purchased in company amalgamations is 
amortised over 20 years.] WT/DS265/R 
Page 182  
 
 C sugar is being sold above average variable costs despite being sold below its average total cost of 
production and its fixed costs are financed through some other way. 
7.303  In the Panel's view, payments could occur by virt ue of a combination of factors and measures.  
The Complainants have submitted extensive evid ence and argumentation as to why and how cross-
subsidization occurs within the EC sugar regime.
620 From the uncontested evidence, the Panel 
understands that the European Communities controls  the supply of sugar within the European 
Communities which has a direct impact on the price of  sugar in the domestic market; indeed prices of 
A and B sugar are three times  higher than the world market price.621  The primary measures are 
controls on the supply of sugar to the domestic ma rket (including restrictions on sales into the 
domestic market, import quotas and requirements to e xport designated quantities of sugar) and direct 
subsidies for production and export, with interven tion buying as a fallback should the sugar price fall 
to the intervention price.  While there are no c ontrols on the quantities of C sugar that may be 
produced and exported, penalties attach to such s ugar if it is not exported or otherwise carried 
forward.  In addition, EC controls on alternativ e sweeteners, such as isoglucose, serve to negate 
competition from more competitively priced products.   
7.304  The Panel recalls that the quantities of sugar th at may be sold on the domestic market are 
tightly regulated through import controls and cont rols on the quantities of domestically produced 
sugar that may be disposed of within the European Communities, together with subsidized exports, as 
a key supply management mechanism designed to avoid intervention buying.  
7.305  The EC regime622 includes mechanisms designed to re gulate the domestic supply of sugar 
produced from EC-harvested beet or cane.  The main  instrument is the system of categorization of 
such sugar into A and B quotas and C sugar (surplus to quota).  Sugar produced as quota or as C sugar 
is reclassifiable under certain circumstances under EC regulatory arrangements.  The A quota sugar 
(which comprises around 82 per cent of the total quota)  is the more valuable quota and is nominally 
intended to meet domestic demand.623  The regime provides for annual A and B sugar production 
quotas for each member State, established for a five -year period.  Member States are responsible for 
assigning the quotas to sugar producers.  The quotas constitute the maximum quantities eligible for 
domestic price support and direct export subsidies (in EC terminology, 'refunds').  There is no limit on 
sugar production above A and B quota but such ex cess sugar (C sugar) has to be exported if not 
carried forward.  Penalties are provided for when  export sugar surplus to A and B quota sugar (C 
sugar) is not exported.  However, as member States are authorized to reduce quotas, failure to produce 
up to maximum quota levels could lead to reductions  in the quotas assigned to individual processors.   
7.306  There are no limits on the quantity of C sugar that may be produced or exported, but such 
sugar cannot be sold on the domestic market and it is  not eligible for intervention or export refunds.  
There is no independent production of C sugar. Th e manufacture of quota and non-quota sugar is 
undertaken by the same enterprises.  There is not hing in the regime to prevent producers pooling 
subsidies for quota sugar to average out subs idies and charges over total sugar production.624  In fact, 
                                                      
620 See Australia's first written submission, paras. 42-71; EC Court of Auditors, Special Report No 
20/2000, Exhibit COMP-1, p. 35, para. 96; "Sugar in the European Union: sugar production costs and cross-
subsidies to C sugar exports" by Roger Rose, Exhibit ALA-1, pp. 17-27; Datagro Report, Exhibit BRA-1, pp. 8-27; Oxfam Briefing Paper 27, August 2002, Exhibit COMP-3, pp. 1, 5-6. 
621 See LMC Data, Exhibit BRA-2, Table 3.4, p. 22; and Datagro Report, Exhibit BRA-1, Table 8.15 
and Table 5, p. 29. 
622 See also Factual Aspects in Section III above. 
623 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 9. 
624 In 1981, the EC advised a GATT working party: "... that the sugar regime resulted in the pooling of 
producers receipts from sales in the in ternal markets at supported prices, r eceipts, from exports of B quota sugar  WT/DS265/R 
 Page 183 
 
 
 the EC regime is predicated on a single stream of manufacture of quota and non-quota sugar by sugar 
quota holders, given that quota and non quota sugar are reclassifiable to a cer tain extent and given 
also the conditionality attached to the grant of an export certificate for C sugar.  As acknowledged by 
the EC Commission, the production of C sugar is directly linked to quota production.625 
7.307  Important by-products of this production support are structural surpluses, with EC sugar 
production substantially in excess of consumpti on.  Consumption averages around 12.5 million 
tonnes, whereas production ranges between 15-18 million tonnes.  In addition to sugar manufactured 
from domestically harvested beet or cane, a furt her 1.8 million tonnes of sugar is manufactured from 
raw cane sugar imported mainly from the ACP countries.626  The regime ensures that domestic 
production surplus to consumption is disposed of on export markets.  Approximately 20 per cent of all 
sugar produced is exported. 
7.308  Export subsidies are funded by producer levies,  calculated on the basis of quota production by 
sugar producers.627  The EC Commission awards export subsidies through Management Committee 
procedures.  Export refunds/subsidies to A and B quota sugar may be fixed at regular intervals or by a 
tender system the proceeds of which cover the di fference between the EC domestic sugar price and 
the world market price for sugar, hence, enabling EC sugar to be exported and sold on the world 
market.628  The export refund amounts are significant which indicates that the EC sugar industry needs 
a great deal of support or subsidies to competitively sell sugar on the world market.  
7.309  When EC consumers pay the regulated high pr ice for domestic sugar (A and B quota sugar), 
these domestic transactions generate substantial fi nancial resources and cons titute an "advantage" to 
the same producers in their production of C sugar. 
7.310  The Panel finds that there is clear evidence th at the relatively high EC administered domestic 
market (above-intervention) prices for A and B quota sugar allow the sugar producers to recover fixed 
costs and to sell exported C sugar over average vari able costs but below the average total cost of 
production.  Sugar is sugar whether or not produced under an EC created designation of A, B or C sugar.  A, B or C sugar are part of the same line of production and thus to the extent that the fixed 
costs of A, B and C are largely paid for by the profits made on sales of A and B sugar, the EC sugar 
regime provides the advantage which allows EC sugar producers to produce and export C sugar at 
below total cost of production.
629  For the Panel this cross-subsidization constitutes a payment in the 
form of a transfer of financial resources.  
7.311  The European Communities submitted that, desp ite the fact that a party derives an 
"advantage" from certain "governmental actions", it does not follow necessarily that any provision of 
goods made by that party would "t ransfer economic resources" to the recipient of the goods.  The 
European Communities contends that the "benefit" had to be examined on its  own merits, and under 
the relevant WTO rules.  In the European Comm unities' 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 th e strict rules on export subsidies provided in the 
Agreement on Agriculture  to virtually any form of government  intervention which might have the 
                                                                                                                                                                     
and receipts from exports of C sugar" .  Source: Report to the [GATT] C ouncil L/5113 of 20 February 1981, 
para. 33. 
625 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 10, para. 38. 
626 Commission of the European Communities: Sugar International Analysis Production Structures 
within the EU, Exhibit COMP-7, p. 39. 
627 The Panel recalls that the levies only partially fund the export refunds for A and B quota sugar. 
628 Commission of the European Communities: Common Organisation of the Sugar Market 
Description, Exhibit COMP-8, p. 20. 
629 Datagro Report, Exhibit BRA-1, para. 43(a), diagram 11 and Exhibit ALA-1, pp. 21-23. WT/DS265/R 
Page 184  
 
 incidental effect of "financing" sales at a loss.  According to the Europ ean Communities, this was 
never intended by the drafters of the Agreement on Agriculture .  
7.312  The Panel is of the view that Article 9.1(c) of the Agreement on Agriculture  does not require 
the demonstration of a benefit for a measure to co nstitute a payment within Article 9.1(c) of the 
Agreement on Agriculture .  The special nature of Article 9.1(c)  is such that once an advantage or 
payment has been demonstrated, there is no need to  prove separately that such an advantage provide 
"benefits" to the producers.  The only additional requi rements are that the advantage or payment is on 
export and is financed by virtue of governmental action.   
7.313  Finally, to the European Communities' argument that several of the measures identified by the 
Complainants are not subsidies but rather tariffs a nd other types of border measures, the Panel recalls 
that in Canada – Dairy (Article 21.5 – New Zealand and US II) , the Appellate Body stated that 
governmental action, within the meaning of Artic le 9.1(c) embrace a full-range of activities by 
governments and that governmental action may be a single act or omission, or a series of acts or omissions.
630   
7.314  The Panel finds therefore that the cross-subs idization taking place through the cumulative 
effect of various measures involved in the operatio n of the EC sugar regime, including high prices 
charged to domestic consumers, en ables C sugar producers to produce and sell C sugar.  In the Panel's 
view, there is a payment in the form of transf ers of financial resource s from the high revenues 
resulting from sales of A and B sugar, for the expor t production of C sugar, within the meaning of 
Article 9.1(c) of the Agreement on Agriculture . 
Is the payment on export ? 
7.315  The Complainants  contended that the payments made to  C sugar producers were payments 
"on the export" of "an agricultural product" w ithin the meaning of Article 9.1(c) of the Agreement on 
Agriculture.    
7.316  For the European Communities, even if these measures provided an indirect benefit to 
C sugar, they were not contingent upon the ex port of C sugar and, therefore, could not be 
characterized as "export subsidies".  The Europ ean Communities argued that a sugar producer's 
eligibility for A and B production quotas did not depe nd 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.  In this regard, th e European Communities noted that some sugar producers 
did not produce any C sugar at all.  The European  Communities noted further 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/Luxe mburg represented only a fraction of their total 
sugar output. 
7.317  As discussed before, an analysis of Article 9.1(c)  shows that the focus of the analysis is on 
whether the payment received is "on the export" or  provides an advantage to the exports, not whether 
the whole EC regime, or the cross-benefits resu lting from A and B quotas are contingent upon C sugar 
being exported.   
7.318  The Panel recalls that C sugar, unless carried forward, must be exported, whether it is 
exported by the C sugar producer or any other inte rmediary.  The European Communities admits that 
                                                      
630 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US I), para. 112 .  WT/DS265/R 
 Page 185 
 
 
 whether C sugar is exported by C sugar producers or so me other intermediate is of no relevance; what 
matters is that C s ugar must be exported.631 
7.319  Moreover, the Panel notes that the Eur opean Communities has not disputed that all 
companies that produce C sugar participate in th e domestic market through production of A or B 
sugar, or both.  In Canada – Dairy  (Article 21.5 – New Zealand and US II ) the Appellate Body held 
that it was irrelevant that some producers did not ma ke payments within the meaning of Article 9.1(c) 
of the Agreement on Agriculture .  It found that Canada would still act inconsistently with its export 
subsidy commitments even if some producers never ma ke or participate in the discounted sales.  The 
requirement is not that every single producer be in volved in receiving or transferring payments but 
rather that the system provides for or  even encourages su ch an occurrence.632 
7.320  The Panel is of the view that such an occu rrence is not, as suggested by the European 
Communities, a mere "incidental effect" of financ ing below cost of productio n of C sugar exports.  
The Panel fails to see a mere "incidental effect" in view of the great discrepancy between the cost of 
production and the C sugar prices.  For instance,  the evidence submitted shows that for 2000/2001 
C sugar was priced at €222.39 per tonne.  But the tota l cost of production for that same sugar in that 
marketing year was on average *** per tonne.633  The evidence submitted also shows that for 
2001/2002 C sugar was priced at *** per tonne.  But the total cost of production for that same sugar in 
that year was on average *** per tonne.634  Nobody could consider the effects of a product paying for 
only *** per cent of its total cost of production in  2000/2001 and *** per cent of its total cost of 
production in 2001/2002, or at *** and *** below its co st of production, respectively, as "incidental".  
Moreover there is evidence that production of C s ugar represents some 11-21 per cent of the total EC 
sugar production.635 
7.321  The Panel recalls that C sugar could only be sold  for export.  If not reclassified, C sugar "may 
not be disposed of in the Community's internal market and must be exported without further processing."
636  Because of that legal requirement, advantages, payments or subsidies to C sugar, that 
must be exported, are subsidies "on the export" of that  product.  It seems clear 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 dome stic price of some 3.5 times the world price of A 
quota sugar and 2.5 times that of B quota sugar.637  The only reason why producers of C sugar export 
C sugar, is because they are prohibited from introduc ing such sugar into the domestic market, facing  
heavy penalties pursuant to Article 13 of the EC Re gulation if they do.  They decide to produce 
C sugar because they are able to export it at pri ces above its average variable costs after covering a 
portion of the fixed costs by way of spill-over from sales of A and B sugar. 
7.322  The Panel finds that the payment on C sugar prod uction in the form of transfer of financial 
resources through cross-subsidization resulting fro m the operation of the EC sugar regime is on export  
within the meaning of Article 9.1(c) of the Agreement on Agriculture .   
                                                      
631 European Communities' reply to Panel question No. 62(b): "However, no meaningful distinction can 
be made between the export sales made directly by the sugar companies and those made through trading companies. The C sugar sold to the tr aders cannot be resold within the EC. Further, in both cases the sugar is 
usually delivered by the sugar compan ies FOB at an EC port. Moreover, sometimes the trading companies are 
not even established in the EC. Thus, for all practical purposes, sales of C sugar to traders are export sales, just like the export sales made directly by the sugar companies." 
632 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 152. 
633 Datagro Report, Exhibit BRA-1, Table B.15 and Exhibit ALA-1, table 2 on page 8. 
634 Datagro Report, Exhibit BRA-1, Table B.15. 
635 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38. 
636 Articles 13(1) of  EC Council Regulation No. 1260/2001 
637 See LMC Data, Exhibit BRA-1, Table 3.4, p. 22; and Datagro Report, Exhibit BRA-1, Table B.15 
and Table 5, p. 29. WT/DS265/R 
Page 186  
 
 Is this cross-subsidization payment financed by virtue of governmental action ?
 
7.323  The Complainants submit that as in Canada – Dairy , the controlling governmental actions are 
"indispensable" to the transfer of resources from c onsumers and tax payers to sugar processors for A 
and B quota sugar and, through them, to growers of A and B quota beet.638   
7.324  The Panel recalls that the "demonstrable link"  and clear "nexus" between the "financing of 
payments" and the "governmental action" must be established in order to qualify as a payment "by 
virtue of governmental action."639  In Canada – Dairy (Article 21.5 – New Zealand and US II) , the 
Appellate Body stated that "Article 9.1(c)  'embraces the full-range' of activities by which 
governments ' 'regulate', 'control' or 'supervise' individuals'. 640  In particular, it said that governmental 
action 'regulating the supply and price of milk in th e domestic market' might be  relevant 'action' under 
Article 9.1(c).641  It added that "Article 9.1(c) does not requi re that payments be financed by virtue of 
government ' mandate ', or other ' direction '.  Although the word 'action'  certainly covers situations 
where government mandates or directs that payments be made, it also covers  other situations where 
no such compulsion is involved.642"643  
7.325  Of particular relevance in the present dispute is  the Appellate Body's discussion of the word 
"financed" (by virtue of governmental action) which refers to the "mechanism or process" put in place 
by the government:  " The word refers generally to the mec hanism or process by which financial 
resources are provided to enable 'payments' to be made. "644   
7.326  The Panel considers that the European Co mmunities' governmental action regulating the 
domestic sugar market cross-subsidizes sales of C su gar that otherwise would not be made, or would 
be made at a loss.  The higher revenue sales for quota sugar in the internal market effectively finances 
some or all of the fixed costs of C sugar.  C suga r is cross-subsidized through direct subsidies, price 
support mechanisms and related mechanisms for quota sugar, all of which are regulatory instruments 
of the EC sugar regime.  The sales of C sugar ar e profitable at prices that merely exceeds average 
variable costs because the higher revenue sales of A and B quota sugar 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."645   
7.327  With respect to market access, the Eur opean Communities recalled that the terms 
"governmental action" in Article 9.1(c) en compass a broad range of government measures646, 
including import tariffs.647  The Complainants' interpretation would imply that, if high import duties 
had the incidental effect of "cross-financing" expor ts below the average total cost of production, the 
                                                      
638 Appellate Body Report on Canada – Dairy , para. 120. 
639 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 130; see 
also Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US) , para. 113. 
640 (footnote original ) Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US) , 
para. 112. 
641 (footnote original ) Ibid. 
642 (footnote original ) Article 9.1(c) of the  Agreement on Agriculture   may be contrasted with 
Article 9.1(e) of the  Agreement on Agriculture ,  as well as with Article 1.1(a)(1)(iv) of the  SCM Agreement ,  
and items (c), (d), (j), and (k) of the Illustrative List  of Export Subsidies (the "Illustrative List") of the 
 SCM Agreement .  In these provisions, some kind of government mandate, direction, or control is an element of 
a subsidy provided through a third party. 
643 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 127 
and 128. 
644 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 132. 
645 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , paras. 139-140. 
646 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 112. 
647 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US II) , para. 144.  WT/DS265/R 
 Page 187 
 
 
 Member concerned would have no alte rnative but to lower its import duty levels, even if such duties 
were within that Member's tariff bindings. 
7.328  The Panel is of the view that the production of  C sugar is not incidental.  The Panel recalls 
that there are no independent producers producin g exclusively C sugar:  C sugar production exists 
only for producers of A and B quota sugar.  The EC  sugar regime provides the incentive to EC sugar 
producers to produce C sugar.  This incentive lies in th e fact that under the EC sugar regime if all the 
allocated quota for A and B sugar is not satisfied by  the producer, the producer runs the risk that the 
quota will be reallocated to another sugar producer .  There is evidence that C sugar was initially 
intended to secure the full quota for a given year and should amount to approximately 6 per cent of 
quota production.648  Yet, the EC Court of Auditors have stated that, over the past years, C sugar 
production has varied between 11 and 21 per cent of quota production.649  The evidence demonstrates 
that one reason for this excessive production of C suga r is that the spill-over of profits from sales of A 
and B quota sugar allows C sugar fixed costs to be c overed and, hence, allows it to be sold profitably 
above its average variable costs.650  This is further evidence of the advantage provided to C sugar 
producers.  Otherwise, C sugar would not be produ ced at such levels if it were only to ensure 
satisfaction of quota allocation.  
7.329  The Panel recalls that the Appellate Body stat ed that the use of WTO-consistent domestic 
support cannot be without limits: 
"However, we consider that the distinct ion between the domestic support and export 
subsidies disciplines in the Agreement on Agriculture   would also be eroded if a 
WTO Member were entitled to use domes tic support, without limit, to provide 
support for exports of agricultural produc ts.  Broadly stated, domestic support 
provisions of that Agreement, coupled with  high levels of tariff protection, allow 
extensive support to producers, as compared  with the limitations imposed through the 
export subsidies disciplines.  Consequent ly, if domestic support could be used, 
without limit , to provide support for exports, it would undermine the benefits 
intended to accrue through a WTO Member's export subsidy commitments."651 
(underlining added) 
7.330  In the Panel's view, the EC sugar regime is  such that it creates incentives to breach the 
ordinary limits of domestic support by encouragi ng producers to produce more sugar for export in 
order to ensure they fulfil their quotas and preven t them from losing access to the preferential quotas.  
More importantly though, by vi rtue of the high prices charged to domestic consumers and the 
operation of the A and B quotas as well as other featur es of the EC sugar regime , exporters of C sugar 
can cover a significant portion of their production costs and make profitable export sales.  
7.331  The Panel is thus of the view that EC sugar producers finance  sales of C sugar at below cost 
of production directly by participating in the dom estic market and making sales internally at high 
prices as regulated by the European Communiti es (and from the purchase of discounted C beet as 
discussed earlier).  The European Communities' govern mental action controls virtually all aspects of 
domestic sugar supply and pricing.  The Europ ean Communities provides this control through a 
combination of guaranteed intervention prices, produ ction quotas and import restraints which limit the 
quantity of quota sugar that may be sold in the in ternal market, and the resulting high domestic price 
for A and B quota sugar. The domestic sales offer lu crative and attractive returns to producers.  
Government action controls the s upply of domestic sugar by way of quotas in pursuit of protecting 
                                                      
648 NEI Report, Exhibit COMP-2, p. 117. 
649 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38. 
650 NEI Report, Exhibit COMP-2, pp. 117 and 160. 
651 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 91. WT/DS265/R 
Page 188  
 
 high domestic prices well above the intervention price.
652  Additionally, penalties levied against sugar 
producers that divert C sugar production into the domestic market are evidence of  further 
governmental control.  The collection of production  levies and distribution of export refunds also 
contribute to the high degree of EC governmental control.  Lastly, the imposition of high import 
tariffs illustrates again governmental action in the EC sugar regime.  
7.332  Accordingly, the EC sugar regime uses the hi gh profits on A and B quota sugar to cover fixed 
costs for C sugar and, most importantly, requires C sugar to be exported and diverted from the 
domestic market.  Again, the result of the EC s ugar system is not the production of C sugar in 
marginal or superfluous amounts simply in the pursuit of ensuring quota fulfilment.  Rather, as the EC 
Court of Auditors stated, over the past years, C production has varied between 11 and 21 per cent of 
quota production, a significant portion of the European Communities' entire sugar production.653  
7.333  In the Panel's view, the EC sugar regime and the cross-over benefits that it creates are thus the 
direct and foreseeable consequences of actions by the European Communities, within the meaning of 
Article 9.1(c) of the Agreement on Agriculture , not merely the decisions of private sugar producers 
responding to market incentives. 
7.334  Therefore, the Panel finds that the production of C sugar receives a payment, through cross-
subsidization resulting from the operation of the EC suga r regime;  there is a payment, in the form of 
transfers of financial resources on export financed by virtue of governmental action.    
7.335  Pursuant to Article 10.3 of the Agreement on Agriculture , the Panel finds that the European 
Communities has not demonstrated that exports of  C sugar that exceed the European Communities' 
commitment levels since 1995 and in particular  since the marketing year 2000/2001, are not 
subsidized.  Consequently, the European Communiti es is acting inconsistently with Articles 3 and 8 
of the Agreement on Agriculture.  
5. Overall conclusion 
7.336  The Complainants have provided prima faci e evidence that the European Communities' 
exports of sugar exceeds its commitment levels sinc e 1995 and in particular since the marketing year 
2000/2001. 
7.337  The Complainants have also provided prima facie evidence that producers/exporters of 
ACP/India equivalent sugar that exceed the Eu ropean Communities' commitment levels receive 
subsidies within the meaning of Article 9.1(a) of the Agreement on Agriculture . 
7.338  The Complainants have provided prima facie evidence that producers/exporters of C sugar 
that exceed the European Communitie s' commitment levels receive payments on export by virtue of 
governmental action:  (i) through sales of C beet to C sugar producers below their total costs of 
production;  and (ii) in the form of transfers of  financial resources, through cross-subsidization 
resulting from the operation of the EC sugar regime, within the meaning of Article 9.1(c) of the 
Agreement on Agriculture .   
7.339  In light of Article 10.3 of the Agreement on Agriculture , the Panel reaches the conclusion that 
the European Communities has not demonstrated that its exports of C sugar and ACP/India 
(equivalent) sugar that exceed the Eu ropean Communities' commitment level are not subsidized . 
                                                      
652 LMC Data, Exhibit BRA-1, Tables 3.1-3.4, pp. 18-22 and Exhibit ALA-1. 
653 EC Commission Court of Auditors, Special Report No 9/2003, Exhibit COMP-11, p. 23, para. 38.  WT/DS265/R 
 Page 189 
 
 
 7.340  Consequently, the Panel finds that the Europ ean Communities has been acting inconsistently 
with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture  by providing export 
subsidies on sugar within the meaning of Articles 9.1(a) and 9.1(c) of the Agreement on Agriculture , 
in excess of the quantity commitment levels specifi ed in Section II, Part IV of its Schedule. 
6. The interpretation and correction of the Eu ropean Communities' Schedule in light of 
the Modalities Paper 
(a) Arguments of the parties654 
7.341  The European Communities considers that the Modalities Paper is an agreement reached by 
all participants in the Uruguay Round in connection with the conclusion of the Agreement on 
Agriculture .  As such, the Modalities Paper is relevant  as "context" for the interpretation of the 
schedules of reduction commitments, in accordance with Article 31.2 (a) of the Vienna Convention . 
7.342  For the European Communities, the letter of the Chairman of the Market Access negotiating 
group of 20 December 1993 recorded the understandi ng of the Participants "that these negotiating 
modalities shall not be used as a basis fo r dispute settlement proceedings under the WTO Agreement ".  
This means that the WTO Member s cannot bring claims under the DSU  based on the violation of the 
Modalities Paper. It does not mean, however, that  the Modalities Paper is irrelevant for the 
interpretation of the Agreement on Agriculture .  This is, as mentioned above, a question to be decided 
by the Panel having regard to th e relevant provisions of the Vienna Convention . 
7.343  For the European Communities, the fact that the Modalities Paper is not "legally binding" 
does not prevent it from being an "agreement" or from being "context".  Thus, Article 31.2 of the 
Vienna Convention  includes among the "context", the "preamble" of a treaty which, by definition, 
imposes no legal obligations.  The European Comm unities adds that in any event, the Modalities 
Paper was drafted in mandatory terms and purported to  be binding.  Thus, Article 1 of the Modalities 
Paper states that: 
"Specific binding commitments in the areas of market access, domestic support and 
export competition shall be established in accordance with the modalities set out 
hereunder." 
7.344  The European Communities submits that the "b ase quantity" included in the EC Schedule is 
part of the text of the WTO Agreement .  The European Communities asserts  that total exports of sugar 
during the most recent marketing year for which there is data available (October 2001-September 
2002) were 2,443,600 tonnes655, i.e. 71,100 tonnes below the final commitment level as re-calculated 
in paragraph 4.124 above.  Thus, the breach of the European Communities' reduction commitments 
alleged by the Complainants would resu lt exclusively from a scheduling error. 
7.345  Therefore, the European Communities submits that: 
"[S]hould the Panel find that the C sugar re gime provides 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 agre e to the correction 
                                                      
654 See also paras. 4.122 et seq. above. 
655 Including exports of C sugar, and adjusted for ACP/India sugar which is subject to a 1.6 million 
tonnes ceiling (see Section IV). WT/DS265/R 
Page 190  
 
 of the European Communities' scheduling co mmitments so as to include the exports 
of C sugar in the base levels and to rectify the annual commitments accordingly."
656 
7.346  For the Complainants, the Modalities Paper does not provide "context" as defined in 
Article 31.2 of the Vienna Convention  as it does not constitute an agreement relating to the Agreement 
on Agriculture  made in connection with the conclusion of  that Agreement.  Instead, it constitutes 
merely an informal note issued by the Chairman of the Market Access Group on his own 
responsibility to assist the participants in the prep aration of specific binding commitments included in 
the Schedules associated with the Agreement on Agriculture .  In relation to Article 31.2(b) of the 
Vienna Convention , the Modalities Paper does not constitute an instrument relating to the Agreement 
on Agriculture  made in connection with the conclusion of  the Agreement.  It does not represent an 
instrument made by one or more parties and, cr itically, it was a document prepared during the latter 
stages of negotiation of the Agreement, not at th e time of its conclusion.  While not providing 
"context" as defined in Article 31.2 of the Vienna Convention , the Modalities Paper does form part of 
the preparatory work, as recognised in Article 32 of the Vienna Convention , of the Agreement on 
Agriculture , having been developed as part of the negotiating process.   
7.347  For the Complainants, the European Communitie s' arguments that its failure to include 
C sugar in its calculation of its base levels constitut es an error that it should be allowed to correct, has 
no foundation in the WTO Agreements  or in WTO jurisprudence.  Moreover, they consider that under 
the DSU , the Panel does not have the authority to permit the European Communities to "correct" its 
Schedule.657  Furthermore, they contend that the "e rror" of the European Communities is not 
"excusable" because "the decision on how to schedul e support was one for each Member to take at the 
end of the day, based on its own interpretation of th e application of the draft provisions to the regimes 
applying in each sector.  Any risk in regard to so -called 'under-calculations' of the base period outlays 
and quantities was the responsibility of the scheduling Member, in this case the EC."658 
(b) Assessment by the Panel 
7.348  The Panel recalls first that participants in  the Uruguay Round submitted draft schedules 
essentially on the basis of the 1991 Draft Final Act Modalities.  It also notes that the Modalities Paper 
was first issued in 1991 and then revised in December 1993 whereas discussions, among others on the 
scope of the Footnote inserted in the EC Schedul e, went on thereafter and even after the European 
Communities submitted its final Schedule in Ma rch 1994.  The version of the Modalities Paper 
(MTN.GNG/MA/W/24) referred to by the par ties was prepared after the 15 December 1993 
conclusion of the negotiation for the purpose of verification.   
7.349  The Panel further recalls that the Modalities Pa per cannot be the basis for dispute settlement 
under the WTO Agreement .  The Panel also recalls that in EC – Bananas III  the European 
Communities emphasized that: "[t]here was no doubt that  any guidelines that existed for scheduling in 
the agricultural sector were left out of the Agreement on Agriculture  on purpose".659  The Appellate 
Body also stated that "We note further that the Agreement on Agriculture makes no reference to the 
Modalities  document ..."660 
                                                      
656 European Communities' first written submission, para. 142.  
657 Brazil's second written submission, para. 4 and Australia’s second written submission, 
paras. 126-131. 
658 Australia's second written submission, para. 132. 
659 Panel Report on EC – Bananas III , para.  4.99. 
660 (footnote original ) Modalities for the Establishment of Specific Binding Commitments Under the 
Reform Programme, MTN.GNG/MA /W/24, 20 December 1993.  WT/DS265/R 
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 7.350  Clearly, the so-called Modalities Paper is not a covered agreement and thus cannot provide 
for WTO rights and obligations to Members.  None theless, it could be relevant when interpreting the 
Agreement on Agriculture,  including Members' Schedules.   
7.351  The Panel is of the view, that even if, arguendo , the Modalities Paper is to be considered as 
"context", within the meaning of Article 31.2 of the Vienna Convention  and even if it becomes clear 
that the European Communities did not take account of  its subsidies to C sugar in the calculation of its 
base quantity for export subsidies, this does not necessarily imply that the European Communities is 
now entitled to recalculate its base quantity.   
7.352  Even if there were clear evid ence that if the European Co mmunities had known that C sugar 
was subsidized, it would have increased its base quan tity to include additional subsidies to C sugar, 
the fact that the European Communities did not do so  at the time, does not in and of itself entitle the 
European Communities to claim a correction of its Schedule today.  WTO Members were not obliged  
to maintain export subsidies, they were only authorized  to maintain them as exceptions to the 
prohibition in Articles 8 and 3.3 of the Agreement on Agriculture .  Even if the interpretation provided 
by the Appellate Body in Canada – Dairy  was novel as suggested by the European Communities661, 
the fact remains that this Panel is bound by the wording of the WTO treaty and it does not have the 
competence to assess whether the Eu ropean Communities at the time mi sinterpreted the scope of its 
obligations. 
7.353  In the Panel's view, the European Communities' assertion that in light of the circumstances, 
the only course of action is for the Complainants to agree to the correction or revision of the European 
Communities' Schedule is not a matter for whic h the Panel has any authority as it goes beyond the 
scope of a panel recommendation which, according to Article 19.1 of the DSU  , should be limited to 
recommending that the concerned Member "bring the measure into conformity with the Agreement on 
Agriculture ".662  The Panel is not authorized, under the DSU , to force the Complainants to agree to 
such a correction or revision. of the European Communities' Schedule. 
7.354  Therefore, the only recommendation that this  Panel can make, is for the European 
Communities to bring its measures into conformity with the Agreement on Agriculture .  In the Panel's 
view this matter is of a multilateral nature and sh ould not be resolved in the context of dispute 
settlement.  The Panel notes that Members are fr ee to negotiate and agree on a revision to the 
European Communities' Schedule or to agree on a waiver in that regard. 
F. ARTICLE  10.1  OF THE AGREEMENT ON AGRICULTURE  
1. Arguments of the parties663 
7.355  The Complainants submitted that 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) of the Agreement on Agriculture , the Panel should, in the alternative, address their 
claims under Article 10.1 of the Agreement on Agriculture .   
                                                      
661 On the contrary the Appellate Body's interpretatio n of Article 9.1(c) would not seem to be a novel 
legal development but a confirmation or clarification of said provision. 
662 Article 19.1 of the DSU  provides: "Where a panel or the Appellate Body concludes that a measure is 
inconsistent with a covered agreement, it shall recomme nd that the Member concerned bring the measure into 
conformity with that agreement.  In addition to its recommendations, the panel or Appellate Body may suggest ways in which the Member concerned could implement the recommendations." 
663 See Section IV:D.2 above. WT/DS265/R 
Page 192  
 
 2. Assessment by the Panel 
7.356  Since the Panel has found that the European Communities is acting inconsistently with 
Articles 3 and 8 of the Agreement on Agriculture , in providing producers/exporters of C sugar and 
ACP/India equivalent sugar, with payments on expor ts financed by virtue of the EC sugar regime, 
within the meaning of Article 9.1(a) and (c) of the Agreement on Agriculture  in excess of the 
European Communities' commitment level, those subsidies cannot , by definition, be "export subsidies 
not listed in paragraph 1 of Article 9" , as required by Article 10.1 of the Agreement on Agriculture.
664  
In this respect the Panel refers to the finding of the Appellate Body in Canada – Dairy (Article 21.5 – 
New Zealand and US)  which held:  
"It is clear from the opening clause of Article 10.1 that this provision is residual in 
character to Article 9.1 of the Agreement on Agriculture . If a measure is an export 
subsidy listed in Article 9.1, it cannot simultaneously be an export subsidy under 
Article 10.1."665 
7.357  The Panel therefore sees no reason to examine the Complainant's claims under Article 10.1 of 
the Agreement on Agriculture . 
G. NULLIFICATION OR IMPAIRMENT  
1. Arguments of the parties 
7.358  The Panel recalls that the parties' argume nts are summarized in paragraphs 4.267-4.284 
above. 
7.359  Subsidiarily, the European Comm unities also submitted that even  if the export of C sugar and 
the ACP/India sugar Footnote resulted in a violation of Articles 3.3, 8 or 10.1 of the Agreement on 
Agriculture , such violation would not nullify or impair any benefits accruing to the complaining 
parties. 
7.360  The European Communities submitted that Article 3.8 of the DSU  made clear that, while a 
finding of violation of a covered ag reement gave rise to a presumpti on of nullification or impairment 
of benefits accruing under that agreement, the de fending party had an opportunity to rebut such 
presumption.  In the opinion of the European Communities, the ordinary meaning of the term 
"adverse impact" in Article 3.8 of the DSU  did not require that the defe nding party had to show that 
the alleged violation had had no actual effect on th e Complainants' exports to establish the absence of 
such impact.  The European Communities submitted that it had shown that the Complainants had 
suffered no "adverse impact" because they could not have expected  that the European Communities 
would stop exporting C sugar.   
7.361  The European Communities argued that if it were to reduce its exports of sugar by 
60 per cent, as requested by the Complainants, it would be doing much more than removing any "adverse impact". The European Communities submitte d that, if nevertheless the Panel were of the 
view that the Complainants were entitled to exp ect that the European Communities would reduce its 
exports of C sugar and ACP/India equivalent su gar, such expectations would be limited to a 
21 per cent reduction, as envisaged in the Modalities Pape r with respect to all e xport subsidies, rather 
than their complete elimination.  Accordingly, the alleged violation of Articles 3, 8 and 10.1 of the 
Agreement on Agriculture  would nullify or impair benefits accruing to the Complainants only to the 
                                                     
 
664 Appellate Body Report on Canada – Dairy , para. 124. 
665 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US),  para. 121.  WT/DS265/R 
 Page 193 
 
 
 extent that the current volume of subsidized exports exceeded 79 per cent of the quantity of 
subsidized exports made during the base period.   
7.362  The Complainants considered that the EC's  infringement of its obligations under the 
Agreement on Agriculture  had resulted in a prima facie case th at nullification and impairment had 
been suffered by the Complainants.  They  agreed with the European Communities that, pursuant to 
Article 3.8 of the DSU , the European Communities, as the defending party, could rebut the 
presumption of nullification and impairment but s ubmitted that in doing so, it must, under Article 3.8 
of the DSU , establish that its breach of the rules had not had "an adverse impact"  on the 
complainant(s).   
7.363  Furthermore, the Complainants provided evid ence that the EC sugar regime caused them 
losses.  The Complainants referred to a March 2004 Oxfam study666 which had calculated, based on 
2002 exports, that the EC sugar regime caused immediate losses of $494 million for Brazil and $151 
million for Thailand in that year alone.  Brazil submitted that that was serious nullification or 
impairment by any reasonable standard.  The Compla inants also referred to this report which noted 
the cost of the EC sugar regime to South Africa and a number of other developing countries, and 
recalled that the Panel had heard directly from Colombia and Paraguay, as third parties, that such 
regime hurt them as well.667   
7.364  The European Communities responded that th e Complainants' arguments overlooked the 
thrust of the European Communities' defence, whic h was precisely that the Complainants could have 
no "legitimate expectations" that the European Comm unities would stop its exports of C sugar.  At 
most, the Complainants could have expected th at the European Communities would reduce those 
exports by 21 per cent (in quantity) as agreed in the Modalities Paper. 
7.365  All parties agreed that the nullification or im pairment allegedly suffered as a result of the 
WTO inconsistencies of the EC sugar regime w ould not differ based on the particular agreement 
violated.668  The Complainants clarified, however, that  if the elements of a violation under the 
Agreement on Agriculture  and the SCM Agreement  are established, then they are entitled to the 
remedies for nullification or impairment established by each agreement, provided there is no overlap 
or duplication in any remedies actually imposed.  
2. Assessment by the Panel 
7.366  The Panel recalls the text of Article 3.8 of the DSU  which provides that the prima facie 
presumption of nullification and impairment may be rebutted: 
"In cases where there is an infringement of the obligations assumed under a covered 
agreement, the action is considered prima facie  to constitute a case of nullification or 
impairment.  This means that there is normally a presumption that a breach of the rules has an adverse impact on other Members parties to that covered agreement, and in such cases , it shall be up to the Member against whom the complaint has been 
brought to rebut the charge. " (emphasis added) 
7.367  The Panel further recalls that in EC – Bananas III , the Appellate Body observed that the 
European Communities, in its appeal, attempted to "rebut the presumption of nullification or 
                                                     
 
666 Exhibit ALA-12, pages 2 and 28. 
667 Brazil's closing statement at the second substantive meeting of the Panel, para. 2, Colombia's oral 
statement, para. 2 and Paraguay' s oral statement, para. 2. 
668 Parties' replies to Panel question No. 2. WT/DS265/R 
Page 194  
 
 impairment on the basis that the United States h as never exported a single banana to the European 
Community, and therefore, could not possibly suffer any trade damage."  The Appellate Body stated: 
"[W]e note that the two issues of nullification or impairment and of the standing of 
the United States are closely related….[T]wo points are made that the Panel may well have had in mind in reaching its conclusions  on nullification or impairment.  One is 
that the United States is a producer of bananas and that a potential export interest by 
the United States cannot be excluded; the other is that the internal market of the United States for bananas could be affect ed by the EC bananas regime and by its 
effects on world supplies and world prices of bananas…. They are…relevant to the 
question whether the European Communities has rebutted the presumption of 
nullification or impairment.
 (emphasis added) 
So, too, is the panel report in United States–- Superfund , to which the Panel referred.  
In that case, the panel examined whether measures with 'only an insignificant effect 
on the volume of exports do nullify or impa ir benefits under Article III:2 ...'.  The 
panel concluded (and in so doing, confirme d the views of previous panels) that: 
'Article III:2, first sentence, cannot be interpreted to protect 
expectations on export volumes;  it protects expectations on the competitive relationship between im ported and domestic products.  A 
change in the competitive relationshi p contrary to that provision must 
consequently be regarded ipso f acto as a nullification or impairment 
of benefits accruing under the Gene ral Agreement.  A demonstration 
that a measure inconsistent with Ar ticle III:2, first sentence, has no or 
insignificant effects would therefore in the view of the Panel not be a sufficient demonstration that the benefits accruing under that provision had not been nullified or impaired even if such a rebuttal were in principle permitted.'
669 
The panel in United States – Superfund  subsequently decided 'not to examine the 
submissions of the parties on the tr ade effects of the tax differential'  on the basis of 
the legal grounds it had enunciated.  The reasoning in United States – Superfund 
applies equally in this case. "670 (emphasis added) 
7.368  The Panel also notes that in the panel on Turkey – Textiles , Turkey argued that even if its 
quantitative restrictions on imports of textile and cl othing products from India were in violation of 
WTO law, India had not suffered any nullification or  impairment of its WTO benefits within the 
meaning of Article 3.8 of the DSU because imports of textile and clothing from India had increased 
since the Turkish measures at issue had entered into  force.  The panel rejected this argument in a 
finding not reviewed by the Appellate Body: 
"We are of the view that it is not possible to segregate the impact of the quantitative 
restrictions from the impact of other factors.  While recognizing Turkey's efforts to 
liberalize its import regime on the occasion of  the formation of its customs union with 
the European Communities, it appears to us that even if Turkey were to demonstrate 
that India's overall exports of clothing a nd textile products to Turkey have increased 
from their levels of previous years, this would not be sufficient to rebut the presumption of nullification and impairmen t caused by the existence of WTO 
incompatible import restrictions.  Rather,  at minimum, the question is whether 
                                                     
 
669 (footnote original)  GATT Panel Report on US – Superfund , para. 5.1.9. 
670 Appellate Body Report on  EC – Bananas III , paras. 251-253.    WT/DS265/R 
 Page 195 
 
 
 exports have been what they would otherwise have been, were there no WTO 
incompatible quantitative restricti ons against imports from India .  Consequently, we 
consider that even if the presumption in Article 3.8 of the DSU  were rebuttable, 
Turkey has not provided us with sufficient information to set aside the presumption 
that the introduction of these import restrictions on 19 categories of textile and 
clothing products has nullified and impair ed the benefits accruing to India under 
GATT/WTO." 671 (emphasis added) 
7.369  The European Communities cites the fi ndings of the Appellate Body in India – Patents (US) 
to conclude that the existence of nullification or  impairment should be assessed by looking at the 
legitimate expectations of the Complainants.  The Pa nel recalls that in that case, the Appellate Body 
rejected the panel's conclusion that the protecti on of "legitimate expectations" is used in GATT acquis  
as a principle of interpretation.672  In this context, the Appellate Body made clear that the "legitimate 
expectations of the parties to a treaty are reflected in the language of the treaty itself" and that this 
course of action should not include the "imputation in to a treaty of words that are not there or the 
importation into a treaty of concepts that were not intended."673  More importantly, in that dispute, the 
panel and the Appellate Body had resorted to reliance on expectations to establish a violation674, 
whereas in this case, the European Communities'  argumentation refers to the nullification or 
impairment of benefits that may or ma y not result from an established violation. 
7.370  In the Panel's view, the European Commun ities' reliance on the Complainants' general 
expectations or lack thereof, is not sufficient to rebut the presumption of nullification of benefits 
pursuant to Article 3.8 of the DSU , once a violation has been demonstrated.675 The Complainants, as 
with all Members, had legitimate expectations that  the competitive relationship of their sugar would 
not be nullified or impaired by the export subsid ies of the European Communities provided in excess 
of the European Communities' commitment level.  Th e Complainants also had legitimate expectations 
that the European Communities would comply with the Agreement on Agriculture , including the 
European Communities' obligation not to provid e export subsidies above its commitment level. 
7.371  The Panel recalls that the flexibilities provided for by Article 9.2(b)(iv) of the Agreement on 
Agriculture  is an exception to the general prohibiti on against export subsidies provided for in 
Article 8 and 3.3 of the Agreement on Agriculture .  Therefore, the European Communities had the 
right, but was not obliged, to maintain export subsidi es if it had scheduled them and if it respected its 
reduction commitment pursuant to Article 9.2(b)(iv) of the Agreement on Agriculture .  The 
Complainants were entitled to exp ect that the European Communiti es put an end to or reduce its 
export subsidies in place prior to the Uruguay Round.  
                                                      
671 Panel Report on Turkey – Textiles , para. 9.204. 
672 Appellate Body Report on India – Patents (US) , paras. 39-42.  The Appellate Body had considered 
in that instance that the panel had confused two different concepts from previous GATT practice: (i) the protection of expectations of contracting parties as to  the competitive relationship between their products and 
the products of other contracting parties (in the context of violation complaints under Articles III and XI of the 
GATT); and (ii) the protection of the reasonable expectations of contrac ting parties relating to market access 
concessions (in the framework of non-violation complaints under Article XXIII:1(b) of the GATT). 
673 Appellate Body Report on India – Patents (US) , paras. 43-45. 
674 European Communities' first written submission, para. 147. 
675 The Panel recalls that Article 3.8 of the DSU  is a codification of GATT practice providing for the 
same presumption.  The Panel also recalls that such a presumption has never been rebutted, except in the 
exceptional panel report on US – Section 301 Trade Act .  The panel in US – Section 301 Trade Act  recognized 
that the United States had rebutted a prima facie presump tion because it found that th e United States had already 
lawfully removed the prima facie  violation of Section 304.  In that instance, the US Executive Office had made 
a "mandatory" promise to render determinations under Section 304 in conformity with its WTO obligations (in the SAA). This for the panel overrided the prima facie  case of violation found earlier on.  See Panel Report on 
US – Section 301 Trade Act , paras. 7.109-7.113. WT/DS265/R 
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 7.372  Moreover, the Panel notes that the European  Communities has not rebutted the evidence 
submitted by the Complainants with regard to the am ount of trade lost by the Complainants as a result 
of the EC sugar regime.  The Panel recalls that "a prima facie  case is one which, in the absence of 
effective refutation by the defending party, requires a pa nel, as a matter of law, to  rule in favour of the 
complaining party presenting the prima facie  case".
676 
7.373  The Panel is, therefore, of the view that the European Communities has not effectively refuted 
the Complainants' allegation that the European Co mmunities' violations nullified or impaired the 
benefits to which they are entitled.  In par ticular, the European Communities has not submitted 
sufficient factual evidence to sugg est that the Complainants did no t suffer an "adverse impact" from 
the European Communities' exports of C sugar and ACP/India equivalent sugar provided in excess of 
the European Communities' commitment level.  The fact that the Complainants did not bring their 
claims forward earlier does not relieve the European Communities from adducing sufficient 
arguments and evidence to rebut the presumption in Article 3.8 of the DSU . 
7.374  Consequently, the Panel finds that the European Communities' violations of the Agreement on 
Agriculture  nullified or impaired the benefits to wh ich the Complainants were entitled under the 
Agreement on Agriculture . 
H. ARTICLE  3 OF THE SCM A GREEMENT  
1. Arguments of the parties 
7.375  The arguments of the parties are summarized in paragraphs 4.232 to 4.266 of this Panel 
report. 
7.376  The Complainants submit that the export subs idies granted in respect of exports of quota 
sugar, ACP/India equivalent sugar and C sugar were prohibited subsidies under the SCM Agreement . 
More specifically, the Complainants claimed that  the EC sugar regime provided subsidies that 
amounted to an export subsidy listed in Item (d) of the Illustrative List of Export Subsidies in Annex I 
of the SCM Agreement  (hereinafter the "Illustrative List of the SCM Agreement ) and that the export 
refund on exports of ACP/India "equivalent" sugar amount ed to an export subsidy listed in Item (a) of 
the same Illustrative List.  Furthermore, Australia and Brazil claimed that the EC sugar regime was 
also otherwise inconsistent with Article 3.2 of the SCM Agreement .  
7.377  The European Communities argued that the SCM Agreement  was not applicable to 
agricultural products. It pointed to, inter alia , Article 21.1 of the Agreement on Agriculture  and 
claimed that this provision had been interprete d by the Appellate Body as meaning that the other 
Annex IA Agreements applied "e xcept to the extent that the Agreement on Agriculture  contains 
specific provisions dealing specifically with the same matter."677 The European Communities 
contended that it was clear that the Agreement on Agriculture  contained specific provisions dealing 
specifically with the "same matter".678  For the European Communities, applying the SCM Agreement  
to agricultural export subsidies (even t hose granted inconsistently with the Agreement on Agriculture ), 
and specifically the prohibition on export subsid ies, would undermine the specificity of the 
agricultural regime, and the gradual process of  reform which all Members signed up to.   
                                                      
676 Appellate Body Report on EC – Hormones , para. 104. 
677 Appellate Body Report on EC – Bananas III ,  para. 155. 
678 For the European Communities, this would neve rtheless not render Article 13(c) meaningless 
because Article 13 in general, and Article 13(c) in pa rticular, were intended to provide added clarity to the 
relationship between the two agreements  during a specific time-period (the nine year implementation period for 
Article 13).  WT/DS265/R 
 Page 197 
 
 
 7.378  The Complainants reiterated that there were es sentially three differences between the remedy, 
and the implementation of recommendations and rulings, provided by Articles 19 to 21 of the DSU  
and that provided by Article 4.7 of the SCM Agreement  pertaining to the nature of the remedy, the 
time-frame and the procedural aspects.   Of these differences the last was of particular importance to 
the Complainants in order to avoid further nego tiations with the European Communities and possibly 
a lengthy and complex arbitration procedure to reso lve a matter that could and should be resolved by 
this Panel. 
7.379  The European Communities responded that the application of Article 4.7 of the 
SCM Agreement  would amount to nullifying the rights of WTO Members under the Agreement on 
Agriculture . 
2. Assessment by the Panel 
7.380  The Panel recalls that, in this dispute, it h as followed the order of examination advanced by 
the Appellate Body in Canada – Dairy (Article 21.5 New Zealand and US ) in relation to the 
Agreement on Agriculture  and the SCM Agreement , where the Appellate Body stated that Article 3.1 
of the SCM Agreement  "indicates that the WTO-consistency of an alleged export subsidy for 
agricultural products has to be examined, in the first place, under the Agreement on Agriculture ."679 
This approach was supported by all parties to the present dispute.680 
7.381  The Panel has already found the EC sugar regi me to be inconsistent with the European 
Communities' export subsidy obligations under both Ar ticle 3.3 and Article 8 (through Article 9.1(a) 
and Article 9.1(c)) of the Agreement on Agriculture .  In principle, therefore, the Panel could  also 
examine the Complainants claims that the regime, or parts thereo f, constitute an export subsidy 
inconsistent with Article 3 of the SCM Agreement , in accordance with the Panel's terms of reference.  
The question that arises is whether the Panel should  examine these claims, or whether it should rather 
apply the principle of judicial economy. 
7.382  The Panel recalls that the Appellate Body in Australia – Salmon , referred to earlier by the 
parties, clarified when judicial economy can be exercised and cautioned against a panel providing 
only a partial resolution of the matter at issue:   
"The principle of judicial economy has to be applied keeping in mind the aim of the 
dispute settlement system.  This aim is to resolve the ma tter at issue and 'to secure a 
positive solution to a dispute'.  To provide only a partial resolution of the matter at 
issue would be false judicial economy.   A panel has to address those claims on which 
a finding is necessary in order to enable the DSB to make sufficiently precise 
recommendations and rulings so as to a llow for prompt compliance by a Member 
with those recommendations and rulings 'in order to ensure effective resolution of disputes to the benefit of all Members'." (emphasis added).
681  
Although the Australia – Salmon dispute did not involve a claim under the SCM Agreement , we 
believe that the principles it sets forth regarding the exercise of judicial economy are relevant to WTO 
dispute settlement generally.  
 7.383  The Complainants claim that the Panel is entitled to examine the Complainants' export 
subsidy claims under Article 3 of the SCM Agreement  because the EC sugar regime is inconsistent 
                                                     
 
679 Appellate Body Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 124. 
680 See for example Brazil's second written submission para. 75. 
681 Appellate Body Report on  Australia – Salmon , para. 223. WT/DS265/R 
Page 198  
 
 with the European Communities' e xport subsidy commitments under the Agreement on Agriculture .
682  
As a matter of logic, therefore, it would appear  that the European Communities would, by fully 
implementing a recommendation by the DSB to bri ng the European Communities' sugar regime into 
conformity with its obligations under the Agreement on Agriculture , also preclude any finding in the 
context of a review procedure under Article 21.5 of the DSU  that the regime is inconsistent with the 
export subsidy disciplines of the SCM Agreement .  Accordingly, the Panel's findings under the 
Agreement on Agriculture  should be sufficient to fully resolve the matter at issue. 
7.384  The Complainants appear to be of the view th at the Panel must examine their export subsidy 
claims under Article 3 of the SCM Agreement  so that they may obtain the benefits of a 
recommendation under Article 4.7 of that Agreemen t that the European Communities withdraw the 
subsidy "without delay" and the specification of th e time period within which the measure must be 
withdrawn.  They emphasize in this respect  the reference by the Appellate Body in Australia – 
Salmon  to the need to make such fi ndings as are necessary to ensure prompt  compliance.  There is 
some issue as to whether this Panel is entitled to  make such a recommendation and to specify such a 
time period in the circumstances before it.683  In any event, it seems to the Panel that the Appellate 
Body's concern in Australia – Salmon  was to ensure that a panel's findings be sufficiently complete so 
as to inform the Member as to w hat needs to be done, rather than on when  it needs to be done.  The 
Panel doubts that the Appellate Body considered that  the application of the normal rules regarding the 
timing of implementation, applicable in most  WTO disputes, would not constitute "prompt" 
compliance, and it does not believe that the Appella te Body's reasoning requires it to decide claims 
not necessary to the full resolution of the matter before  the Panel merely in order to obtain what might 
– but would not necessarily be – more rapid compliance.  
7.385  Referring to Article 19.2 of the DSU, Australia contends that a decision to exercise judicial 
economy in respect of the Complainants' SCM Agreement  claims would diminish its rights under a 
covered agreement in regard to the implementation ti me period in the event of its claims succeeding.  
The Panel notes that, under Article 4.7 of the SCM Agreement,  a panel shall make its 
recommendation, including the time period for implementing this recommendation, "[i]f the measure 
in question is found to be a prohibited subsidy"  .  Similarly, Article 19.1 of the DSU provides that a 
panel shall make its recommendation "[w]here a pa nel or the Appellate Body concludes that a 
measure is inconsistent with a covered agreement" .  While these provisions govern the obligations of 
panels where they make findings of inconsistency, they do not, in the Panel's opinion, prevent panels 
from exercising judicial economy in the appropriate circumstances.  Thus, the Panel does not agree 
that its decision to exercise judicial economy in th e present case diminishes Australia's rights within 
the meaning of Article 19.2 of the DSU 
7.386  Finally, the Panel notes that the Complainants' have not set forth their claims under Article 3 
of the SCM Agreement  in quite as clear and unambiguous a manner as under the Agreement on 
Agriculture.   Rather, the Complainants have  focused on their claims under the Agreement on 
Agriculture .  Panels depend upon the activ e participation of the parti es to clarify and develop the 
issues presented in a dispute.  The Panel consider s that the important questions presented under the 
SCM Agreement  in this dispute would be best decided in  a case where they have been further argued 
by the parties.  In this connection, the Panel especially notes that many of the Complainants' 
references to the SCM Agreement were made in the  context  of their claims under the Agreement on 
Agriculture .  
                                                      
682 Brazil's second written submission, title F and paras.  75 and 76; Thailand's first written submission 
para. 113 and Australia's first written submission, paras.  189-193 and second written submission, paras. 67-71 
and 100-101.    
683 See Panel Report on Canada – Dairy (Article 21.5 – New Zealand and US) , para. 6.99.  WT/DS265/R 
 Page 199 
 
 
 7.387  For these reasons, the Panel exercises judi cial economy and declines to examine the 
Complainants' export subsidy claims under Article 3 the SCM Agreement . 
VIII.  CONCLUSIONS, RECOMMENDATION AND SUGGESTION 
A. CONCLUSIONS  
8.1 The Panel concludes  that: 
(a) the European Communities' budgetary outla y and quantity commitment levels for 
exports of subsidized sugar is determined with reference to the entry specified in 
Section II, Part IV of its Schedule and the content of Footnote 1 in relation to these 
entries is of no legal effect and does not enlarge or otherwise modify the European 
Communities' specified commitment levels.  
(b) the European Communities' quantity commitm ent level for exports of sugar pursuant 
to Articles 3.3, and 8 of the Agreement on Agriculture  is 1,273,500 tonnes per year, 
with effect from the marketing year 2000/2001. 
(c) the European Communities' budgetary outlay commitment level for exports of sugar 
pursuant to Articles 3.3, and 8 of the Agreement on Agriculture  is €499.1 million per 
year, with effect from the marketing year 2000/2001”. 
(d) the Complainants have provided prima f acie evidence that since 1995 the European 
Communities' total exports of sugar ex ceeds its quantity commitment level. In 
particular, in the marketing year 2000/ 2001 the European Communities' exported 
4,097,000 tonnes of sugar, i.e. 2,823,500 tonnes in excess of its commitment level. 
(e) there is prima facie evidence that the European Communities has been providing 
export subsidies within the mean ing of Article 9.1(a) of the Agreement on Agriculture  
to what it considers to be exports of "A CP/India equivalent sugar" since 1995.   
(f) there is prima facie evidence that the European Communities has been providing 
export subsidies within the mean ing of Article 9.1(c) of the Agreement on Agriculture  
to its exports of C sugar since 1995.  
8.2 In light of Article 10.3 of the Agreement on Agriculture , the Panel concludes  that the 
European Communities has not demonstrated that its  exports of sugar in excess of its commitment 
level are not subsidized .   
8.3 Therefore, the Panel concludes  that the European Communities,  through its sugar regime, has 
acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture , by 
providing export subsidies within the meaning of Article 9.1(a) and (c) of the Agreement on 
Agriculture in excess of (i) its quantity commitment level specified in Section II, Part IV of its 
Schedule, which since the marketing year 2000/2001 is for 1,273,500 tonnes of sugar and (ii) its 
budgetary outlay commitment level specified in Secti on II, Part IV of its Schedule, which since the 
marketing year 2000/2001 is €499.1 million  per year. 
8.4 Since Article 3.8 of the DSU  provides that "[i]n cases where there is an infringement of the 
obligations assumed under a covered agre ement, the action is considered prima facie to constitute a 
case of nullification or impairment", the Panel c oncludes that – to the extent the European 
Communities has acted inconsistently  with its obligations under the Agreement on Agriculture – it has 
nullified or impaired benefits accruing to Australia under the Agreement on Agriculture . WT/DS265/R 
Page 200  
 
 B. 
RECOMMENDATION  
8.5 In light of the above conclusions, the Panel recommends that the Dispute Settlement Body 
request the European Communities to bring its EC Council Regulation No. 1260/2001, as well as all other measures implementing or related to the Euro pean Communities' sugar regime, into conformity 
with its obligations in respect of export subsidies under the Agreement on Agriculture .
 
C. SUGGESTION BY THE PANEL  
8.6 The Panel is aware of the concerns and in terests expressed, in the context of these 
proceedings, by several developing countries, with regard to their continued preferential access to the 
EC market for their sugar exports.  
8.7 Pursuant to Article 19.1 of the DSU , the Panel suggests that in bringing its exports of sugar 
into conformity with its obligati ons under Articles 3.3 and 8 of the Agreement on Agriculture , the 
European Communities consider measures to bring its production of sugar more into line with 
domestic consumption whilst fully respecting its inte rnational commitments with respect to imports, 
including its commitments to developing countries. 
8.8 In this regard, the Panel notes the recent statement of the European Communities on 
14 July 2004 that the European Communities "fully stands by its commitments to ACP countries and 
India" and that with the reform of its sugar re gime, the ACP countries and India will "get a clear 
perspective, keep their import preference s and retain an attractive export market."684 
                                                      
684 See "Commission proposes more market-, co nsumer- and trade-friendly regime" dated  14/07/2004. 
http://www.europa.eu.int/rapid/pressR eleasesAction.do?reference=IP/04/915&format=HTML&aged=0&langua
ge=EN&guiLanguage=en .  WT/DS265/R 
 Page 201 
 
 
 ANNEX A  
 
LIST OF EXHIBITS SUBMITTED BY THE PARTIES 
 
EXHIBIT CONFIDENTIAL 
(C) FULL TITLE 
ALA-1 C Roger Rose, Sugar in the European Union: Sugar Production Costs and Cross 
Subsidies to C Sugar Exports, 2004 
ALA-2  GATT, AG/W/9, 26 June 1984, Special distribution, Committee on Trade in 
Agriculture, Draft Recommendations – E xplanatory note by the Secretariat 
ALA-3  G8, Technical Discussions on Agriculture Schedules, Geneva, 23 to 26 March 
1992 - Record of Discussion 
ALA-4  Letter from Trân Van-Thinh, EC Permanent Representative, to Arthur Dunkel, 
Director-General, GATT, Chairman of the TNC, 4 March 1992 – agricultural 
negotiations – Draft commitments (schedules) 
ALA-5  Uruguay Round – Agriculture, 10 D ecember 1993 letter and accompanying 
paper, Issues Requiring Settlement – Australia, from Australian Minister for Trade, Peter Cook, to Mr Steichen EU Commissioner for Agriculture & Rural Development 
ALA-6  14 December 1993 Letter from Trân Van- Thinh EC Permanent Representative, 
to Peter Sutherland, Director-General GATT - agricultural negotiations – draft 
commitments (schedules) 
ALA-7  25 March 1994 Letter from Hervé Jouanjean, Deputy Head of EC Delegation, 
to A. Hoda, Deputy Director-General GATT – agricultural negotiations – draft commitments (schedules) 
ALA-8  Uruguay Round – Australia – Summary statement – Issues Still Requiring 
Settlement – Brussels, 31 January 1994 
ALA-9  Judgment of the Court (Sixth Chamber) - 10 January 2002(1), (Agriculture – 
Common organisation of the markets – Sugar – Attribution as C sugar of a quantity of sugar produced during a given marketing year – Charge payable in 
respect of sugar disposed of on the inte rnational market – Levied in the case of 
export with an export licence – Export refunds) Case C-101/99. 
ALA-10  Opinion of Advocate General Stix-Hackl delivered on 10 September 2003(1) 
Case C-329/01 The Queen on the application of British Sugar plc v   
Intervention Board for Agriculture Produ ce, (Reference for a preliminary ruling 
from the High Court of Justice of England & Wales, Queen's Bench Division (Administrative Court)) (Common organisation of the markets in the sugar 
sector – Export licence for C sugar – Pr oof of export – Correction of licence – 
Principle of proportionality – Penalty) 
ALA-11  Official Journal of the European Union - 1.10.2003, Commission Regulation 
(EC) No 1739/2003 of 30 September 2003, Reducing, for the 2003/2004 marketing year, the guaranteed quantity under the production quotas for the 
sugar sector and the presumed maximum supply needs of sugar refineries under 
preferential imports 
ALA-12  Oxfam Briefing Paper 61, Dumping on the world - Ho w EU sugar policies hurt 
poor countries , March 2004 . 
 
 
 
 WT/DS265/R 
Page 202  
 
 EXHIBIT CONFIDENTIAL 
(C) FULL TITLE 
BRA-1 C Considerations over C Sugar Production and Exports in the European 
Communities, report prepared by Plinio  M. Nastari, Ph.D., Datagro, Brazil 
BRA-2 
 
 C LMC Data 
COMP-1  European Communities Court of Auditors, Special Report No 20/2000 
(pursuant to Article 248, paragraph 4 (2), EC) concerning the management of the Common Organisation of the Market for Sugar  together with the 
Commission's replies 2000 
COMP-2  Netherlands Economic Institute, Evaluation of the Common Organisation of 
the Markets in the Sugar Sector  (prepared for the Commission of the European 
Communities), September 2000  
COMP-3  Oxfam Briefing Paper 27, The Great EU Sugar Scam, How Europe's sugar 
regime is devastating livelihoods in the developing world,  August 2002 
COMP-4  OECD, Working Party on Agricultural Policies and Markets,   
Background Information on Selected Po licy Issues in the Sugar Sector, 
AGR/CA/APM(2001)32/FINAL, 7 June 2002 
COMP-5 
EC Regulations   A. Commission Regulation (EC) No 38/2004 of 9 January 2004 
amending Regulation (EC) No 314/2002 laying down detailed rules for the application of the quota system in the sugar sector 
B. Commission Regulation (EC) No 1159/2003 of 30 June 2003 laying 
down detailed rules of application for the 2003/04, 2004/05 and 2005/06 
marketing years for the import of cane sugar under certain tariff quotas and 
preferential agreements and amending Regulations (EC) No 1464/95 and (EC) No 779/96 
C. Commission Regulation (EC) No 1440/2002 of 7 August 2002 
revising the maximum amount for the B production levy and amending the 
minimum price for B beet in the sugar sector for the 2002/03 marketing year 
D. Commission Regulation (EC) No 1164/2002 of 28 June 2002 
amending Regulation (EC) No1646/2001 as regards the setting of the amount of the adjustment aid and additional basic aid for the sugar refining industry for the 2002/2003 to 2005/2006 marketing years  
E. Commission Regulation (EC) No 314/2002 of 20 February 2002 
laying down detailed rules for the application of the quota system in the sugar 
sector 
F. Council Regulation (EC) No 1260/2001 of 19 June 2001 on the 
common organisation of the markets in the sugar sector 
G. Commission Regulation (EC) 1520/2000 of 13 July 2000, laying 
down common detailed rules for the application of the system of granting export refunds on certain agricultural products exported in the form of goods not covered by Annex I to the Treaty, and the criteria for fixing the amount of 
such refunds 
H. Council Regulation (EC) No 2201/96 of 28 October 1996 on the 
common organization of the markets in processed fruit and vegetable products 
I. Commission Regulation (EC) No 2315/95 of 29 September 1995 
laying down detailed rules for the application of export refunds to certain sugars covered by the common organization of the market in sugar used in 
certain products processed from fruit and vegetables 
  WT/DS265/R 
 Page 203 
 
 
 EXHIBIT CONFIDENTIAL 
(C) FULL TITLE 
J. Commission Regulation (EC) No 1464/1995 of 27 June 1995 on 
special detailed rules for the application of the system of import and export licences in the sugar sector 
K. Council Regulation (EC) No 3 448/93 of 6 December 1993 laying 
down the trade arrangements applicable to certain goods resulting from the processing of agricultural products 
L. Commission Regulation (EEC) No 65/82 of 13 January 1982 laying 
down detailed rules for carrying forward sugar to the following marketing year. 
COMP-6 
 Commission of the European Communities,  Commission Staff Working Paper, 
Reforming the European Union's sugar policy – summary of impact assessment , SEC(2003) September 2003 
COMP-7 
 Commission of the European Communities, Sugar: International Analysis 
Production Structures within the EU,  22 September 2003 
COMP-8 
 Commission of the European Communities, Common Organisation of the 
Sugar Market, Description 
[europa.eu.int/comm./agricultu re/markets/sugar/index_en.htm] 
COMP-9  European Communities Court of Auditors, Extracts from Annual Report 
concerning the financial year 2001 2002 /C 295/01, 28 November 2002  
COMP-10  Commission of the European Communities,  Official Journal L103/1,  
24.4.2003, Commission Decision of  20 December 2001 declaring a 
concentration to be compatible with the common market and the EEA Agreement, (Case COMP/M.2530 - Südz ucker/Saint Louis Sucre), (C(2001) 
4524) 
COMP-11  European Communities Court of Auditors, Special Report No 9/2003 (pursuant 
to article 248, (4), second subparagra ph, EC) concerning the system for setting 
the rates of subsidy on exports of agricultural products  (Export Refunds) 
together with the Commission's replies, 2003/C 211/01, 5 September 2003 
COMP-12  Commission of the European Communities  -  Commission Responds to Court 
of Auditors' report on the sugar market organization, press release BIO/00/214, 
9 November 2000 
COMP-13  Commission of the European Communities, Commission clears acquisition of 
Saint Louis Sucre by Südzucker subject to commitments, press release IP/01/1891, 20 December 2001 
COMP-14  European Communities  (EC, EURATOM) , extracts from Preliminary Draft 
general budget of the European Communities for the financial year 2004 
Volume 1, 13 June 2003 
COMP-15  Commission of the European Communities Extracts from 32
nd Financial 
Statement concerning the European Agricu ltural Guidance and Guarantee Fund 
EAGGF, Guarantee Section – Financial Year 2002  (presented by the Commission) 12 November 2003 COM (2003) 680 final 
COMP-16  Schedule CXL:   European Communities, Extract from Part I : Most-Favoured-
Nation Tariff, Section I – Agricultural Products 
Section I – B Tariff Quotas 
Part IV – Agricultural Products : Commitments Limiting Subsidization, Article 
3 of the Agreement on Agriculture) 
Section II : Export Subsidies : Budge tary Outlay and Quantity Reduction 
Commitments WT/DS265/R 
Page 204  
 
 EXHIBIT CONFIDENTIAL 
(C) FULL TITLE 
COMP-17  WTO Committee on Agriculture, notifications concerning export subsidy 
commitments (Tables ES:1 to ES:3) received from the delegation of the 
European Communities for marketing years 1995/1996 to 2001/2002, G/AG/N/EEC/5, 11, 20, 23, 32, 36, 44. 
COMP-18  WTO Committee on Agriculture, notifications concerning domestic support 
commitments, (Table DS:1 and the releva nt supporting tabl es) received from 
the delegation of the European Communities for marketing years 1995/1996 
through to 1999/2000, G/AG/N/EEC/12, 16, 26, 30, 38 
 
COMP-19  Negotiating Group on Mark et Access - 20 December 1993, Modalities for the 
Establishment of Specific Binding Commitments under the Reform Programme, Note by the Chairman  of the Market Access Group, 
MTN.GNG/MA/W/24 
COMP-20  Blair House Agreement, Exchanges of le tters regarding the oilseeds agreement 
between EC Commission Vice-President With Special Responsibility For External Relations and Commercial Policy and the United States Trade Representative, 2 and 4 December 1992 
COMP-21  WTO Committee on Agriculture, Summary Report of the Meeting held on 17-
18 November 1998, G/AG/R/17, 25 January 1999 
COMP-22  WTO Ministerial Conference Fourth Session Doha, 9-14 November 2001, 
Summary Record of the Ninth Meeting WT/MIN(01)/SR/9, 10 January 2002 
 
EC-1  Export subsidy commitments in Schedule CXL – EC 
EC-2  Draft Final Act Embodying the Results of the Uruguay Round of Multilateral 
Trade Negotiations, MTN.TNC/W/FA, 20 December 1991, Section L ("Text on Agriculture"), Part B ("Agreement on Modalities for the Establishment of Specific Binding Commitments under the Reform Program2) 
EC-3  Modalities for the Establishment of Specific Binding Commitments, 
MTN.GNG/MA/W/24, 20 December 1993 
EC-4  Draft schedule of commitmen ts submitted on 16 December 1992 
EC-5  Letter of 4 March 1992 and Supporting Table 11 attached to that letter 
EC-6  Draft schedule of commitmen ts submitted on 14 December 1993 
EC-7  List of bilateral meetings between the EC and other participants 
EC-8  EC Commission minutes of the mee ting with Australia of 3 December 1993 
EC-9  Export subsidy commitments in Schedule LXXX- EC 
EC-10  Minutes of the DSB meeting of 18 December 2001, WT/DSB/M/116 
EC-11  Minutes of the DSB Meeting of 17 January 2003, WT/DSB/M/141 
EC-12  Uruguay Round Outcomes – Agriculture , July 1994, Agriculture Branch, Trade 
Negotiations and Organisations Divisions, Department of Foreign Affairs and Trade, Canberra, Australia 
EC-13  Uruguay Round Outcomes – Agriculture provided the basis for the document 
Implications of the GATT Uruguay Round for the Sugar Industry, An 
Australian Perspective , ABARE Conference Paper 94.19 
EC-14  International Policies Affecting Market Expansion , ABARE, 1999  WT/DS265/R 
 Page 205 
 
 
 EXHIBIT CONFIDENTIAL 
(C) FULL TITLE 
EC-15  Effects of the Uruguay  Round Agreement on U.S. Agricultural Commodities , 
USDA, March 1994 
EC-16  Sample control sheet for export refunds under the sugar CMO, DG 
Agriculture, European Commission 
EC-17 C Update of Sugar Policy in Selected Countries,  LMC International 
EC-18 C Protected Domestic Sugar Markets, The Scope for Cross-Subsidising Sugar 
Exports, LMC International, March 2003  
EC-19 C Review of Sugar Policies in Major Sugar Industries, Transparent and Non-
Transparent or Indirect Policies , LMC International, January 2003. 
EC-20  Excerpt from Background Information on Select ed Policy Issues in the Sugar 
Sector , OECD, June 2002  
EC-21  The Australian Sugar Industry in the 1990s , ABARE, August 1991, The 
Australian Sugar Industry,  Sweetener Analysis, May 1994, H.R. Bonanno, P.J. 
Noble, The Australian Sugar Industry, recent changes and future prospects , 
F.O. Licht, 1993 Yearbook. 
EC-22 C Excerpts from the LMC Worldwide Survey of Sugar and HFCS Production 
Costs , 2003 Report  
EC-23 C Profitability of the export sales of the major sugar exporters, according to LMC 
data.  
EC-24  Letter dated 10 December 1993 from Mr Peter Cook, Australia's Minister of 
Trade to Mr René Steichen, Commission er for Agriculture of the European 
Commission  
EC-25  Production, carry over and exports of C sugar by French producers  
EC-26  Ministerial Communiqué of 23 February 1994. 
EC-27  Section II, Part IV of Canada's  and Ne w Zealand's schedules of export subsidy 
commitments. 
 WT/DS265/R 
Page 206  
 
 ANNEX B
 
 
SCHEDULED EXPORT SUBSIDY COMMITMENT LEVELS (QUANTITIES ), 
AND NOTIFIED TOTAL EXPORTS  
 
Scheduled (1) 
implementation period Scheduled quantity 
levels (1) Commitment level 
alleged by the EC685 Notified total exports (2) 
Marketing year starting 
1October/30 September Thousand tonnes,   
white sugar equivalent " Annual reduction 
commitments + 1.6 million 
tons ACP/India equivalent" Thousand tonnes,      
product weight basis 
1995/1996 1,555.6 3,155.6 4,544.4 (3) 
1996/1997 1,499.2 3,099.2 4,536.0 (3) 
1997/1998 1,442.7 3,042.7 5,670.4 (3) 
1998/1999 1,386.3 2,986.3 5,116.3 (3) 
1999/2000 1,329.9 2,929.9 5,669.0 (3) 
2000/2001 1,273.5 2,873.5 6,023.0 
2001/2002 1,273.5 2,873.5 4,097.0 
 
(1)  Schedule CXL. 
 
(2)  Table ES:2 notifications  to the WTO Committee on Agriculture (G/AG/N/EEC/5/Rev.1; 
EEC/11; EEC/20/Rev.1; EEC/23; EEC/32; EEC/36; EEC/44). 
 
(3) Year starting 1 July to 30 June.  
                                                      
685 See Table 11 of the European Communities' first written submission.  The Panel presumes that the 
marketing years and the measurem ent units are identical to those specified in Schedule CXL.  
  WT/DS265/R
 Page 207ANNEX C  
 
SCHEDULE CXL – EUROPEAN COMMUNITIES 
This Schedule is authentic on ly in the English language 
PART IV – AGRICULTURAL PRODUCTS:  COMMITMENTS LIMITING SUBSIDIZATION 
(Article 3 of the Agreement on Agriculture) 
SECTION II:  Export Subsidies:  Budgetary  Outlay and Quantity Reduction Commitments 
 
Description of products 
and tariff item numbers 
at HS six digit level 
(*) Base 
outlay 
level 
 
Mio ECU Calendar/ 
other 
year 
applied 
(*) Annual and final outlay 
commitment levels  
1995 – 2000 
 
Mio ECU Base 
Quantity 
 
(*) 
000 t Calendar/ 
other 
year 
applied 
(*) Annual and final quantity 
commitment levels  
1995 – 2000 
 
000 t Relevant 
Supporting 
Tables and 
document 
reference 
1 2 3 4 5 6 7 8 
   1995 1996 1997 1998 1999 2000   1995 1996 1997 1998 1999 2000  
                  
 
 
  
 
   
 
 
Sugar (1) 779,9  733,1 686,3 639,5 592,7 545,9 499,1 1.612,0  1.555,6 1.499,2 1.442,7 1.386,3 1.329,9 1.273,5  
 
                  
 
  
 
  
 
  
 
 
(*) See Annex 
(1) Does not include exports of sugar of ACP and Indian origin  on which the Community is not making any reduct ion commitments.  The average of export in the period 1986 to 1990 
amounted to 1,6 mio t. 
 
 
Note:  For the purpose of this Panel Report, references to products othe r than sugar have been deleted from this page of the Eu ropean Communities' Schedule. 
 WT/DS265/R 
Page 208  
 
 ANNEX D
 
 
REQUESTS FOR THE ESTABLISHMENT OF A PANEL 
 
 
 WORLD TRADE  
ORGANIZATION  WT/DS265/21 
11 July 2003 
 (03-3752) 
 Original:   English 
 
  
EUROPEAN COMMUNITIES – EX PORT SUBSIDIES ON SUGAR 
 
Request for the Establishment of a Panel by Australia
 
   The following communication, dated 9 July 2003,  from the Permanent Mission of Australia to 
the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU. 
 
_______________ 
 
  My authorities have requested me to submit th e following request for the establishment of a 
panel on behalf of Australia. 
 
 On 27 September 2002 Australia requested c onsultations with the European Communities 
(EC) pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of 
Disputes (DSU), Article XXII:1 of the Genera l Agreement on Tariffs and Trade 1994 (GATT 1994), 
Article 19 of the Agreement on Agriculture and Ar ticles 4 and 30 of the Agreement on Subsidies and 
Countervailing Measures (SCM Agreement) with r espect to the EC's Common Organization of the 
Markets in sugar and its application and implementation.  The request was circulated to Members on 
1 October 2002 in document number WT/DS265/1.  Consultations were held  on 21 and 22 November 
2002 but unfortunately did not result in resolution of the dispute.   Consequently, Australia requests that a Panel be established pursuant  to Article 4.7 and 
Article 6 of the DSU, Article XXIII:2 of GATT 1994,  Article 19 of the Agreement on Agriculture and 
Article 4.4 and Article 30 of the SCM Agreement.   The measures that are the subject of this re quest are the subsidies provided by the EC in 
excess of its reduction commitment levels on sugar and sugar containing pr oducts including sugar 
cane and sugar beet, processed and unprocessed cane and beet sugar and chemically pure sucrose in 
solid form, molasses resulting from the extraction of refining of sugar, isoglucose, inulin syrup and 
the other products listed in Article 1 of Counc il Regulation (EC) No 1260/2001 of 19 June 2001 on 
the European Communities' Common Organization of th e markets in sugar sector (Official Journal of 
the European Communities, 30 June 2001, L178/1-45).  
 The above-mentioned subsidies are accorded through the EC sugar regime, which is 
contained in a number of EC regulations including  Council Regulation No 1260/2001 and related EC  WT/DS265/R 
 Page 209 
 
 
 regulations, administrative policies, rules, decisi ons and other instruments including instruments pre-
dating the above regulation, and their implementati on.  These various instruments will be referred to 
as "the EC sugar regime".   In addition to setting down the conditions attachi ng to imports of sugar, the EC sugar regime 
provides conditions attached to the production, supply and exports of sugar, including domestic 
support and export subsidies.  Sugar is classified in to quota and non-quota sugar.  Non-quota sugar is 
known as C sugar.  The sugar regime provides for the reclassification from quota to C sugar and from 
C sugar to quota sugar.  Sugar classified as C s ugar cannot be disposed of in the EC market.  
 
 Australia is particularly concerned at the subs idies provided by the EC for "C sugar" exports 
under the EC sugar regime.  Under the regime, producers of C sugar are able to sell C sugar on the 
world market at below the total average cost of production through cross-subsidisation of C sugar from quota sugar profits.  By financing payments on the export of C sugar, the EC exceeds its export 
subsidy reduction commitments under the WTO Agreement on Agriculture.   
 
 Australia is also particularly concerned at the provisions of the EC sugar regime which accord direct subsidies contingent on export performance for quantities of approximately 1.6 million tonnes 
of sugar which are additional to the budgetary outlays  and quantities of subsidised exports notified by 
the EC to the Committee on Agriculture under the provisions of Article 18.2 of the Agreement on 
Agriculture.  In the application of those provisi ons, the EC significantly exceeds its budgetary outlays 
and quantity commitments for export subsidi es on sugar under the Agreement on Agriculture. 
  By granting export subsidies within the meaning of Articles 1.1(a)(1)(i), 1.1(a)(1)(iv), 1.1(a)(2) and 1.1(b) of the SCM Agreement that are not permitted by the Agreement on Agriculture, 
the EC also acts inconsistently with its obliga tions under Articles 3.1(a) and 3.2 of the SCM 
Agreement.  
  Australia considers that the provision of the a bove subsidies and the rele vant elements of the 
EC sugar regime are inconsistent with the EC's obligations under the following provisions: 
 – Articles 3.3, 8, 9.1(a), 9.1(c), and altern atively, 10.1 of the Agreement on Agriculture; 
 
– Articles 3.1(a) and 3.2 of the Agreemen t on Subsidies and Countervailing Measures. 
  Australia therefore requests the establishment of  a Panel in accordance with Article 7 of the 
DSU.  
 
 I would be grateful if you would place this item on the agenda for the next DSB meeting scheduled for 21 July 2003.  
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  WT/DS265/R 
Page 210  
 
  
 
WORLD TRADE  
ORGANIZATION  WT/DS266/21 
11 July 2003 
 (03-3760) 
 Original:   English 
  
EUROPEAN COMMUNITIES –EXPORT SUBSIDIES ON SUGAR 
 
Request for the Establishment of a Panel by Brazil
 
   The following communication, dated 9 July 2003, from the Permanent Mission of Brazil to the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU. 
 
_______________ 
 
  On 27 September 2002, Brazil requested cons ultations with the European Communities 
("EC") pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement 
of Disputes ("DSU"), Article XXII:1 of the Ge neral 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 Agre ement"), with respect to export subsidies 
provided by the EC to its sugar industry.  That  request was circulated to Members in document 
WT/DS266/1,
 G/L/570,  G/AG/GEN/53,  G/SCM/D48/1, dated 1 October 2002.  Consultations were 
held in Geneva on 21 and 22 N ovember 2002, with a view to reaching a mutually satisfactory 
solution.  Unfortunately, these consulta tions failed to resolve the dispute. 
  Therefore, pursuant to Articles 4.7, 6 and 7 of the DSU, Article 19 of the Agreement on Agriculture, Articles 4.4 and 30 of the SCM Agreem ent, and Article XXIII:2 of the GATT, Brazil 
hereby requests the establishment of a panel.   
 
 The specific measures at issue in this dispute are the subsidies provided and maintained by the 
EC, in excess of the EC's reduction commitment levels for sugar, under Council Regulation (EC) 
No. 1260/2001 of 19 June 2001 on the European Communities' common organi zation of the markets 
in the sugar sector
686, and pursuant to all other legislation,  regulations, administrative policies and 
other instruments relating to the EC regime for sugar,  including the rules adopted pursuant to the 
procedure referred to in Article 42(2) of Counc il Regulation (EC) No. 1260/2001 of 19 June 2001, 
and any other provision related thereto.  These are re ferred to as the "EC sugar regime".  The products 
at issue are those listed in Article 1 of the Regula tion, including cane or beet sugar and chemically 
pure sucrose in solid form, molasse s resulting from the extraction or refining of sugar, isoglucose and 
inulin syrup.  These products are referred to collectively as "sugar". 
  The EC provides export subsidies for sugar in excess of its reduction commitment levels 
specified in Section II of Part IV of its Schedule of Concessions (Schedule CXL-European 
                                                     
 
686 Council Regulation (EC) No. 1260/2001 of 19 June 2001 on the common organization of the 
markets in the sugar sector, OJ L 178/1-45, 30.6.2001, p. 1.   WT/DS265/R 
 Page 211 
 
 
 Communities), in violation of the Agreement on Agri culture and the SCM Agreement.  In particular, 
Brazil is concerned with two cate gories of subsidized EC exports: 
 (i) The EC sugar regime guarantees a high price fo r the sugar that is produced within production 
quotas.  This is termed "A and B sugar".  S ugar produced in excess of these quotas is termed 
"C sugar".  Sugar classified as C sugar cannot be sold internally in the year in which it is 
produced, and must, in principle, be exported.  Payments in the form of high prices provided 
to growers and processors by the EC sugar regime finance the production and export of 
C sugar at prices below its total cost of production.   
 
(ii) The EC grants export subsidies to an amount  of white sugar ostensib ly equivalent to the 
quantity of raw sugar that the EC imports unde r its preferential arrangements.  This amount, 
reportedly, is approximately 1.6 million tons. 
  The EC unjustifiably excludes these subsidi es from the calculation of its total amount of 
export subsidies that it provides for sugar.  The amount of sugar thus subsidized, alone or in 
combination with other export subsidies for suga r provided by the EC, exceeds the export subsidy 
reduction commitment levels and, as such, constitu tes a violation of the EC's obligations under 
Articles 3.3, 8, 9.1 (a) and (c), or, alternatively,  Article 10.1 of the Agreement on Agriculture.  By 
granting export subsidies within the meaning of Articles 1.1(a)(1)(i) and (iv), 1.1(a)(2), and 1.1(b) of the SCM Agreement, that are not permitted by the Agreement on Agriculture, the EC also acts 
inconsistently with its obligations under Artic les 3.1(a) and 3.2 of the SCM Agreement. 
  Brazil asks that this request for the establishm ent of a panel be placed on the agenda of the 
next meeting of the Dispute Settlement Body, wh ich is scheduled to take place on 21 July 2003. 
 
__________ 
 
 WT/DS265/R 
Page 212  
 
  
 
WORLD TRADE  
ORGANIZATION  WT/DS283/2 
11 July 2003 
 (03-3757) 
 Original:   English 
   
EUROPEAN COMMUNITIES – EX PORT SUBSIDIES ON SUGAR 
 
Request for the Establishment of a Panel by Thailand
 
   The following communication, dated 9 July 2003, from the Permanent Mission of Thailand to 
the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU. 
 
_______________ 
 
  On 14 March 2003, pursuant to Article 4 of  the Understanding on Rules and Procedures 
Governing the Settlement of Dis putes (the "DSU"), Article XXIII  of the General Agreement on 
Tariffs and Trade 1994 (the "GATT 1994"), Artic le 19 of the Agreement on Agriculture, and 
Articles 4 and 30 of the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement") the Kingdom of Thailand ("Thailand") requested consultations with the European Communities (the "EC") with respect to export subsid ies provided by the EC in the sugar sector.  The 
request was circulated to Members on 20 Marc h 2003 in document WT/DS283/1.  The EC and 
Thailand held consultations in Geneva on 8 April 2003 with a view to reaching a mutually satisfactory 
resolution of the matter, but failed to resolve the dis pute.  Pursuant to Articles 4.7 and 6 of the DSU, 
Article XXIII:2 of the GATT 1994,  Article 19 of the Agreement on Agriculture and Articles 4.4 and 
30 of the SCM Agreement, Thailand therefore request s the Dispute Settlement Body (the "DSB") to 
establish a panel to examine the following matter. 
 
 The measures at issue are the export subs idies for sugar and sugar-containing products 
accorded under Council Regulation (EC) No. 1260/ 2001 of 19 June 2001 on the common organization 
of the markets in the sugar sector published in th e Official Journal of the European Communities on 
30 June 2001 (L 178/1-45) and related legal inst ruments.  The Council Regulation and the related 
legal instruments and administrative actions will be referred to below as the "EC sugar regime".  The 
products at issue  are those listed in Article 1 of the Council Regulation, including cane or beet sugar and chemically pure sucrose in solid form, molasses resulting from the extraction or refining of sugar, 
isoglucose and inulin syrup. These product s will be referred to below as "sugar".  
 
 Under the EC sugar regime, sugar that is produced within production quotas ("A" and "B" 
quotas) is guaranteed a high intervention price.  Sugar produced in excess of those quotas ("C-sugar") 
must in principle be exported.  By virtue of the EC sugar regime, exporters of C-sugar are able to 
export such sugar at prices below the average cost  of production.  The EC therefore accords export 
subsidies to C-sugar in the form of payments on the export of sugar financed by virtue of 
governmental action. 
  WT/DS265/R 
 Page 213 
 
 
  Furthermore, under its sugar regime, the EC gr ants export refunds to an amount of white 
sugar that the EC claims to be equivalent to the quantity of raw sugar imported under preferential 
import arrangements.  The export re funds cover the difference between the world market price and the 
high prices in the EC for the products in question, thus making it possible for those products to be exported.  The export refunds c onstitute direct subsidies contingent on export performance. 
 
 Under the Agreement on Agriculture, the EC  undertook budgetary outlay and export quantity 
reduction commitments with respect to sugar.  In determining its budgetary outlays for export 
subsidies for sugar and the quantities benefiting fro m such subsidies, the EC does not take into 
account exports of C-sugar and exports  of an amount of white sugar equivalent to the quantity of raw 
sugar imported under preferential import arrangements.   As a result, the EC provides export subsidies 
for sugar in excess of its reduction commitments and consequently acts in consistently with its 
obligations under Articles 3.3, 8, 9.1(a) and 9.1(c) of the Agreement on Agriculture or, alternatively, 
Article 10.1 of the Agreement on Agriculture. By gr anting export subsidies within the meaning of 
Articles 1.1(a)(1)(i) and (iv), 1.1(a)(2), and 1.1(b)  of the SCM Agreement, that are not permitted by 
the Agreement on Agriculture, the EC also acts  inconsistently with its obligations under 
Articles 3.1(a) and 3.2 of the SCM Agreement.    I would appreciate it if this request for the establishment of a panel were placed on the agenda for the meeting of the DSB scheduled for 21 July 2003.  
__________ 
 
 
 
  