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Monday, March 29, 2010

Brazil’s WTO Case Against the U.S. Cotton Program

Randy Schnepf
Specialist in Agricultural Policy

On December 21, 2009, Brazil announced that it was authorized by the WTO to impose trade retaliation against up to $829.3 million in U.S. goods in 2010 (based on 2008 data) in a longrunning dispute over U.S. cotton subsidies. Brazil stated that it could retaliate with duties of up to 100% on goods of U.S. origin, and with cross-retaliation (i.e., retaliatory countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents). On March 10, 2010, Brazil released a list of 102 goods of U.S. origin valued at $591 million that will be subject to import tariffs within 30 days unless a last-minute agreement is reached. On March 15, Brazil released a preliminary list of U.S. patents and intellectual property rights it could restrict, barring a joint settlement. 

This trade dispute had its origins in 2002, when Brazil—a major cotton export competitor— expressed its growing concerns about U.S. cotton subsidies by initiating a World Trade Organization (WTO) dispute settlement case (DS267) against specific provisions of the U.S. cotton program. On September 8, 2004, a WTO dispute settlement panel ruled against the United States on several key issues. This ruling was appealed by the United States, and on March 3, 2005, a WTO Appellate Body upheld the panel's ruling and provided specific deadlines for removal or modification of the offending U.S. subsidies. 

Key findings included (1) U.S. domestic cotton subsidies exceeded WTO commitments of the 1992 benchmark year, thereby losing the protection afforded by the "Peace Clause," which had previously shielded them from substantive challenges; (2) the two major types of direct payments made under U.S. farm programs—production flexibility contract payments of the 1996 farm act and the direct payments of the 2002 farm act—do not qualify for WTO exemptions from reduction commitments as fully decoupled income support and should therefore count against the "Peace Clause" limits; (3) Step 2 program payments are prohibited subsidies; (4) U.S. export credit guarantees are effectively export subsidies, making them subject to previously notified export subsidy commitments; and (5) U.S. domestic support measures that are "contingent on market prices" have resulted in excess cotton production and exports that, in turn, caused low international prices and resulted in adverse effects (i.e., "serious prejudice") to Brazil. 

Shortly after the March 2005 ruling, the United States made several changes to its cotton programs in an attempt to bring them into compliance with the WTO recommendations. However, Brazil argued that the U.S. response was inadequate, and requested the establishment of a WTO compliance panel in August 2006 to review whether the United States had fully complied with the previous rulings. The compliance panel ruled against the United States in December 2007, and the ruling was upheld on appeal in June 2008. 

On August 25, 2008, Brazil requested that the arbitration on its retaliation proposal of nearly $3 billion (which had been suspended pending the compliance panel review) be resumed. Nearly a year later, on August 31, 2009, the WTO arbitration panel released its decision, generally finding in favor of Brazil's retaliation requests but at levels substantially reduced from those requested by Brazil (as described above). However, in a key decision, the panel ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeds a formula-based variable annual threshold. If the threshold is surpassed, then Brazil would be entitled to cross-retaliation in the amount in excess of the threshold.

Date of Report: March 17, 2010
Number of Pages: 39
Order Number: RL32571
Price: $29.95

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