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Tuesday, July 6, 2010

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

Randy Schnepf
Specialist in Agricultural Policy

U.S. and Brazilian trade negotiators reached agreement on June 17, 2010, on a "Framework agreement" regarding a World Trade Organization (WTO) dispute settlement case over U.S. cotton subsidies and GSM-102 agricultural export credit guarantees. The Framework agreement—which lays out a number of "steps and discussions"—represents a path forward toward the ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTOsanctioned trade retaliation by Brazil against U.S. goods and services. The Framework includes quarterly discussion on potential limits of trade-distorting U.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill) and provides benchmarks for further changes to the GSM-102 program. The Framework agreement was formally accepted by Brazil's Foreign Trade Council of Ministers (CAMEX) on June 17, 2010.

The so-called Brazil cotton case is a long-running WTO dispute settlement case (DS267) initiated by Brazil—a major cotton export competitor—in 2002 against specific provisions of the U.S. cotton program. In September 2004, a WTO dispute settlement panel found that certain U.S. agricultural support payments and guarantees—including (1) payments to cotton producers under the marketing loan and counter-cyclical programs, and (2) export credit guarantees under the GSM-102 program—were inconsistent with WTO commitments. In 2005, the United States made several changes to both its cotton and GSM-102 programs in an attempt to bring them into compliance with WTO recommendations. However, Brazil argued that the U.S. response was inadequate. A WTO compliance panel ruled against the United States in December 2007, and the ruling was upheld on appeal in June 2008.

In August 2009, a WTO arbitration panel—assigned to determine the appropriate level of retaliation—announced that Brazil's trade countermeasures against U.S. goods and services could include two components: (1) a fixed amount of $147.3 million for cotton payments, and (2) a variable amount based on GSM-102 program spending. The arbitrators also ruled that Brazil would be entitled to cross-retaliation if the overall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliation involves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S. copyrights and patents.

Based on the arbitrators' formulas, using 2008 data, Brazil announced in December 2009 that it would impose trade retaliation against up to $829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory countermeasures. In March 2010, Brazil released a list of 102 goods of U.S. origin that would be subject to import tariffs of up to 100%, followed by a preliminary list of U.S. patents and intellectual property rights that it could restrict. Brazil announced an April 6 deadline for imposing the tariffs, which led to intense negotiations between Brazil and the United States to find a mutual agreement and avoid the trade retaliation.

In early April, 2010, the United States offered a three-point proposal including establishment of a $147.3 million annual fund to provide technical assistance and capacity-building for Brazil's cotton sector, near-term modifications to the operation of the GSM-102 program, and special recognition for certain Brazilian beef imports into the United States. As a result, Brazil agreed to postpone the implementation of countermeasures until April 22. On April 20, the two parties signed a memorandum of understanding (MOU) that detailed the specifics of the $147.3 million fund. As a result, Brazil extended the suspension of trade retaliation until mid-June. The aforementioned "Framework agreement" is intended to delay any trade retaliation until after the 2012 farm bill, when potential changes to U.S. domestic cotton subsidies will be evaluated.

Date of Report: June 22, 2010
Number of Pages: 41
Order Number: RL32571
Price: $29.95

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