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Monday, March 1, 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 in a long-running dispute over U.S. cotton subsidies. On February 10, 2010, Brazil stated that it may levy duties of up to 100% on a preliminary list of 222 goods of U.S. origin valued at $561 million, then apply the remaining value of $268.3 million in 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). Brazil has not yet finalized its decision to actually impose retaliatory measures; however, Brazil has said that it would announce a final list of potential retaliatory products on March 1, 2010. 

Case DS267 has its origins in 2002. In that year, U.S. cotton exports had expanded to account for nearly 39% of world trade—making the United States the world's largest cotton exporter. U.S. cotton subsidies averaged $3.8 billion per year during the 1999 to 2002 period. In late 2002, Brazil—a major cotton export competitor—expressed its growing concerns about U.S. cotton subsidies by initiating a 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. 

Brazil argued for the authority to impose countermeasures against the United States valued at nearly $3 billion. The United States requested arbitration of Brazil's retaliation proposal. The WTO Dispute Settlement Body referred the matter to arbitration in July 2005; however, Brazil and the United States mutually agreed to suspend the arbitration. Since the March 2005 ruling, the United States has made several changes to its cotton programs to bring them into compliance with the WTO recommendations. However, Brazil argued that the U.S. response has been both slow and 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. Shortly thereafter, on August 25, 2008, Brazil requested that the arbitrations on its retaliation proposals 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. 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: February 17, 2010
Number of Pages: 34
Order Number: RL32571
Price: $29.95

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