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Tuesday, April 20, 2010

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

Randy Schnepf
Specialist in Agricultural Policy

On April 5, 2010, Brazil's Foreign Trade Council (CAMEX) approved a resolution that would postpone until April 22 the implementation of WTO-approved countermeasures by Brazil against U.S. imports in relation to a long-running dispute over U.S. cotton subsidies. Earlier, on March 10, 2010, Brazil had released a list of 102 goods of U.S. origin valued at $561 million that would be subject to import tariffs of up to 100% within 30 days unless a last-minute agreement was reached. Five days later, on March 15, Brazil released a preliminary list of U.S. patents and intellectual property rights it could restrict, barring a joint settlement. In light of the temporary suspension of countermeasures, negotiations between the United States and Brazil on a proposed settlement continue. If preliminary objectives (discussed in the report) are achieved, it may result in the permanent suspension of any countermeasures related to this case. 

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. It found both (1) prohibited U.S. export subsidies (related to Step 2 program payments and export credit guarantees under the GSM-102 program) and (2) actionable U.S. domestic support measures (i.e., marketing loan benefits and counter-cyclical program payments) that resulted in adverse effects against Brazil's commercial interests. 

The United States appealed the ruling, but 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. 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 31, 2009, a WTO arbitration panel (reviewing Brazil's retaliation proposal of nearly $3 billion) 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 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. 

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). The countermeasure included a fixed annual amount of $147.3 million, reflecting the adverse effects from U.S. price-contingent subsidies, and a balance related to the volume of U.S. export credit guarantees, which may vary annually. The WTO also established a threshold value (related to the value of Brazil's consumer goods imports from the United States) for determining the extent of permissible cross-retaliatory countermeasures. The threshold varies annually based on changes in Brazil's total imports from the United States, but is currently estimated at $561 million, yielding a remaining value of $268.3 million ($829.3 million - $561 million) in eligible cross-retaliatory countermeasures.

Date of Report: April 6, 2010
Number of Pages: 41
Order Number: RL32571
Price: $29.95

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