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Thursday, May 6, 2010

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

Randy Schnepf
Specialist in Agricultural Policy

In 2002, 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. In September 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. In March 2005, a WTO Appellate Body upheld the panel's ruling on appeal, 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 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, and requested a WTO compliance panel in August 2006 to review U.S. compliance with the previous rulings. This panel ruled against the United States in December 2007, and the ruling was upheld on appeal in June 2008. 

Brazil proposed trade retaliation of nearly $3 billion against U.S. goods and services. The United States disagreed and a subsequent WTO arbitration panel, in August 2009, generally found in favor of Brazil's retaliation requests but at formula-based levels substantially reduced from those requested by Brazil. The panel 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. In December 2009, Brazil announced that it would impose trade retaliation against up to $829.3 million in U.S. goods in 2010 (based on the WTO formulas using 2008 data). In addition, Brazil announced that the WTO arbitrator's formula yielded a threshold estimate of $561 million, which implied $268.3 million in eligible cross-retaliatory countermeasures. In March 2010, Brazil 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%, followed by a preliminary list of U.S. patents and intellectual property rights valued at $268 million that it could restrict. Brazil announced an April 6 deadline for imposing the tariffs, barring a joint settlement. 

Brazil and the United States were engaged in intense negotiations to find a mutual agreement to avoid the trade retaliation prior to the April 6 deadline. On April 5, 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 until April 22 the implementation of WTO-approved countermeasures. 

The U.S. proposal was solidified when, on April 6, USDA cancelled unutilized balances of GSM- 102 funding for FY2010 and, on April 19, USDA announced new fee rates for its GSM-102 program. Then, on April 16, USDA published a proposed rule on Brazilian meat imports, and on April 20 the two parties signed a memorandum of understanding (MOU) that officially detailed the specifics of the $147.3 million fund. As a result, Brazil extended the suspension of trade retaliation an additional 60 days until mid-June. The two sides continue to negotiate on changes to the nature of U.S. domestic cotton programs. However, Brazil retains its full rights of retaliation pending a negotiated settlement.

Date of Report: April 28, 2010
Number of Pages: 42
Order Number: RL32571
Price: $29.95

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