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
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The Proposed U.S.-Panama Free Trade Agreement

J. F. Hornbeck
Specialist in International Trade and Finance

On June 28, 2007, after two and a half years of negotiation, the United States and Panama signed a reciprocal free trade agreement (FTA). Negotiations were formally concluded on December 16, 2006, with an understanding that further changes to labor, environment, and intellectual property rights (IPR) chapters would be made pursuant to future detailed congressional input. These changes were agreed to in late June 2007, in time for the FTA to be considered under Trade Promotion Authority (TPA) legislation before it expired on July 1, 2007. TPA allows Congress to consider trade implementing bills under expedited procedures. Panama's legislature approved the FTA 58 to 4 on July 11, 2007. The 110th Congress did not take up the agreement, and so far there is little indication that the 111th Congress is ready to act on the FTA. 

The proposed U.S.-Panama FTA is a comprehensive agreement. Some 88% of U.S. commercial and industrial exports would become duty-free upon implementation, with remaining tariffs phased out over a ten-year period. Over 60% of U.S. farms exports to Panama also would achieve immediate duty-free status, with tariffs and tariff rate quotas (TRQs) on select farm products to be phased out by year 17 of the agreement. Panama and the United States signed a separate bilateral agreement on sanitary and phytosanitary (SPS) issues that would recognize U.S. food safety inspection as equivalent to Panamanian standards, which will expedite entry of U.S. meat and poultry exports. The FTA also consummates understandings on telecommunications, services trade, government procurement, investment, and intellectual property rights. 

The circumstances framing the proposed U.S.-Panama FTA differ considerably from those of two others that have yet to be considered by Congress. The deep concerns that Congress has expressed over Colombia's violence have not been an issue in the Panama FTA debate, which is framed more by the positive image of a longstanding strategic bilateral relationship based on Panama's canal. Nor does Panama compare well with the continuing debate over the proposed FTA with South Korea, which as a major U.S. trading partner, can affect key industries such as automobile and beef production. To the contrary, Panama trades little with the United States, even by Latin American standards, and so the FTA cannot have a major effect on the U.S. economy. 

The final text of the proposed U.S.-Panama FTA incorporates specific amendments on key issues at the behest of congressional leadership. The most significant were adoption of enforceable labor standards, compulsory adherence to select multilateral environmental agreements (MEAs), and an easing of restrictions on developing country access to generic drugs. In these cases, the proposed U.S.-Panama FTA goes beyond provisions in existing bilateral FTAs and multilateral trade rules, including those contemplated in the Doha Round.Two other concerns still linger. The first pertains to a Panamanian labor statute, which some Members of Congress would like to see amended so that the minimum number of workers required to start a union would be reduced from 40 to 20, per ILO guidelines. The second relates to questions raised over Panama's status as a "tax haven" and its refusal to enter into a tax information exchange treaty. Currently, the government of Panama is working closely with the USTR to find a mutually acceptable solution to both these issues. The time frame for completing this process is unclear and may depend in part on whether the Obama Administration and Congress signal that they are prepared to move ahead with implementing legislation. For more on Panama, see CRS Report RL30981, Panama: Political and Economic Conditions and U.S. Relations, by Mark P. Sullivan. .


Date of Report: February 22, 2010
Number of Pages: 33
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Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”

J. F. Hornbeck 
Specialist in International Trade and Finance

In December 2001, following an extended period of economic and political instability, Argentina suffered a severe financial crisis, leading to the largest default on sovereign debt in history. It was widely recognized that Argentina faced an untenable debt situation that was in need of restructuring. In 2005, after prolonged, contentious, and unsuccessful attempts to find a mutually acceptable solution with its creditors, Argentina abandoned the negotiation process and made a one-time unilateral offer on terms highly unfavorable to the creditors. Although 76% of creditors accepted the offer, a diverse group of "holdouts" opted instead for litigation in hopes of achieving a better settlement in the future. Although Argentina succeeded in reducing much of its sovereign debt, its unorthodox methods have left it ostracized from international credit markets for nearly a decade and triggered legislative action and sanctions in the United States. 

Argentina still owes private creditors $20 billion in defaulted debt and $10 billion in past-due interest, as well as $6.2 billion to Paris Club countries. Of the disputed privately held debt, U.S. investors hold approximately $3 billion. The more activist investor groups have lobbied Congress to pressure Argentina to reopen debt negotiations. Some Members of Congress have introduced punitive legislation in both the 110th and 111th Congress, but to date it has not received any legislative action. Nearly five years after the original debt workout, however, a confluence of circumstances has persuaded Argentina to restructure the holdout debt, particularly the need to secure long-term public financing. 

On December 16, 2009, Argentina filed a registration statement and prospectus to issue $15 billion in bonds, the proceeds of which will be used to finance an exchange of defaulted debt. The terms of exchange were not included and are not expected until March 2010 at the earliest. Some analyses speculate that the structure of the new exchange will be similar to the one offered in 2005, which would entail a discount of 65% from the face value of the bonds, with past due interest capitalized and financed separately. Given that Argentine law prohibits the new exchange from offering better terms than the 2005 offer, and that bondholders who participated in that exchange benefitted from additional payments based on Argentina's strong economic growth, it appears likely that the new offer will be the less favorable of the two. 

For Argentina, a successful restructuring requires a sufficiently large participation rate for the courts to set aside existing judgments and attachment orders. This action would allow Argentina renewed access to the international credit markets. Historically, sovereign debt workouts with at least a 90% participation rate have achieved this goal. Since holdouts compose 24% of the original bondholders, a 60% participation rate of this group would allow for the total participation rate to reach the 90% threshold. If the exchange succeeds, Argentina will have completed a sovereign debt restructuring with the deepest write-off of principal in history. The original bondholders were severely hurt by this deal, but so was Argentina by the crisis. It appears that nothing can be done for the original investors who have traded their bonds. If there is a legacy to the Argentine case, it may be in the changes to bond contracts that seek to improve outcomes for creditors. One option is collective action clauses (CACs) in bonds, which require all creditors to bargain collectively, with a compulsory majority decision applicable to all bondholders. This provision may allow for more coordinated creditor responses, which could increase their bargaining leverage, allow for more equitable treatment of all bondholders, and lead to a far quicker resolution to any future sovereign default. .


Date of Report: February 17, 2010
Number of Pages: 15
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Venezuela: Issues in the 111th Congress

Mark P. Sullivan
Specialist in Latin American Affairs

Under the populist rule of President Hugo Chávez, first elected in 1998 and reelected to a six-year term in December 2006, Venezuela has undergone enormous political changes, with a new constitution and unicameral legislature, and a new name for the country, the Bolivarian Republic of Venezuela. U.S. officials and human rights organizations have expressed concerns about the deterioration of democratic institutions and threats to freedom of expression under President Chávez, who has survived several attempts to remove him from power. The government benefitted from the rise in world oil prices, which sparked an economic boom and allowed Chávez to increase expenditures on social programs associated with his populist agenda. These programs have helped reduce poverty levels significantly. 

After he was reelected, Chávez announced new measures to move the country toward socialism, but his May 2007 closure of a popular Venezuelan television station (RCTV) that was critical of the government sparked protests, and his proposed constitutional amendment package was defeated in a December 2007 national referendum. State and local elections held in November 2008 were a mixed picture of support for the government, with the opposition winning several key contests. In February 2009, Venezuelans approved a controversial constitutional referendum that abolished term limits and allows Chávez to run for re-election in 2012. Since 2009, the government has increased efforts to suppress the political opposition, including elected officials. In January 2010, the government shut down broadcast of the cable station RCTV-Internacional, prompting domestic protests and international concern about freedom of expression. 

The United States traditionally has had close relations with Venezuela, the fourth major supplier of foreign oil to the United States, but there has been friction with the Chávez government. U.S. officials have expressed concerns about human rights, Venezuela's military arms purchases, its relations with Cuba and Iran, and its efforts to export its brand of populism to other Latin American countries. Declining cooperation on anti-drug and anti-terrorism efforts has also been a concern. In September 2008, bilateral relations worsened when President Chávez expelled the U.S. Ambassador to Venezuela, and the United States responded in kind. Under the Obama Administration, Venezuela and the United States reached an agreement for the return of respective ambassadors in July 2009. While some observers are hopeful that the return of ambassadors will mark an improvement in relations, others emphasize continued U.S. concerns about the Venezuelan government's treatment of the news media and political opposition and about interference in the affairs of other countries in the region. 

In the 111th Congress, House-passed H.R. 2410 includes a provision noting the close relationship between Iran and Venezuela, and requiring a report on the actions of Iran and Hezbollah in the Western Hemisphere, and House-passed H.R. 2194 would amend the Iran Sanctions Act to make gasoline sales to Iran subject to U.S. sanctions. The Senate approved an amendment (S.Amdt. 1536) to the National Defense Authorization Act for FY2010, S. 1390/H.R. 2647, that would have required a report on Venezuelan military and intelligence activities, but the measure was not included in the enacted legislation. Among other initiatives: H.R. 375 would, among its provisions, place restrictions on nuclear cooperation with countries assisting the nuclear programs of Venezuela; H.Res. 174 and H.Con.Res. 124 would express concern about anti-Semitism in Venezuela; and H.Res. 872 would call for the designation of Venezuela as a state sponsor of terrorism. For more information, see CRS Report RS21049, Latin America: Terrorism Issues.


Date of Report: February 8, 2010
Number of Pages: 45
Order Number: R40938
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Costa Rica: Background and U.S. Relations

Peter J. Meyer
Analyst in Latin American Affairs

Costa Rica is a politically stable Central American nation with a relatively well-developed economy. Former president (1986-1990) and Nobel-laureate Oscar Arias of the historically center-left National Liberation Party was elected President in 2006. Throughout his term, Arias has advanced so-called "third-way" policies, embracing his party's traditional support for social welfare programs while rejecting state-led development in favor of market-oriented economic policies. Considerable economic growth and social protection programs have provided Costa Rica's citizens with a relatively high standard of living, however, conditions have deteriorated recently as a result of the global financial crisis and U.S. recession. Although Costa Rica's economy contracted and poverty increased in 2009, analysts believe President Arias' ambitious fiscal stimulus and social protection plan and improving global economic conditions should aid recovery in 2010. 

On February 7, 2010, former Vice President Laura Chinchilla (2006-2008) of the ruling National Liberation Party was elected president, easily defeating her competitors. Chinchilla, who is closely tied to President Arias and the centrist faction of her party, will be Costa Rica's first female president. Throughout the campaign, Chinchilla pledged to maintain the Arias Administration's economic and social welfare policies while improving public security. She will need to form cross-party alliances to implement her policy agenda, however, as her party will lack a majority in Costa Rica's unicameral National Assembly. Chinchilla and the new legislature are scheduled to take office in May 2010. 

Successive Costa Rican administrations have sought to address extensive deforestation and environmental degradation that resulted from decades of logging and agricultural expansion. The country's strong conservation system and innovative policies have done much to restore Costa Rica's environment and ecotourism has provided a significant source of economic growth. Costa Rica's efforts also have led many observers to recognize it as a world leader in environmental protection and have enabled the country to play an outsized role in the formulation of global environmental policies. Nonetheless, some maintain that a number of environmental problems in Costa Rica remain unaddressed. 

The United States and Costa Rica have long enjoyed close relations as a result of the countries' shared commitments to strengthening democracy, improving human rights, and advancing free trade. The countries have also maintained strong commercial ties, which are likely to become even more extensive as a result of President Arias' efforts to secure ratification and implementation of CAFTA-DR. On April 28, 2009, the House of Representatives passed H.Res. 76 (Burton), which mourns the loss of life in Costa Rica and Guatemala that resulted from natural disasters that occurred in January 2009. The resolution also expresses the senses of the House, that the U.S. government should continue providing technical assistance relating to disaster preparedness to Central American governments. 

This report examines recent political and economic developments in Costa Rica as well as issues in U.S.-Costa Rica relations. For additional information, see CRS Report RL31870, The Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), by J. F. Hornbeck and CRS Report R40135, Mérida Initiative for Mexico and Central America: Funding and Policy Issues, by Clare Ribando Seelke. .


Date of Report: February 22, 2010
Number of Pages: 15
Order Number: R40593
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