Brazil-U.S. Upland Cotton Case (DS267) Michael DeRenzo Brian Franklin Mookie Hojiwala

On September 27, 2002, Brazil made a formal “request for consultations” with the United States to discuss U.S. cotton subsidies. This action initiated WTO dispute settlement case number 267 (DS267): the U.S.-Brazil upland cotton subsidy dispute case.

World Cotton Market (Production)

World’s Top Cotton Producers (2003/2004)

Source: NationMaster.com

China United States India 17,559 25,500 12,500 Pakistan 8,350 Brazil 4,400 Legend: 25,500 808 0 0 5,000 10,000 15,000 20,000 1,000 480 lb Bales Cotton Production in the US and Brazil (1992-2003)

Source: Statistical LexisNexus

25,000 30,000 25,000 20,000 15,000 10,000 5,000 0 US Cotton Production Brazil Cotton Production Year

World Cotton Market (Exports)

World’s Top Cotton Exporters (2003/2004)

Source: NationMaster.com

United States Australia Brazil 1,700 1,300 Greece 1,175 12,000 Mali 1,000 Legend: 12,000 231 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 1,000 480 lb Bales US and Brazil Cotton Exports (1992-2003)

Source: Statistical LexisNexus

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1992 1994 1996 1998 Year 2000 2002 100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

US Cotton Exports Brazil Cotton Exports World Price of Cotton (A Index 1/, Cents/lb)

So the theory goes...

USG subsidizes US cotton industry Lower cotton prices and a decreased share of world cotton markets cost the Brazilian cotton industry millions of dollars Underpriced US cotton lowers world cotton prices and increases US share of world cotton markets

Contested U.S. agricultural support measures

• Production Flexibility Contract Payments • Direct Payments • Counter-Cyclical Payments • Marketing Assistance Loans • Loan Deficiency Payments • Crop Insurance Payments • Market Loss Assistance Payments • Step-2 Payments • FSC/ETI Tax Breaks • Export Credit Guarantees

U.S. Spending on Cotton Support Programs

Applicable WTO Agreements/Provisions

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Agreement on Agriculture

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Article 13: “Peace Clause”

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Annex 2

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Agreement on Subsidies and Countervailing Measures (SCM)

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Article 3: Prohibition

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Article 6: Serious Prejudice

“Peace Clause”

“Article 13 (‘due restraint’) of the Agriculture Agreement protects countries using subsidies which comply with the agreement from being challenged under other WTO agreements. Without this “peace clause”, countries would have greater freedom to take action against each others’ subsidies, under the Subsidies and Countervailing Measures Agreement and related provisions.”

Source: WTO

• •

Agreement on Subsidies and Countervailing Measures (SCM)

Prohibited subsidies (Article 3):

subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods. They are prohibited because they are specifically designed to distort international trade, and are therefore likely to hurt other countries’ trade. They can be challenged in the WTO dispute settlement procedure where they are handled under an accelerated timetable. If the dispute settlement procedure confirms that the subsidy is prohibited, it must be withdrawn immediately. Otherwise, the complaining country can take counter measures. If domestic producers are hurt by imports of subsidized products, countervailing duty can be imposed.

Actionable subsidies (Article 6):

in this category the complaining country has to show that the subsidy has an adverse effect on its interests. Otherwise the subsidy is permitted. The agreement defines three types of damage they can cause. One country’s subsidies can hurt a domestic industry in an importing country. They can hurt rival exporters from another country when the two compete in third markets. And domestic subsidies in one country can hurt exporters trying to compete in the subsidizing country’s domestic market. If the Dispute Settlement Body rules that the subsidy does have an adverse effect, the subsidy must be withdrawn or its adverse effect must be removed. Again, if domestic producers are hurt by imports of subsidized products, countervailing duty can be imposed.

Source: WTO

The Positions of the US

United States: • The cotton industry is a major component to the agricultural sector. • Many of the Brazilian disputes are vital to US cotton growers and does not violate any WTO agreements. • These disputed programs include direct payments, counter cyclical payments, loan deficiency payments, Step-2 payments, amongst other program benefits.

The Position of Brazil

Says that US cotton subsidies violated fair trade rules by depressing world prices and breaching WTO subsidy limits. Brazil had six claims that it brought to the WTO 1. Stated that the US was in violation of the Peace Clause 2. US federal Direct Payments do not qualify for Exemption

The Position of Brazil

3. The Step-2 Program Functions as an export subsidy 4. US export credit guarantees functions as an export subsidy. 5. US export subsidies have contributed to overproduction and resulted in a surge of US cotton exports (particularly between 1999-2002), lowering prices and hurting Brazil. 6. The Foreign Sales Corporation Repeal and Extraterritorial Act of 2000 acts as export subsidy to cotton.

Decisions of the Dispute Settlement Panel

First: US domestic cotton subsidies have exceeded WTO commitments, thereby losing the protection afforded by the “Peace Clause” which shielded them from substantive challenges.

Peace Clause: Located under Article 13 of the WTO Agreement on Agriculture. States that domestic support measures (subsidies) and export subsidies of a WTO member that are already legal under the provisions of the Agreement on Agriculture cannot be challenged by other WTO members on grounds of being illegal under the provisions of another WTO agreement.

Decisions of the Dispute Settlement Panel

Second: Two types of direct payments made under the US farm programs, the Production Flexibility Contract (PFC) of the 1996 Farm Act and the Direct Payments of the 2002 Farm Act, did not qualify for WTO exemptions and should therefore count against the “Peace Clause” limits.

Decisions of the Dispute Settlement Panel

Third: Step-2 program payments are prohibited export subsidies. • Step-2 payments are made to exporters and domestic mill users to compensate them for their purchase of higher priced US cotton. • For example, the US government pays Kellogg’s (a US based company) to buy only American corn.

Decisions of the Dispute Settlement Panel

Fourth: US export credit guarantees are export subsidies; making them in violation of previous export subsidy agreements. Fifth: US domestic support measures have resulted in excess cotton production, causing lower international prices, and hurting the Brazilian cotton market

Decisions of the Dispute Settlement Panel

Sixth: The Panel agreed with the US that Brazil had failed to make any specific new case that the EU made during its dispute settlement, number DS108, and decided not to proceed in examining Brazil’s calm that the Foreign Sales Corporation Repeal and Extraterritorial Act of 2000 should be considered an export subsidy. Additionally, the Panel ruled in favor of the US regarding US domestic support measures. It said that they do not have any influence on world prices and were not included in the WTO ruling.

Timetable Since WTO Ruling

• The U.S. failed to meet deadlines of July 21, 2005 for “prohibited subsidies” and September 21, 2005 for “actionable” subsidies • Brazil was poised to retaliate against $4 billion of U.S. exports, but in the middle of 2005, both parties agreed to “temporarily suspend” retaliation proceedings • However, in August 2006, Brazil requested a WTO compliance panel to review U.S. compliance with the 2004 WTO AB ruling • A compliance panel was formed on September 28, 2006, and its report is expected in July 2007

U.S. Actions to Date

• Restructured some direct payment schemes via the 2007 Farm Bill • Repealed Step-2 program effective August 1, 2006 • Revised Export Credit Guarantee guidelines/criteria

Response to U.S. Actions

• EU and G-20 countries state that 2007 U.S. farm bill does not reduces total subsidies enough • Brazil argues that the U.S. is not compliant with the WTO AB decision regarding Step-2, because Step-2 was not repealed within the WTO recommended timeframe • Brazil has also argued that U.S. revisions to Export Credit Guarantee programs still fall short of WTO compliance

Recent Developments

• Jacques Chirac: “Europe ... has corrected its problem. The United States hasn't done so and I strongly encourage them, in the name of morality, to take the necessary measures, that is to put an end to this scandalous aid.” • The U.S. and Brazil will deliver oral arguments to the WTO compliance panel in early March • WTO Director General Lamy has called for a “high-level” WTO session on cotton on March 15-16

Proposal for U.S.-Brazil Cotton Case

• Deliberations of the WTO compliance panel should be concluded before the March 15-16 “high-level” session • Congress should expand on U.S. farm subsidies reduction in the current farm bill • U.S. should continue to engage Brazilians to pursue resolution of the cotton issue in the form of a broader Doha solution and not a bilateral solution

Proposal for Long-Term U.S. Agenda

• U.S. needs political will to cut agriculture subsidies – We are propping up inefficient agricultural sectors at the expense of services exports, intellectual property rights, etc.

Questions