UNITED STATES – SUBSIDIES ON UPLAND COTTON

HISTORY OF THE COTTON SUBSIDY

• Devised during the Great Depression, the Farm Bill was designed to assist American farmers when the market bottomed out.

• For years, the federal government has guaranteed American cotton producers about 72 cents a pound, even though the real market price of cotton has averaged about 57 cents.

• American subsidies result in overproduction, which depresses the global price of cotton, which keeps millions of Africans on the edge of malnutrition.

• Who benefits from the current system of subsidies? About 20,000 American cotton producers, with an average annual income of more than $125,000 -- a portion of which goes to hire lobbyists. And these lobbyists do their work well. Even after the World Trade Organization in 2005 found U.S. cotton supports to be illegal, Congress made only cosmetic changes in policy. And recently the compliance panel of the WTO reaffirmed that America remains in violation. • Since the US is the world’s largest cotton exporter, these additional US cotton exports depress world prices.

UNITED STATES: COTTON SUBSIDY

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL $211,636,988 $807,484,252 $744,710,475 $1,317,974,839 $1,944,900,027 $2,067,797,008 $3,337,585,115 $1,955,246,245 $2,551,733,120 $2,230,543,662 $3,701,168,282 $2,979,753,309 $2,012,419,224 $1,582,196,585 $2,270,123,381 $30,312,303,402

SUBSIDY PROGRAMS

Counter Cyclical Payment - Cotton Commodity Certificates - Coop Cotton Production Flexibility - Upland Cotton Direct Payment - Upland Cotton Crop Ins. Prem. Sub. - Cotton Loan Deficiency - Upland Cotton Market Loss Assistance - Upland Cotton Commodity Certificates - Cotton Estimated Direct Payments 2009** Cotton Market Gains Warehouse - Upland Cotton Advance Deficiency - Upland Cotton Storage Forgiven - Upland Cotton $7,408,022,793 $4,319,961,441 $4,031,013,323 $3,820,779,718 $3,193,117,812 $2,564,694,969 $2,064,677,514 $1,432,882,059 $597,030,889 $369,941,231 $97,791,215 $38,819,172

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BRAZIL – USA WTO: TIMELINE

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COMPLAINANT: BRAZIL

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RESPONDENT: USA

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THIRD PARTIES: Argentina; Australia; Benin; Canada; Chad; China; Chinese Taipei; European Union; India; New Zealand; Pakistan; Paraguay; Venezuela (Bolivarian Republic of); Japan; Thailand

• • On 27 September 2002 Brazil requested consultations with the US regarding prohibited and actionable subsidies provided to US producers, users and/or exporters of upland cotton.

On 8 September 2004, the panel report was circulated to Members. The panel found that: agricultural export credit guarantees are subject to WTO export subsidy disciplines and three United States export credit guarantee programmes are prohibited export subsidies which have no Peace Clause protection and are in violation of those disciplines; the United States also grants several other prohibited subsidies in respect of cotton; •

REQUEST FOR CONSULTATIONS: SEPTEMBER 27, 2002

United States’ domestic support programmes in respect of cotton are not protected by the Peace Clause, and certain of these programmes result in serious prejudice to Brazil’s interests in the form of price suppression in the world market. •

PANEL REPORT: SEPTEMBER 8, 2004

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APPELLATE BODY REPORT: MARCH 3, 2005

On 3 March 2005, the Appellate Body Report was circulated to Members. At its meeting on 21 March 2005, the DSB adopted the Appellate Body report and the Panel report, as modified by the Appellate Body report.

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BRAZIL – USA WTO: TIMELINE

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COMPLAINANT: BRAZIL

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RESPONDENT: USA

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THIRD PARTIES: Argentina; Australia; Benin; Canada; Chad; China; Chinese Taipei; European Union; India; New Zealand; Pakistan; Paraguay; Venezuela (Bolivarian Republic of); Japan; Thailand

• • On 27 September 2002 Brazil requested consultations with the US regarding prohibited and actionable subsidies provided to US producers, users and/or exporters of upland cotton.

On 8 September 2004, the panel report was circulated to Members. The panel found that: agricultural export credit guarantees are subject to WTO export subsidy disciplines and three United States export credit guarantee programmes are prohibited export subsidies which have no Peace Clause protection and are in violation of those disciplines; the United States also grants several other prohibited subsidies in respect of cotton; •

REQUEST FOR CONSULTATIONS: SEPTEMBER 27, 2002

United States’ domestic support programmes in respect of cotton are not protected by the Peace Clause, and certain of these programmes result in serious prejudice to Brazil’s interests in the form of price suppression in the world market. •

PANEL REPORT: SEPTEMBER 8, 2004

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APPELLATE BODY REPORT: MARCH 3, 2005

On 3 March 2005, the Appellate Body Report was circulated to Members. At its meeting on 21 March 2005, the DSB adopted the Appellate Body report and the Panel report, as modified by the Appellate Body report.

AGREEMENTS CITED BY BRAZIL

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COMPLAINANT: BRAZIL

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RESPONDENT: USA

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THIRD PARTIES: Argentina; Australia; Benin; Canada; Chad; China; Chinese Taipei; European Union; India; New Zealand; Pakistan; Paraguay; Venezuela (Bolivarian Republic of); Japan; Thailand

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DISPUTE: DS267

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AGREEMENTS CITED:

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Agriculture Articles: 3.3, 7.1, 8, 9.1, 10.1

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Subsidies & Countervailing Measures

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Articles: 3, 5, 6

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GATT 1994 Articles: III:4, XVI

• • Brazil argued that USA’s actions were inconsistent with its obligations under the following provisions: Agriculture Articles: – 3.3

: “ Subject to the provisions of paragraphs 2(b) and 4 of Article 9, a Member shall not provide export subsidies listed in paragraph 1 of Article 9 in respect of the agricultural products or groups of products specified in Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity commitment levels specified therein and shall not provide such subsidies in respect of any agricultural product not specified in that Section of its Schedule. “ – 7.1

: “ Each Member shall ensure that any domestic support measures in favour of agricultural producers which are not subject to reduction commitments because they qualify under the criteria set out in Annex 2 to this Agreement are maintained in conformity therewith.” – 8 :Export Competition Commitments “ Each Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in that Member’s Schedule.”

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AGREEMENTS CITED BY BRAZIL (Cont’d)

9.1: Export Subsidy Commitments: “ The following export subsidies are subject to reduction commitments under this Agreement: (a) the provision by governments or their agencies of direct subsidies, including payments-in-kind, to a firm, to an industry, to producers of an agricultural product, to a cooperative or other association of such producers, or to a marketing board, contingent on export performance; (c) payments on the export of an agricultural product that are financed by virtue of governmental action, whether or not a charge on the public account is involved, including payments that are financed from the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the exported product is derived; (f) subsidies on agricultural products contingent on their incorporation in exported products.” • 10.1

: Prevention of Circumvention of Export Subsidy Commitments: “ Export subsidies not listed in paragraph 1 of Article 9 shall not be applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy commitments; nor shall non-commercial transactions be used to circumvent such commitments. ” • Article III:4 of GATT 1994: National Treatment on Internal Taxation and Regulation “ The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product.” • Article XVI of GATT 1994: Subsidies “ If any contracting party grants or maintains any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory, it shall notify the CONTRACTING PARTIES in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making the subsidization necessary.”

“PEACE CLAUSE” USA’s MAIN DEFENSE

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COMPLAINANT: BRAZIL

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RESPONDENT: USA

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THIRD PARTIES: Argentina; Australia; Benin; Canada; Chad; China; Chinese Taipei; European Union; India; New Zealand; Pakistan; Paraguay; Venezuela (Bolivarian Republic of); Japan; Thailand

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DISPUTE: DS267

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AGREEMENTS CITED by USA: Agriculture Article: 13

• Article 13 of the Agreement of Agriculture.

• Recognized that some agriculture subsidies could not be immediately eliminated.

• Allowed WTO members to maintain a limit of export subsidies on their agriculture.

• Maintained that export subsidies that are legal under the “PEACE CLAUSE” cannot be challenged by other members as long as the level of support for a commodity remains at or below the benchmark 1992 marketing year levels.

CLAIM 1 2 3

USA’s subsidies are in violation of the “PEACE CLAUSE”. Almost double the subsidies permitted in 1992.

Under the “PEACE CLAUSE”, WTO members agreed that agriculture subsidies could not be eliminated immediately and should be exempt from Subsidies and Countervailing Measures (SCM) in some cases.

Two of USA’s payments: (1) Production Flexibility Contract and (2) Direct Payments are in excess of USA’s “PEACE CLAUSE” limit.

Step-2 Program serves as an export subsidy.

Those payments fall under the “PEACE CLAUSE” exemptions as they are not market distorting.

Program is consistent with WTO agreements.

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USA’s Export Credit Guarantee Programs are effectively export subsidies.

Programs are consistent with WTO agreements.

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USA’s subsidies have cause “serious prejudice” to Brazil’s upland cotton.

Low domestic demand led to higher US exports of cotton, and weak global demand resulted in low cotton prices worldwide.

PANEL PROCEEDINGS

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COMPLAINANT: BRAZIL

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RESPONDENT: USA

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THIRD PARTIES: Argentina; Australia; Benin; Canada; Chad; China; Chinese Taipei; European Union; India; New Zealand; Pakistan; Paraguay; Venezuela (Bolivarian Republic of); Japan; Thailand

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REQUEST FOR CONSULTATIONS: SEPTEMBER 27, 2002 PANEL REPORT: SEPTEMBER 8, 2004

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APPELLATE BODY REPORT: MARCH 3, 2005

• • 18 March 2003: Establishment of the Panel.

• 8 September 2004: Circulation of Panel Report.

PANEL’S FINDINGS: • 3 USA agricultural export credit guarantees are prohibited and in violation.

• In addition, the USA grants several other cotton subsidies that are prohibited.

USA’s domestic support programs for cotton are not protected by the Peace Clause and some of them “result in serious prejudice” to Brazil through suppressing prices in the world market.

• 18 October 2004: USA appeals.

APPELLATE BODY’S RECOMMENDATIONS

3 March 2005: Circulation of Appellate Body Report.

APPELLATE BODY’S FINDINGS: • upholds the Panel’s finding that two challenged measures (production flexibility contract and direct payments) are not exempt from the Peace Clause, • modifies the Panel’s interpretation of the phrase “support to a specific commodity” but upholds the Panel’s conclusion that the challenged domestic support measures granted support to upland cotton • upholds the Panel’s finding that the challenged domestic support measures are in excess of that decided during the 1992 benchmark period and, therefore, that these measures are not exempt from actions under the GATT 1994 • upholds the Panel’s finding that the effect of the challenged price-contingent subsidies prejudice Brazilian cotton and subject it to significant price suppression.

• Upholds the Panel’s findings that: “a causal link exists” between the USA’s subsidies and price suppression, and that this link is not influenced by other factors raised by the USA • Upholds the Panel’s findings that the Agreement on Agriculture does not exempt export credit

guarantee programs.

Latest Developments

• March 2009: Brazil claims it has right to take $2.5 billion in retaliatory sanctions against US cotton subsidies – One-time measure worth $300 million against Step 2 program (which US ended in 2006) – $1.2 billion annually against export credit guarantees (under prohibited sanctions ruling) – $1 billion annually against actionable subsidies (including measures such as counter-cyclical payments and marketing loans) Source: Randy Schnepf, “Brazil’s WTO Case Against the US Cotton Program,” CRS, 17 Mar. 2009.

Latest Developments

• August 2009: WTO authorizes Brazilian sanctions against United States, but only in the amount of $300 million a year for prohibited and actionable cotton subsidies • WTO based its figures on 2006 US payments, and ruled that sanctions ought to vary according to annual payments • WTO also ruled that obligations to protect US intellectual property (e.g. drug patents) could be suspended, but only if US subsidies exceeded a threshold Source: Bradley S. Klapper, “WTO Sanctions U.S. Over Cotton Subsidies, Associated Press, 1 Sep. 2009

Latest Developments

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Dec. 2009-March 2010:

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Brazil received WTO approval to impose up to $830 million in sanctions against US goods and services (including $270 million involving intellectual property rights)

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Targeted items included drug patents, cosmetics, autos, textiles, medical equipment—even ketchup and chewing gum

Source: Iuri Dantas, “Brazil to Sanction US on Goods, Intellectual Rights,” Businessweek, 9 Feb. 2010.

PRODUCT

MILK POWDER WHEAT RAISINS, WALNUTS

BRAZIL PROPOSED TARIFFS

CURRENT PLANNED PRODUCT CURRENT TARIFF TARIFF TARIFF

28 PCT 48 PCT VARIOUS MEDICINES 8 PCT PARACETIMOL 10 PCT 30 PCT 14 PCT 18 PCT 10 PCT 30 PCT VARIOUS COSMETICS TOOTHBRUSHES CHERRIES, PEARS, PRUNES 10 PCT 30 PCT 18 PCT AUTOMOBILES 35 PCT UNCOMBED COTTON 6 PCT 100 PCT SUNGLASSES 20 PCT 20 PCT COMBED COTTON 8 PCT 100 PCT WATCHES COTTON FABRIC 26 PCT 100 PCT FREEZERS 20 PCT KETCHUP, OTHER SAUCES 18 PCT 38 PCT LOUD SPEAKERS 20 PCT SUGAR FREE CHEWING GUM 16 PCT 36 PCT MOTOR YACHTS 20 PCT CAR TIRES 16 PCT 32 PCT VARIOUS ELECTRONICS 20 PCT

PLANNED TARIFF

14 PCT 28 PCT 36 PCT 36 PCT 50 PCT 40 PCT 40 PCT 40 PCT 40 PCT 40 PCT 40 PCT

Latest Developments

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Last-minute reprieve, April 2010: A day before the sanctions went into effect, US reached agreement with Brazil

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Brazil decided to forego implementing sanctions—which would have cost US businesses up to $239 million

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In exchange, US agreed to subsidize Brazilian cotton farmers at almost $150 million a year

Source: Sewell Chan, “US and Brazil Reach Agreement in Cotton Dispute,” New York Times, 6 Apr. 2010.

Has the US Gone Daffy?

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"If the average person at home realized what's happening with the cotton program, there would be outrage in the streets. Instead of reforming the cotton program so it's less market- and trade-distorting, we're now creating a taxpayer subsidy to go to Brazilian cotton producers. It's beyond ridiculous.” —Rep. Ron

Kind, D-Wis

The Challenge of Reform in the US

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Since 2000, US has been subsidizing cotton farmers at about $3.5 billion a year

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The best policy solution is to eliminate subsidies altogether, but farm reform is difficult and can only be done by Congress

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Obama administration faced immediate trade war with Brazil, but Congress isn’t due to reconsider farm subsidies until 2012

Source: Jonathan Rauch, “Why You’re Bribing Brazilian Farmers,” National Journal, 29 May 2010.

The Challenge of Reform in the US

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Agricultural reform was tried by Bush in 2008: he sent reform bill to Congress, and also vetoed a wasteful agriculture bill it passed

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Congress overrode that presidential veto

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Obama administration will likely face similar difficulties making meaningful changes

Source: Jonathan Rauch, “Why You’re Bribing Brazilian Farmers,” National Journal, 29 May 2010.

Implications of the Case in Trade System

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Initial amount of $300 million in sanctions authorized by WTO was second-highest in dispute settlement history

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Brazil would have been first country, with WTO approval, to suspend US intellectual property rights over illegal trade policies

Sources: Bradley S. Klapper, “WTO Sanctions U.S. Over Cotton Subsidies, Associated Press, 1 Sep. 2009; Sewell Chan, “US and Brazil Reach Agreement in Cotton Dispute,” New York Times, 6 Apr. 2010.

Implications of the Case in Trade System

• Because the WTO allowed Brazil to extend retaliatory measures to TRIPS and GATS, it raises the stakes of non-compliance with farm subsidy obligations • Thus, the case could embolden other countries wishing to challenge US cotton and other farm subsidies • Four African cotton producers, for example, (Chad, Benin, Mali and Burkina Faso) had already submitted WTO proposal for all members to halt all production-related support to cotton growers—US disagreed, but tried to address concerns over cotton in agriculture framework of 2004 • If agreement on farm payments continues to stall in Doha Round, countries may take note of Brazil’s success and opt to use dispute resolution system to attack subsidies directly Source: Randy Schnepf, “Brazil’s WTO Case Against the US Cotton Program,” CRS, 30 Jun. 2010.

SOURCES

• • • • • • • • • • • • • http://farm.ewg.org/progdetail.php?fips=00000&progcode=cotton http://www.washingtonpost.com/wp dyn/content/article/2007/11/06/AR2007110601808.html

http://www.oxfamamerica.org/files/paying-the-price-summary.pdf

http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds267_e.htm

http://siteresources.worldbank.org/INTRANETTRADE/Resources/Pubs/Tra deNote16.pdf

http://fpc.state.gov/documents/organization/57876.pdf

http://www.wto.org/english/docs_e/legal_e/14-ag_01_e.htm#art3_3 http://www.wto.org/english/docs_e/legal_e/14-ag_01_e.htm#art7_1 http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm#art8 http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm

http://www.wto.org/english/docs_e/legal_e/14-ag_02_e.htm#art10_1 http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#art3_4 http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#art16