Congressional Research Service epub Brazil’s WTO Case Against the U.S. Cotton Program

Updated 11/22/2011: The so-called “Brazil cotton case” is a long-running World Trade Organization(WTO) dispute settlement case (DS267) initiated by Brazil—a major cotton export competitor—in2002 against specific provisions of the U.S. cotton program. In September 2004, a WTO disputesettlement panel found that certain U.S. agricultural support payments and guarantees—including(1) payments to cotton producers under the marketing loan and counter-cyclical programs, and (2)export credit guarantees under the GSM-102 program—were inconsistent with WTO commitments.In 2005, the United States made several changes to both its cotton and GSM-102 programs inan attempt to bring them into compliance with WTO recommendations. However, Brazil arguedthat the U.S. response was inadequate. A WTO compliance panel ruled in favor of Brazil’s non-compliance charge against the United States in December 2007, and the ruling was upheld onappeal in June 2008.In August 2009, a WTO arbitration panel—assigned to determine the appropriate level ofretaliation—announced that Brazil’s trade countermeasures against U.S. goods and servicescould include two components: (1) a fixed amount of $147.3 million in response to U.S. cottonprogram payments, and (2) a variable amount based on U.S. GSM-102 program spending.In response to Brazil’s argument that insufficient trade in goods occurred between the twocountries, the arbitrators also ruled that Brazil would be entitled to cross-retaliation if theoverall retaliation amount exceeded a formula-based variable annual threshold. Cross-retaliationinvolves countermeasures in sectors outside of the trade in goods, most notably in the area of U.S.copyrights and patents. Based on the arbitrators’ formulas, using 2008 data, Brazil announcedin December 2009 that it would impose trade retaliation starting on April 6, 2010, against up to$829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory countermeasures.The threat of sanctions led to intense negotiations between Brazil and the United States tofind a mutual agreement and avoid the trade retaliation. In April 2010, the two parties reacheda preliminary memorandum of understanding (MOU) spelling out certain actions which, ifundertaken by the United States, would lead to suspension of Brazil’s threatened retaliation. Then,on June 17, 2010, U.S. and Brazilian trade negotiators concluded the Framework for a MutuallyAgreed Solution to the Cotton Dispute in the WTO (WT/DS267). The framework agreement—which lays out a number of “steps and discussions”—represents a path forward toward theultimate goal of reaching a negotiated solution to the dispute, while avoiding WTO- sanctionedtrade retaliation by Brazil against U.S. goods and services. As a result, Brazil has suspended traderetaliation pending U.S. compliance with the framework agreement measures. Key aspects of theframework agreement include (1) payment by the United States of a $147.3 million annual fundto a newly created “Brazilian Cotton Institute” to provide technical assistance and capacity-building for Brazil’s cotton sector, (2) quarterly discussions on potential limits of trade-distortingU.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill),and (3) near-term modifications to the operation of the GSM-102 program coupled with a semi-annual review of whether U.S. GSM-102 program implementation satisfies certain performancebenchmarks.These U.S. commitments are intended to delay any trade retaliation until after the 2012 farmbill, when potential changes to U.S. cotton programs will be evaluated. However, in the interim,several failed legislative attempts have been made to ban U.S. payments to the Brazil CottonInstitute.