BrazilU'S' Upland Cotton Case DS267

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Brazil-U.S. Upland Cotton Case (DS267)

• Michael DeRenzo
• Brian Franklin
• Mookie Hojiwala

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• 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.

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World Cotton Market (Production)
Worlds Top Cotton Producers (2003/2004)
Source NationMaster.com
Legend
25,500 808
0
Source Statistical LexisNexus
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World Cotton Market (Exports)
Worlds Top Cotton Exporters (2003/2004)
Source NationMaster.com
Legend
12,000 231
0
Source Statistical LexisNexus
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So the theory goes...
USG subsidizes US cotton industry
Underpriced US cotton lowers world cotton prices
and increases US share of world cotton markets
Lower cotton prices and a decreased share of
world cotton markets cost the Brazilian cotton
industry millions of dollars
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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

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U.S. Spending on Cotton Support Programs
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Applicable WTO Agreements/Provisions

• Agreement on Agriculture
• Article 13 Peace Clause
• Annex 2
• Agreement on Subsidies and Countervailing
  Measures (SCM)
• Article 3 Prohibition
• Article 6 Serious Prejudice

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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

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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 countrys 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
  countrys 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

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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.

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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

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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.

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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.

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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.

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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 Kelloggs (a
  US based company) to buy only American corn.

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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

.
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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
  Brazils 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.

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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

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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

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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

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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

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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

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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.

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Questions