Presentation by: Sherkhan Khan, Fang-Yun Kuan , and Mikra Krasniqi

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Presentation by Sherkhan Khan, Fang-Yun Kuan ,
and Mikra Krasniqi
The Trade Dispute Over U.S. Cotton Subsidies.
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Background and Chronology of Events

• Complainant Brazil Respondent
  United States
• September 27, 2002 Brazil requested
  consultations with the US
• February 6, 2003, Brazil requested the
  establishment of a panel
• September 8, 2004 the Panel Report was
  circulated to Members of the WTO
• October 18, 2004 Notice of Appeal filed by the
  United States
• March 3, 2005, The Appellate Body issued its
  report

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Brazil's Position

• U.S. cotton subsidies have depressed cotton
  prices worldwide, and have hurt Brazilian farmers
• According to Brazils estimates, commissioned
  from an American agricultural economist, U.S.
  cotton production would have fallen by 29 in
  2001 - 2002 and its cotton exports dropped by 41
• The contraction of US production would have led
  to a rise in international cotton prices of 12.6.

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Areas in question
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Brazils Legal Claims

• User marketing (Step 2) payments to exporters
  under Section 1207(a) of the FSRI Act of 2002 are
  per se export subsidies listed in Article 9.1(a)
  of the Agreement on Agriculture
• Export credit guarantee programs in respect of
  exports of eligible agricultural commodities are
  export subsidies inconsistent with Articles 8 and
  10.1 of the Agreement on Agriculture
• The ETI Act of 2000 is inconsistent with
  Articles 8 and 10.1 of the Agreement on
  Agriculture, as well as with Articles 3.1 and 3.2
  of the SCM Agreement

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Brazil argues that export subsidies constitute

• Marketing loan program payments
• User marketing payments
• Production flexibility contract payments
• Market loss assistance payments
• Direct payments
• Counter-cyclical payments
• Export credit guarantee programs
• Crop insurance payments
• Cotton seed payments

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• Marketing loan program
• Interim financing to domestic producers to
  facilitate the gradual distribution of the
  commodity throughout the year
• Production flexibility contract payments
• Support to producers based on historical acreage
  and yields (not related to current prices of
  cotton)

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• Market loss assistance payments
• Ad hoc emergency and supplementary assistance
  provided to producers for compensating potential
  losses should commodity prices fall under a
  certain level
• Direct payments
• Support to producers based on historical acreage
  and yields (not related to current prices of
  cotton)

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• User marketing payments
• ("Step 2" program) Marketing certificates or cash
  payments to domestic users and exporters of
  upland cotton when certain US cotton pricing
  benchmarks are exceeded
• Export credit guarantee measures
• ("GSM 102", "GSM 103" and "SCGP") Guarantees to
  US exporters against the risk of not being paid,
  in the event that the foreign bank failed to pay
  under the foreign bank letter of credit or the
  importer failed to pay under the importer
  obligation

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• Crop insurance payments
• Insurance coverage to producers for losses due to
  natural disasters and market fluctuations
• Cottonseed payments
• Ad hoc emergency and supplementary assistance
  provided to first handlers and producers of
  cottonseed

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WTO Pertinent Laws and Agreements

• Articles 4.1, 7.1 and 30 of the Agreement on
  Subsidies and Countervailing Measures ("SCM
  Agreement")
• Article 19 of the Agreement on Agriculture
• Article XXII of the GATT 1994

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U.S. Extraterritorial Income Exclusion Act

• The 1972 Act sought to redress tax disadvantages
  faced by U.S. companies exporting or operating
  overseas. U.S. enacted the Domestic International
  Sales Corporation (DISC) provisions to the U.S.
  tax code, which allowed U.S. firms to defer
  taxation on a percentage of their export profits.
  
• The European Commission challenged the DISC
  provisions in the General Agreement on Tariffs
  and Trade (GATT), on the grounds that it
  constituted an illegal export subsidy.
• In November 2000, US replaced DISC with ETI Act

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United States Position

• Aggregate the value of all U.S. payments and
  claim that those subsidies have had an effect
  on production and prices
• Misuses the data on production by making
  comparisons using marketing years 1998 and 2001
• Decoupled payments that are not linked to
  production of upland cotton.
• The Sumner Model presented by Brazil is
  inadequately explained

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Decisions of the WTO Panel

• Agricultural export credit guarantees are subject
  to WTO export subsidy disciplines and three
  United States export credit guarantee programs
  are prohibited and as such are not protected by
  the provisions of the Peace Clause
• Also, domestic support programs are not supported
  by the provisions of the Peace Clause and
  certain of these programs result in serious
  prejudice to Brazils interests in the form of
  price suppression in the world market

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Appellate Bodys decision

• The Appellate Body upheld most of the Panels
  findings.
• U.S. shall bring its cotton policy into line
  with the panels ruling within a
  reasonable time. If it fails to act, it has to
  enter into negotiations with Brazil in order to
  determine mutually-acceptable compensation
• If no satisfactory compensation is agreed,
  Brazil may ask the Dispute Settlement Body for
  permission to impose limited trade sanctions).
•  

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Implementation Stage

• U.S. missed several deadlines on the
  implementation of the WTO ruling . In October
  2005, Brazil threatened U.S. with major trade
  sanctions
• Two moths later, the Bush administration agreed
  to start the process of implementing the
  elimination of subsidies
• Senate approval triggered immediate actions,
  which provided West African nations with
  duty-free access to its cotton markets

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Implementation Stage (Cont.)

• Following Senate authorization, the U.S. House of
  Representatives, in early February 2006, also
  voted in favor of the bill, thus effectively
  ending a long time agricultural impasse in
  international trade negotiations
• In accordance with the bill, major subsidies and
  other domestic support programs for cotton
  producers and exporters have been eliminated

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Our Proposal

• Eliminate all distortions and inconsistencies in
  the remaining support programs between small and
  large producers
• Use these resources to support numerous RD
  projects, which encourage innovation and
  diversification of agriculture products, rather
  than cotton overproduction
• Because this is a major breakthrough, the U.S.
  should seek and be rewarded access to numerous
  markets (i.e. high tech products and
  pharmaceuticals)

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Policy implications in the domestic market

• Fairer environment for small producers, which
  will have a greater share of the market
• Encourage diversification or agricultural
  products( widen the production base) and
  discourage overproduction of one particular
  product
• Cotton prices will increase (normalize), however,
  this will reveal the fact that until now cotton
  prices have been kept low by U.S. taxpayers
  money

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Policy implications in the world market

• Cotton prices in the international market will
  stabilize, reaching more reasonable levels
• United States will gain more access for its
  exports in developing countries (i.e. Brazil,
  West Africa, etc.)
• EU and Japan will be under increasing pressure to
  eliminate their tariffs in agriculture imports

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Policy Implications in International Trade
Relations

• It will pressure European Union, Japan and other
  protective countries to further liberalize and
  open their markets
• The authority of the WTO panels and rulings will
  gain more prevalence by strengthening the rule of
  law and enforce trade regulations and
  implementations
• U.S.s controversial position and its commitments
  to free trade and open markets will no longer
  embarrass U.S trade representatives before other
  nations

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References

• http//www.buyusa.gov/finland/en/tradesanctions.ht
  ml
• http//www.businessdayonline.com/?c45a4392
• http//news.bbc.co.uk/2/hi/americas/4672786.stm
• http//www.ustr.gov/
• http//www.mercopress.com/Detalle.asp?NUM7166
• http//internationaltraderelations.com/
• http//www.commerce.gov/
• http//www.wto.org