Deal Near in U.S./Brazil Cotton Dispute?

In the dispute between the United States and Brazil relating to U.S. cotton subsidies, it appears that the sides may be on the verge of striking a deal. During the first week of April 2010, Brazil announced its intention to implement nearly $1 billion in sanctions against imports of various imports from the United States. These retaliatory measures were widespread – coming in two forms.

The first form – direct retaliation – focused on retaliation against U.S. goods (i.e. the sector in which the "injury" occurred). In this form, Brazil intended to implement approximately $561 million in retaliatory measures against over 100 U.S. products. Overall, the list of targeted products were highly diverse, but were most directly targeted at imports of U.S. wheat and other agricultural products (the Brazilian tariff upon which would have increased from 10% to 30% under Brazil's announced plan).

The second form – cross retaliation – focused on retaliation against U.S. intellectual and patent rights. In this form, Brazil indicated that it intended to implement approximately $268.3 million in sanctions against 21 items - including U.S. pharmaceuticals, biotechnology, and other chemicals. If Brazil would have implemented this proposal, this dispute would have been among the first to utilize cross-retaliation under the WTO – i.e. retaliating in a sector other than the one in which the violation or injury occurred, which could have set an important international trade precedent.

Just prior to Brazil's threatened implementation of its retaliatory measures, the United States made a counter-proposal to Brazil, and Brazil has now agreed to delay its implementation through April 22, 2010 to allow for sufficient consideration of the U.S. proposal. The terms of this offer are not fully known, but Brazil has confirmed that the U.S. has proposed creating an approximately $147 million annual fund to provide technical assistance/capacity building for the Brazilian cotton industry until the passage of the next farm bill, or until this dispute is otherwise mutually resolved. The U.S. has also proposed to reduce its export credits under the GM-102 guarantee program – which has been another source of contention between the agricultural nations (the GM-102 program is a credit guarantee program for international buyers of U.S. cotton). This agreement may potentially, resolve, or defuse the almost decade long dispute between the U.S. and Brazil over U.S. cotton subsidies.

In 2002, Brazil lodged a complaint against the U.S. for its cotton subsidies, and a WTO panel ruled against the U.S. on several aspects of the Brazilian claim which alleged that the late 1990's/early 2000's U.S. cotton programming paradigm (direct payments, market loss assistance, marketing loan benefits, and crop insurance premium subsidies) had the net effect of distorting trade flows and providing additional incentive to U.S. cotton producers to overproduce. After a lengthy appeals process, in late 2009, the WTO finally held that Brazil's annual injury from the U.S. subsidies equaled $147 million. Based upon the countermeasure determination formulas utilized by the WTO arbitration panel, in December 2009, Brazil announced that it had been authorized by the WTO to impose retaliatory measures against the U.S. of $829.3 million in 2010. At that time, Brazil indicated its intent to apply $561 million in retaliatory measures against U.S. goods, and, the remaining $268.3 million in cross retaliation against U.S. patents and intellectual property rights.

If the agreement between the U.S. and Brazil actually materializes, the U.S. will be in the somewhat unique position of supporting both Brazilian and U.S. cotton producers. However, it is uncertain whether Brazil will accept the U.S. offer. This ongoing dispute is but the latest, and certainly not the last, development in the ongoing battle over agricultural subsidies occurring at the WTO.