The WTO Cotton Dispute

The WTO Cotton Dispute: How the U.S. is trying to Escape International Trade Regulation while Brazil Asserts Itself as a Regional Leader

by COHA Research Associate Felix Blossier

• While pressuring developing countries to adopt pro-trade measures, the U.S. does not enforce its WTO commitment on cotton subsidies.
• By pointing out this problem Brazil asserts itself in the international arena while the voice of African cotton exporting countries is not heard at the WTO.

On April 20th 2010, a Memorandum of Understanding (MoU) was signed between the two largest economies of the Western hemisphere, thus calming a decade-long, sometimes rancorous, dispute involving Washington and Brasilia over the subject of subsidies paid out by the U.S. to its cotton producers. By initiating a U.S.-financed fund, which would be allocated to cotton producers in Brazil and all over the world, this agreement was widely seen as resolving, once and for all, the existing trade tensions between the two countries. But, at the same time, the MoU can be seen in other, less charitable, ways as a token agreement and as a refusal by the U.S. to reform its basic system and to comply with international regulation.

Brazil’s fight against U.S. subsidized cotton

The cotton industry is a major component of both countries’ agricultural sectors. The U.S. is the third largest producer of cotton in the world, after India and China. Since these two countries do not export the commodity but use it for their domestic clothing industry, the U.S. is the largest exporter of this commodity with 40% of world exports. U.S. cotton production is supported by heavy subsidies, averaging upwards of $3.5 billion per year. This governmental aid measure is seen as an “important safety net” by the National Cotton Council of America; the views of the Brazilian government and numerous developing countries are radically different and tend to be far less serene on the issue.

Washington’s production support program allows American farmers to produce cotton at a lower cost and, therefore, to sell it at cheaper prices. As a result, the world price of cotton tends to head downward and the share of U.S. cotton exports increases at the expense of producers from developing countries whose governments do not have the resources to offer subsidies. As Environmental Working Group analyst David DeGennaro notes; “for farmers in Sub-Saharan Africa who are subsisting on very little money, a small reduction in price based on American subsidization is a big deal.”

Amongst other allegations, the Brazilian government has accused the U.S. of violating article 13 of the WTO Agreement on Agriculture (AA) regarding subsidy restrictions, since governmental aid to cotton producers in the U.S. has doubled since 1992 (the benchmark year used by the agreement). Brazil also asserted that production flexibility contracts (stipulated by the 1996 Farm Bill) and the direct payments received by producers under the 2002 Farm Bill, were not a form of permissible decoupled income support, since they were based on prices and production and were, therefore, not considered applicable under the reduction commitment guaranteed by the agreement in its annex 2.

An enduring dispute at the WTO

The aforementioned allegations and other factors dealing with the $12.9 billion of subsidies handed out by U.S. government authorities between marketing years 1999 and 2002 were lodged by the Brazilian delegation at the WTO on September 27th 2002. Brazil was supported by Argentina, Canada, China, the European Union, India, and Japan; and the panel established by the WTO Dispute Settlement Body (DSB), published a final report in favor of Brasilia in September 2004. Its findings were upheld on appeal on March 3rd of the following year. The U.S. was given until July 1st 2005 to remove the prohibited subsidies which had been established as causing a “serious prejudice” to Brazil and other third party countries.

Despite a few ameliorative steps taken by Washington, such as the suppression of the Step 2 Cotton program, Brazil requested the establishment of another compliance panel that delivered its final report on December 18th 2007. According to this report, the U.S. did not comply with the WTO recommendations. As a result, on August 31st 2009, WTO arbitrators authorized Brazil to retaliate against U.S. goods and services and to use a cross sector retaliation schema. In other words, Brazil was given the right not only to increase its tariffs on incoming U.S. goods but also to retaliate with other means, for instance by violating patents. The cross sector retaliation issue has been at the core of the dispute since tariff retaliation alone is not satisfactory to Brazil, given the fact that the country imports very little raw material from the U.S. and that tariffs on imported goods could lead to unwanted inflation in Brazil. The WTO decision is remarkable since it is the first time that the U.S. has been penalized for its subsidies and because, if Brazil decides to cross-sector retaliate, it would be the first country to do so in the history of the organization.

Recent threats made by the Brazilian Chamber of External Trade

As a result of the August 31st rulings, the Brazilian Chamber of External Trade (CAMEX) issued on March 8th 2010 a list of trade sanctions applicable to 102 U.S. products, that was supposed to take effect in early April. The most important tariffs were planned on products made of cotton and industries with an important political component, such as the automobile industry, that could have been subject to a 50% tariff on imports. By targeting these sensitive industries, defended by strong lobbies, the intent of the Brazilian government was, without question, to win the full attention of concerned U.S. officials.

A week later, in another statement, the CAMEX claimed that Brazil could also disregard intellectual property rights on all kinds of U.S. products (from pharmaceuticals to entertainment goods) by suspending its obligations under the Agreement on Trade Related aspects of Intellectual Property Rights (TRIPS), as well as under the General Agreement on Trade and Services (GATS). These two threats were the equivalent to a full scale retaliation amounting to respectively $591 million and $238 million, thus honoring the authorization made by the WTO that gave Brazil the second largest retaliation award since the organization was created.

A challenge raised by Brazil to Obama’s “New Export Initiative”

These threats were not likely to be immediately implemented, given the two countries’ interdependence, and, as Brazilian Trade and Development Minister Miguel said; “Brazil is not interested in a trade war. Nobody is. We’re ready to negotiate.” Nevertheless the CAMEX public statement triggered off a certain degree of fear and agitation in Washington. The news came out only a month and a half after President Obama’s 2010 State of the Union address during which he announced his intention to launch a “National Export Initiative” and called this project into question. Obama’s objectives were to double U.S. exports in the next five years in order to save 2 million jobs. The Obama administration intended to do so by relying on a weak dollar and by creating a series of new free trade agreements (such as the ones being negotiated with Panama and Colombia).

U.S. Trade Representative Ron Kirk asserted Washington’s willingness to comply with applicable WTO regulation if no agreement could be found. However, at a time when the U.S. unemployment rate is brushing 10%, Congress is sure to be reluctant to do anything favoring imports that could further worsen the U.S. job market. Furthermore, the upcoming midterm elections would have made it difficult for U.S. congressmen to reduce cotton subsidies, especially in countering the penetrating voice of the National Cotton Council of America.

The CAMEX announcement also came in the aftermath of the crisis, at a time when protectionism seems to have come back to life. After a trade contraction of 12% in 2009, these threats raised the fear of a trade war between the major agricultural economies, especially since several analysts foresaw a possible move by China to back Brazil. After the failure of the WTO Doha Development Round, because of the seemingly insoluble disagreement between China, India, and the U.S. on agricultural trade regulation, Brazil wisely and indirectly questioned the quality of U.S. leadership of international trade.

This dispute shows the unfairness and some of the abiding problems within the trading system. On one hand, the U.S. desires developing countries to be bound up with an overwhelming pro-trade legislation, but, on the other hand, it does not itself comply with this same legislation. President Obama’s trade agenda for the year 2009 clearly stated: “This administration reaffirms America’s commitment to a rules-based trading system […] We shall continue this country’s commitment to the WTO’s system of multilateral trading rules and dispute settlement.” But few actions have backed this otherwise muscular statement. As pointed out by trade analyst Daniella Markheim:

“America’s refusal to comply with adverse WTO rulings erodes US credibility and influence in the debate shaping globalization and undermines the multilateral trading system. America can afford either trade retaliation or the loss of its leadership position in international economic issues and the WTO is already weakened by nations’ inability to conclude Doha round trade negotiations. The US should not only change its cotton program this year, but it should also take a hard look at other needed reforms if its national export initiative is to be part of legitimate trade policy.”

Brazil as a Leader in the International Economic Arena

Brazil started to impose itself as a leader of developing countries and of the Cairns group: an association of 19 agricultural exporting countries, by standing out during the London G20 Summit in April 2009, when President Lula forcefully criticized the American and European farm subsidies. The recent threats made by the CAMEX and the cotton dispute in general, are now a further step for Brazil to be asserting its leadership and its role as the voice of agricultural exporting and developing countries during recent international negotiations. Brasilia’s action was backed by the international community and its recent acquisition of $20 billion in IMF bonds, which gave it another claim for more power and enhanced representation in the international economic arena.

The implicit Brazilian threats also appeared when tensions between the two countries were increasing. For instance, after Washington’s near inaction regarding the conservative coup in Honduras, during which President Zelaya was overthrown and had to find refuge in the Brazilian embassy in Tegucigalpa. Lula also asserted his support for Palestine and the Iranian nuclear program; it was clear that Brazil was now prepared to be a more decisive factor in world affairs, even at the risk of alienating the U.S.

The recent agreement and settlement of the dispute

The April 6th 2010 Memorandum of Understanding planned the establishment of a $147.3 million fund per year for “technical assistance and capacity building related to the cotton industry” in Brazil and in other countries. This fund, financed by U.S. authorities, would remain in place until an agreement has been achieved between Brazil and the U.S, or until the next U.S. farm bill was passed in 2012. The agreement also guaranteed the U.S. recognition of the state of Santa Catarina as free of several animal diseases. In return for this little favor which would buttress Brazilian meat exports, Brazil agreed to refrain from imposing trade sanctions against the U.S. Nevertheless, this agreement has been criticized by many analysts such as David Orden of the International Food Policy Research Institute who claimed that: “Rather than have Brazil retaliate against us, the U.S. has found a way to bribe Brazil, if you will, not to impose that retaliation in exchange for various things the U.S. says it will do” and according to David DeGennaro, “It’s really kind of ridiculous that American taxpayers are going to be subsidizing Brazilian cotton farmers just so that we can keep on subsidizing our own cotton farmer. It’s really a strange situation.”

The just described agreement calmed the situation with its outcome being predictable, mainly because no one would gain from a trade war, and because it is really important for Brazil to protect property rights, in view of its enormous revenue from royalties and other forms of income that could accrue from the 2014 FIFA World cup and the 2016 Olympics Games in the country. But one should recall from this dispute that the failure by the U.S. to reform its trade system and the country’s loss of legitimacy in the trade field when it asks developing countries to adopt pro-trade measures did not win many plaudits for Washington.

One can also anticipate the dire consequences of such a fund on sub-Saharan cotton producers. Even if part of the financial pool is destined to flow to them, the voice of the coalition of Benin, Burkina Faso, Chad and Mali was not being heard at all during the WTO negotiations. Thus one of the organization’s major problems was revealed: the fact that the voice of the understaffed and inexperienced country delegations tend to be almost a non-factor when it comes to cotton pricing. The problem appears even more catastrophic when one learns through Inter Press Service that, “Studies by international organizations show that the total abolition of U.S. subsidies would increase the world cotton price by 14 percent. According to the charity Oxfam, this would translate into additional revenue that could feed one million more children per year, or pay the school fees of two million children in West Africa.”

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This analysis was prepared by COHA Research Associate Felix Blossier
Posted 01 Jun 2010
Word Count: 2200

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