Critical Trade Issues WTO Dispute Settlement Understanding Brazil- U.S. Cotton (DS 267)

1. George Mason University ITRN 603 002 Professor Stuart Malawer 7 October, 2009 Critical Trade IssuesWTO Dispute Settlement UnderstandingBrazil-U.S. Cotton (DS 267) Presented by Solaiman Afzal, Junaid Abu, Brian Adams

2. WTO Dispute Settlement Rules and Procedures • Made out of 27 Articles and 4 Appendices • Focus on: • Article 1 Coverage and Application • Article 4 Consultation • Article 6 Establishment of Panels

3. U.S. and Brazil Agricultural Sectors U.S. • Highly productive agriculture sector but less than 1% of GDP • Heavily subsidized • Dependent on exports Brazil • Growing industry, but less than 6% of GDP • Accounts for 20% of formal jobs • Share of exports to U.S. is in decline (14% in 2006, 11% in 2007) • Little success in multilateral negotiations with U.S., E.U. • Dispute with E.U. on sugar subsidies, and U.S. for cotton and orange subsidies Source: Economist Intelligence Unit

4. WTO Agricultural Products Disputes WTO http://www.wto.org/english/tratop_e/dispu_e/dispu_subjects_index_e.htm#agricultural_products

5. WTO Agricultural Products Disputes Analysis • Two out three cases brought up against the U.S. are from Brazil • U.S. generally files complaints against Japan and Korea • Overall most complaints are filed by developing countries against developed countries

6. Timeline

7. Outline • Claim 1: Peace Clause • Claim 2: U.S. Direct Payments • Claim 3: Step-2 Payment as Export Subsidy • Claim 4: Export Credit Guarantees as Export Subsidy • Claim 5: U.S. subsidies cause “Serious Prejudice” • Claim 6: FSC-ETI Act of 2000 as Export Subsidy

8. Claim 1:Peace Clause Violation • Brazil claimed that U.S. no longer exempt from WTO dispute proceedings under “Peace Clause”. • U.S. claimed that agricultural subsidies could not be eliminated immediately, to be exempted from Subsidies and Countervailing Measures (SCM) Agreement and GATT 1994 subsidies discipline. Source: United States — Subsidies on Upland Cotton, “Report of the Panel,” WTO, WT/DS267/R, Sept. 8, 2004; p. 157

9. Finding • The panel found that Brazil had successfully discharged its burden to show that U.S. domestic cotton support measures were in excess of WTO commitments (of $2.0 billions) during MY1992.

10. Claim 2: U.S. Direct Payments • Brazil claimed that two types of U.S. Payments should therefore count against the U.S. “Peace Clause” • Production Flexibility Contract (PFC) • Under the 1996 farm bill • Direct Payment (DP) • Under the 2002 Farm bill • U.S. argued that PFC and DP were consistent with WTO agreements

11. Finding 2 • The panel found (and was upheld by the AB) that U.S. payments made under the PFC and DP programs they should be counted as domestic subsidies directly affecting cotton production.

12. Claim 3: The Step-2 Program Functions as Export Subsidy • Brazil argued that Step-2 Payments made under the U.S. cotton program function as export subsidies and are inconsistent with the U.S. WTO obligations as specified under the SCM Agreement. • The United States argued that Step-2 Payments were part of its domestic support program; they were targeted to domestic cotton users as well as to exporters.

13. Finding 3 • In its finding, the panel considered Step-2 program payments as following; • Payments to exporters were found to be “contingent upon export performance” and therefore qualified as prohibited export subsidies in violation of WTO commitments. • Payments to domestic users were found to be “contingent on the use of domestic over imported goods” and therefore qualified as prohibited import substitution subsidies.

14. Claim 4: U.S. Export Credit Guarantee Function as Export Subsidies • Brazil claimed that the terms under U.S. export credit guarantee programs – GSM 102, GSM103 and the Supplier Credit Guarantee Program (SCGP) are inconsistent with WTO’s AA and SCM Agreements. • U.S. Trade officials argued that Article 10.2 of the AA reflected the deferral of disciplines on export credit guarantee programs contemplated by WTO members to the next WTO multilateral negotiating round — the Doha Round. • Finding: The panel found that U.S. was found to Violate Annex I (j) of SCM, WTO Legal Texts, p. 267

15. Claim 5: U.S. Subsides have caused “Serious Prejudice” • Brazil claimed that U.S. cotton Subsidy led to three market conditions: • By increasing the U.S. share of the world upland cotton market; • By displacing or impeding Brazilian upland cotton sales in third-country markets; and • By contributing to a steep decline in world cotton prices • U.S. argued that Subsidies were within allowable limits of WTO.

16. Finding • The panel found (and was upheld by the AB) that U.S. domestic support measures that are directly contingent on market price levels caused serious prejudice in terms of market price suppression for the period 1999 to 2002 • The panel also did not find in favor of Brazil’s alleged serious prejudice in terms of an effect on international market share.

17. Claim 6: FSC-ETI Act of 2000 Acts as an Export Subsidy to Upland Cotton • Brazil claimed that under FSC-ETI Act of 2000, by eliminating tax liabilities for U.S. upland cotton exporters constituted as export subsidy. • The United States asserted that Brazil failed to make any specific case with respect to FSC-ETI Act of 2000 and Upland cotton exports. • Finding: The panel concurred with U.S. in stating that Brazil failed to present any new arguments or evidence concerning effects upon Upland Cotton.

18. Compliance and Retaliation Phase of the Dispute • Brazil Seeks Authority for Retaliatory Trade Measures • Brazil Requests a Compliance Panel • Brazil Requests Resumption of Arbitration Review of Proposed Countermeasures

19. An arbitration ruling in favor of both Brazil’s retaliation amounts and the requested “crossretaliation” feature could raise the stakes in this particular dispute by expanding retaliation into TRIPS and the General Agreement on Trade in Services. The U.S. response to the WTO cotton ruling is being watched closely by developing countries, particularly by a consortium of four African cotton-producing countries that has submitted its own proposal to the WTO calling for a global agreement to end all production-related support for cotton growers of all WTO-member countries. Trade experts have expressed concern that the panel findings could extend beyond cotton to other major field crops, particularly as concerns the potential limits on export credit guarantees. Some trade and market analysts, as well as legislators, have expressed concern that a broad finding against U.S. farm program provisions under the actionable subsidies ruling could necessitate legislative changes to the U.S. farm bill to bring existing program operations into compliance. The Potential Implications of WTO Panel Ruling

20. Brazil claimed the right to impose $2.5 billion in retaliatory sanctions against the United States. Brazil’s proposed sanctions total comprises three separate components: 1. One-time countermeasure of $300 million. 2. An annual countermeasure of $1.2 billion based on the prohibited subsidies ruling concerning the U.S. export credit guarantee program. 3. Annual countermeasure of $1 billion based on the actionable subsidies ruling concerning price-contingent programs (e.g., the counter-cyclical and marketing loan programs). As part of its prohibited subsidy countermeasure, Brazil is seeking “cross-retaliation” rights that would permit retaliation in sectors other than just the goods sector What has happened concerning implementation and sanctions if any. Source: CRS report

21. US Latest Claims • The United States has expressed strong disagreement with both the amount of countermeasure requested and with any right of “cross-retaliation.” • Great interest to Us because if granted, cross-retaliation could involve retaliation in intellectual property rights and services agreements as well Source: CRS Report

22. The Ruling • The US faces annual trade sanctions of about $295m (£181m) for failing to scrap illegal subsidies paid to its cotton growers. • A WTO panel upheld last year's ruling that subsidies helped US cotton growers undercut foreign competitors. • Brazil said that its farmers and those in West Africa had suffered the most. • It made reference to the $4bn figure in documents it filed with the WTO about three years ago. • WTO rule that Brazil could take retaliatory sanctions against the US and "suspend concessions or other obligations". Source: BBC News

23. The Effects • US cotton subsidies were one of the most contested issues in the Doha round of world trade talks. • Producers in developing countries, especially in Africa, say the US subsidies squeeze their own farmers out of the market. • About $12.5bn was paid to American farmers by the US government between August 1999 and July 2003, Brazil had claimed. • A WTO-proposed draft released two years ago calls on the U.S. to make an 82 percent cut in trade-distorting handouts to American cotton farmers as part of the trade accord. Washington has rejected the cuts, but never proposed an alternative. Source: BBC News

24. Further Effects • The WTO panel said Brazil could target other American goods for retaliation if U.S. cotton supports rise significantly beyond current levels for its 25,000 farmers. Brazil, which has a robust pharmaceuticals and generic-drug industry, has targeted patented U.S. drugs for potential retaliation. That means the country could allow domestic drug makers to manufacture copies of U.S. pharmaceuticals that are still under patent protection. • The issue of "cross retaliation" in global trade disputes is contentious. Many smaller countries need U.S. capital goods in order to grow, leaving them without effective tools to fight back with when the WTO finds that U.S. trade policy has injured the smaller nations. • The WTO cotton ruling for Brazil is, therefore, "the big banana in terms of smaller countries having effective means of retaliation," said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington. "This will cause the intellectual-property community a few shakes and quivers." Source: Wall Street Journal

25. Other Considerations • Brazil, the world's biggest exporter of coffee, sugar, beef, chicken and iron ore, imports $18 billion a year of American goods and has long complained that many of its products face unfair obstacles to the U.S. markeet. It still needs most of those U.S. goods, but som of its sectors -- particularly pharmaceuticals -- could profit from import tariffs. • Some experts said the possibility of retaliating against the U.S. by flouting U.S. patents on medicines, films and other intellectual property gives Brazil an important new weapon. Source: Wall Street Journal

26. Brazil’s Opinion • In a statement, Brazil said that these damage figures were calculated using 2006 trade figures, and that it will seek a bigger payout of around $800 million to reflect current trade flows. • "Brazil hopes that the United States will bring itself promptly and effectively into compliance with the WTO rulings, so that the imposition of the countermeasures authorized today is not necessary," Brazil's Foreign Ministry said in a statement. • But the ruling opened an important door to retaliatory measures that, under certain circumstances, could punish American pharmaceuticals companies and other owners of intellectual property. Source: Wall Street Journal

27. US Take • The US Trade Representative's office said it was "disappointed" with the overall outcome. But added that it was "pleased" that arbitrators had "awarded Brazil far below the amount of counter measures it asked for". • Still, the U.S. seeks closer ties with Brazil as a way to improve its broader standing in the region, where governments in Venezuela, Argentina, Ecuador and Bolivia have become opponents to U.S. influence. • Brazil is an important player in sputtering global trade talks. Source: Wall Street Journal

28. Observations concerning the dispute in the context of the global trading system.  • This issue should be solved by negotiation, but absent that developing countries should invoke past legislation through the WTO dispute settlement system. • Agriculture lobby unlikely to quit protecting its generous industry. • It was a small step in the right direction.

29. Sources • Brazil’s WTO Case Against the U.S. Cotton. CRS Report, By Randy Schnepf Specialist in Agricultural Policy. March 17, 2009 • U.S. Loses Ruling on Cotton Payouts. Wall Street Journal, By PETER FRITSCH and JOHN LYONS. SEPTEMBER 1, 2009 • US faces sanctions in cotton row. BBC. August 31, 2009 • http://www.ustr.gov/ • http://www.wto.org/ • http://www.gao.gov/