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DS267: United States – Subsidies on Upland Cotton.

DS267: United States – Subsidies on Upland Cotton. Luna Kolb Jamie Kuhne Carmen Lozano. Outline of Presentation. 1. History and Context 2. Main WTO Issue 3. Position of Main Parties 4. Decisions of DSB 5. Proposals and Observations. Consultations.

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DS267: United States – Subsidies on Upland Cotton.

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  1. DS267: United States – Subsidies on Upland Cotton. Luna Kolb Jamie Kuhne Carmen Lozano

  2. Outline of Presentation • 1. History and Context • 2. Main WTO Issue • 3. Position of Main Parties • 4. Decisions of DSB • 5. Proposals and Observations

  3. Consultations • Brazil request consultations Sep 27, 2002 • Two Rounds of Consultations • First Round: Dec 3, 4, 19 • Second Round: January 17, 2003 • Consultations Fail

  4. DSB Panel • Brazil requests a panel Feb 6, 2003 • DSB establishes panel Mar 18, 2003 • Panel publishes decision Sep 8, 2004 • Both Brazil and United States appeal

  5. Appellate Body • US-Brazil appeal DSB report Oct 18, 2004 • Appellate Body ruling Mar 3, 2005 • Upholds, overrules, and refuses to rule on some points for both Brazil and US • DSB adopts Appellate Body ruling Mar 21, 2005 • US announce will comply Apr 20, 2005

  6. United States Compliance • US Department of Agriculture makes administrative changes to its export credit guarantee program Jun 30, 2005 • Proposed domestic legislation to change export guarantee and Step 2 (subsidy) programs Jul 5, 2005 • The same day as proposed legislation Brazil requests authorization to impose countermeasures of $3 billion a year

  7. Arbitration Process • US objects to Brazil’s $3 billion request on Jul 14, 2005. Referred to arbitration. • US-Brazil agree to suspend arbitration Aug 17, 2005. • Brazil makes new countermeasures request for $1.04 billion per year Oct 6, 2005. US rejects and again referred to arbitration.

  8. Compliance Problems • Brazil requests establishment of WTO panel to examine if US in compliance with DSB rulings, Sep 1, 2006 • US objects and blocks request • Brazil makes second request for compliance panel, Oct 18, 2006 • US requests panel on Oct 20, 2006 • Compliance panel created Oct 25, 2006

  9. Sept. 2002 Oct. 2002 Dec. 2002 Jan. 2003 Feb. 2003 Mar. 2003 Jun. 2004 Sept. 2004 U.S. Upland Cotton Case Timeline Panel’s final confidential ruling is released Brazil requests consultation with the US Panel’s final ruling issued publicly DSB establishes a Panel Consultations held Zimbabwe, India, Argentina, and Canada request to join consultations Brazil requests the est. of a panel in WTO (WTO/DS267) Panel’s final confidential ruling is released

  10. Brazil’s Allegations • Brazil’s Complaint • Brazil and other cotton producing countries have been hurt • World cotton prices are adversely affected by US subsidies • US subsidies distort cotton trade in world market • $600 million estimated loss for Brazil in 2001 alone • Contested U.S. Laws and Practices • Section 1207(a) of the FSRI Act of 2002 • GSM 102, GSM 103, and SCGP Export Credit Guarantee Programs • ETI Act of 2000 • International Agreement Violations • Agreement on Subsidies and Countervailing Measures (SCM Agreement) • Agreement on Agriculture

  11. U.S. Contested Laws • U.S. Policies and Practices in Question: • Section 1207(a), The Farm Security and Rural Investment Act of 2002 • Requires the USDA to pay U.S. exporters the difference between higher priced U.S. upland cotton and the average of the five lowest price quotes for exports of upland cotton worldwide • Export Credit Guarantee Programs • GSM 102/103: Helps ensure that credit is available to finance commercial exports of U.S. products while providing competitive credit terms to buyers • Supplier Credit Guarantee Program (SCGP): Makes it easier for exporters to sell U.S. food products overseas by insuring short-term, open-account financing • Extraterritorial Income Exclusion Act of 2000 • Allows U.S. companies to exclude their foreign source income from tax

  12. International Agreements Violated • Agreement on Subsidies and Countervailing Measures (Articles 3.1 (a) & (b), 3.2, 5(c) & 6.3(b), (c), & (d)) • Article 3.1 • Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: • (a) Subsidies contingent in law or in fact, whether solely or as one of several other conditions, upon export performance • (b) Subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods • Article 3.2 • A member shall neither grant nor maintain subsidies • Article 5 • No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.: • (c) serious prejudice to the interests of another Member

  13. International Agreements Violated • Agreement on Subsidies and Countervailing Measures continued… • Article 6.3 • Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply: • (b) the effect of the subsidy is to displace or impede the exports of a like product of another  Member from a third country market; • (c) the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression • (d) the effect of the subsidy is an increase in the world market share of the subsidizing Member in a particular subsidized primary product or commodity(17) as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.

  14. International Agreements Violated • Agreement on Agriculture (Articles 3.3, 7.1, 8, 9.1, & 10.1) • Members are required to reduce the value of mainly direct export subsidies to a level 36 per cent below the 1986-90 base period level over the six-year implementation period, and the quantity of subsidised exports by 21 per cent over the same period. In the case of developing countries, the reductions are two-thirds those of developed countries over a ten-year period (with no reductions applying to the least-developed countries) and subject to certain conditions, there are no commitments on subsidies to reduce the costs of marketing exports of agricultural products or internal transport and freight charges on export shipments. • Increase market orientation in agricultural trade with provisions that encourage the use of: • Less trade-distorting domestic support policies to maintain the rural economy • Actions taken to ease any adjustment burden • Some flexibility in the implementation of commitments

  15. International Agreements Violated • Agreement on Agriculture continued… • “Peace” provisions within the agreement include: an understanding that certain actions available under the Subsidies Agreement will not be applied with respect to green box policies and domestic support and export subsidies maintained in conformity with commitments; an understanding that “due restraint” will be used in the application of countervailing duty rights under the General Agreement; and setting out limits in terms of the applicability of nullification or impairment actions. These peace provisions will apply for a period of 9 years. • Domestic support measures that conform fully to the provisions of Annex 2 shall be: • Non-actionable • Exempt from actions based on Article XVI of GATT 1994 • Exempt from actions based on non-violation nullification or impairment of the benefits of tariff concessions accruing to another member under Article II of GATT 1994

  16. Brazil’s Position • Brazil Claims that the US is destroying the cotton industry in Brazil • Cotton was Brazil’s main export until the early1990s • Brazil was world’s 3rd largest cotton producer • High production costs in Brazil • Subsidies paid out by the US government to American cotton growers • Substantial increases in subsidies to US cotton farmers from 1999 to 2002 • Mass unemployment brought on by the cotton crisis

  17. U.S. Position • U.S. Counter-Arguments: • Worldwide cotton prices have increased • U.S. cotton production has remained stable • U.S.cotton consumption has remained stable • U.S. farmers have responded to market price signals • U.S. farmers have responded to expected market prices

  18. FindingViolation AA Art. 13 (peace clause): • "Peace Clause" in the AA did not apply to a number of US measures, including domestic support measures for upland cotton • PFC payments, DP payments, do not satisfy the condition in paragraph (a) of Article 13 of the Agreement on Agriculture • United States domestic support measures do not satisfy the conditions in paragraph (b) of Article 13 of the Agreement on Agriculture • United States export credit guarantees under the GSM 102, GSM 103 and SCGP export credit guarantee programmes do not satisfy the condition in paragraph (c) of Article 13 of the Agreement on Agriculture and constitute per se export subsidies prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement

  19. FindingViolation ASCM Art. 6.3(c) (serious prejudice): • The effect of subsidy programme at issue – i.e. marketing loan programme payments, Step 2 (user marketing) payments, market loss assistance payments, and counter-cyclical payments – is significant price suppression within the meaning of Art. 6.3(c), causing serious prejudice to Brazil's interests within the meaning of Art. 5(c). • However, the Panel found that other US domestic support programmes (i.e. production flexibility contract payments, direct payments, and crop insurance payments) did not cause serious prejudice to Brazil's interests.

  20. FindingViolation ASCM Art. 3.1(a) and (b), AA, Art. 9.1(a): • Marketing Step 2 payments to domestic users of US upland cotton • were subsidies contingent on the use of domestic over imported goods that are prohibited under Art.3.1(b) and 3.2 of the ASCM. • Marketing Step 2 payments to exporters of US upland cotton • constitute subsidies contingent upon export performance within the meaning of Art. 9.1(a) of the AA.

  21. FindingViolation AA Art. 10.1 and ASCM Art. 3.1(a) and 3.2 (Export credit guarantees – export subsidies): • US export credit guarantee programmes at issue were "export subsidies" within the terms of the ASCM, and thus, circumvented the US export subsidy commitments in violation of Art. 10.1 of the AA and violated Art. 3.1(a) and 3.2 of the ASCM.

  22. Recommendations • The Panel recommended that (i) as for prohibited subsidies (export credit guarantees and step 2 payments), the United States withdraw them without delay (i.e. in this case, within six months of the date of adoption of the Panel/AB Report or 1 July 2005 (whichever was earlier))3; and (ii) as for subsidies found to cause serious prejudice, the United States should take appropriate steps to remove their adverse effects or withdraw the subsidy.

  23. Implementation • Brazil requested the DSB for authorization to suspend concessions or other obligations under Article 4.10 of the SCM Agreement and Article 22.2 of the DSU.

  24. Update on Implementation • It has not been possible for the Panel to complete its work within the 90 day period as foreseen in Article 21.5. The Panel expects to complete its work in July 2007.

  25. Update on Implementation • On June 30, 2005, the United States announced certain administrative changes relating to its export credit guarantee programs. Further, on July 5, the United States proposed legislation relating to the export credit guarantee and Step 2 programs. On July 5, 2005, Brazil requested authorization to impose countermeasures and suspend concessions in the amount of $3 billion. • On July 14, 2005, the United States objected to the request, thereby referring the matter to arbitration. On August 17, 2005, The United States and Brazil agreed to suspend the arbitration. • On October 6, 2005, Brazil made a separate request for authorization to impose countermeasures and suspend concessions in the amount of $1.04 billion per year in connection with the “serious prejudice” findings. The United States objected to Brazil’s request on October 17, 2005, and that matter was also referred to arbitration.

  26. Effects on the Global Trading System • Eliminating U.S. Cotton Subsidies will have the Following Impacts: • In the U.S.: • Eliminating subsidies on cotton will be difficult due to U.S. political interests • Big farms are easily able to circumvent the limits through creative accounting, side companies and partnerships • However, the elimination of cotton subsidies will have the global benefits of: • Contributing to the legitimacy of the WTO • Promoting free trade practices globally • Reduces the potential for the U.S. to suffer retaliatory tariffs

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