Alleging that the US has missed the 21 September deadline to comply with a March WTO ruling on its cotton subsidy programme, Brazil has formally requested the right to retaliate against US patents, copyrights, and services providers. On 6 October, Brazil asked the WTO Dispute Settlement Body (DSB) for permission to suspend obligations under WTO rules on services and intellectual property rights. Members will discuss Brazil's request to impose USD 1.037 billion worth of sanctions at a DSB meeting scheduled for 18 October.

It is likely that the US will contest the type of retaliation or the level of sanctions that Brazil is seeking. This would force the issue to arbitration, in which case either the panel that first ruled on the dispute or an arbitrator appointed by the WTO Director-General would determine whether Brazil's demands are appropriate.

Meanwhile, at a 6 October press conference, US Deputy Secretary of State and former trade chief Robert Zoellick hinted that retaliation might cause Brazil to lose its preferential access to the US market under the Generalised System of Preferences.

On 3 March, the WTO Appellate Body upheld a previous panel ruling that US cotton subsidies were in violation of WTO rules on agriculture and subsidies (see , BRIDGES Weekly9 March 2005).

Brazil: Retaliation under GATT not practical

Prior to applying trade sanctions, Members seeking to induce a country to meet its WTO obligations must seek authorisation to retaliate against it from the DSB. Such sanctions generally take the form of tariff surcharges on imports from the offending country. Standard retaliation occurs against items that come within the remit of the violated agreement; where possible, against products within the sector that is the subject of the dispute.

'Cross-retaliation' is the term given to retaliatory measures applied under WTO agreements different from the ones being violated. According to WTO rules, Members may be granted permission to cross-retaliate when it is not "practicable" or "effective" for them to impose penalties under the violated agreement. Whether this is indeed the case depends on the likely effects of retaliating against the same sector in the same agreement -- for example, in this case, retaliating under the General Agreement on Tariffs and Trade, or the GATT, which governs trade in agricultural and non-agricultural products.

In principle, since it is retaliating against the effects of US cotton subsidies, Brazil should thus first retaliate by imposing higher tariffs on agricultural or non-agricultural products, which are counted as a single sector under the GATT. Brazil, however, has argued that imposing additional duties worth the entire USD 1.037 billion on goods imported from the US would be harmful and place the country at a competitive disadvantage by increasing the cost of inputs and capital goods. It argued that such import duties would hurt Brazil more than the much larger US economy, in addition to impeding its efforts to curb inflation. Brazilian imports from the US amounted to USD 11.3 billion in 2004.

Brazil is therefore seeking to suspend concessions under two other sets of WTO rules: the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Services (GATS). This would enable it to target US intellectual property such as patents, copyrights, trademarks, industrial designs, and the protection of undisclosed information. Brazil also proposes to make up for damages it has suffered by denying access to US enterprises in the business, communication, construction, distribution, financial, tourism, and transport services sectors. It has, however, reserved the right to seek retaliation against US goods exports as well.

If granted permission to cross-retaliate, Brazil would, for example, have the right to suspend the effects of US patents, which would clear the way for companies in Brazil to make generic copies of medicines. Cross retaliation would also give Brazil much greater leverage in forcing the US to bring its cotton subsidies into compliance with WTO rules.

Most experts on the WTO dispute settlement system agree that retaliation in the same sector or under the same agreement is not effective between economies of vastly different sizes: the larger country might hardly feel the pain of lost exports, while the smaller one might cause serious harm to its own economy if it increases the cost of imports from the offending Member. Cross-retaliation provides a tool in such cases for smaller economies to induce compliance by larger ones.

If Brazil receives the right to cross-retaliate and actually does so, it would become the first country in WTO history to impose such measures. In 2000, a WTO dispute arbitrator granted Ecuador permission to impose cross-retaliatory sanctions worth USD 200 million against the EU for the latter's failure to comply with a WTO ruling against its banana import regime. However, Ecuador chose not to avail itself of this right to retaliate.

ICTSD reporting; "Brazil Requests $1.04 Billion in Sanctions Over U.S. Cotton Aid," BRAZIL BLOOMBERG, 6 October 2005.