WTO Panel Allows Brazil to Cross-Retaliate on IP, Services in US Cotton Row

9 September 2009

A WTO panel has cleared the way for Brazil to impose trade sanctions worth US$294.7 million - and possibly including cross-retaliation in services and intellectual property - to retaliate against the US' failure to comply with previous WTO rulings on Washington's cotton subsidies. The award was significantly lower than the US$4 billion in sanctions that Brasilia had sought, but still marked the second-largest level of retaliation that has ever been authorised by the WTO, according to one measure.

Observers say that the panel reports, which set clear conditions for cross-retaliation and specifically outlines how the level of sanctions should be calculated, may set a precedent for how cross-retaliation is to be exercised in practice.

The WTO had already ruled in the seven-year-old case that trade-distorting US cotton subsidies worth US$3 billion annually violated the WTO's Agreement on Subsidies and Countervailing Measures (SCM). The US has since continued its controversial subsidies, arguing that subsequent reforms had brought the programmes into compliance with the ruling.

Using 2006 figures as a reference, the arbitrators found that Brazil was entitled to impose annual sanctions worth US$147.4 million in the case of prohibited subsidies and US$147.3 million for actionable subsidies unless the US puts an end to the subsidies faulted in the ruling.

Though the sanctions constitute only 10 percent of the US$2.2 billion in sanctions that Brazil had sought, the retaliation is still much higher than the US' claim that no more than US$22.8 million per year in sanctions would be appropriate.

"While we remain disappointed with the outcome of this dispute, we are pleased that the arbitrators awarded Brazil far below the amount of countermeasures it asked for," said Carol Guthrie, spokeswoman for US Trade Representative Ron Kirk.

Interestingly, the panel found the retaliation amount for illegal export subsidies to be a variable figure that should change from year to year depending on the level of the payments actually distributed. Roberto Azevedo, Brazilian Ambassador to the WTO, says that the current payments are much higher than they were in 2006, the year that the dispute panel used to make its calculations. Using the methodology developed by the arbitrators, he said, Brazil would be entitled to US$800 million in sanctions for 2009.

Pedro Carneiro de Mendonca of Brazil's Foreign Affairs Ministry alleged that the panel had used outdated numbers to calculate the fine and that spending on illegal subsidies has increased significantly since 2006. Azevedo later specified that credit guarantees under the US' DSM-102 programme - which the WTO found to violate the SCM -- ballooned from US$1.36 billion in 2006 to a preliminary estimate of US$4.62 billion for the first 10 months of the 2009 fiscal year.

US cotton and other farm groups balked at these statements. The US Congress changed the GSM-102 program significantly in the 2008 US farm bill, they argued, ensuring that the programme would comply with Washington's obligation to guarantee that premiums received under the programme cover its operating costs and losses.

"The US cotton programme and export credit guarantee programmes have changed considerably since 2005," said Jay Hardwick, Chairman of the National Cotton Council, in a statement. "Today's programmes cannot possibly be determined to be causing injury in the world market."

Despite the continued - albeit altered - subsidies, US cotton production has shrunk by 46 percent and cotton exports have fallen by 25 percent since 2005, Hardwick noted.

Seven US farming groups called upon the US government to "request a new compliance panel to update this ruling to reflect the changes in the program made by congress and the USDA since 2005."

Cross-retaliation in TRIPS: a powerful tool

A second major issue in the recent Article 22.6 proceedings was Brazil's request that the WTO authorise the country to ‘cross-retaliate' against the US under the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). That request was based on the assumption that retaliation in goods alone would harm the Brazilian economy and thus would not be an effective countermeasure.

The panel granted that request, with one condition: Brazil may retaliate in IP and services but only after a threshold of US$410 million worth of sanctions has already been reached.

By lifting patent and trademark protection on pharmaceutical products and software - rather than simply raising tariffs on imported goods - Brazil could spur US domestic interests to pressure Washington to comply with the original ruling.

Cross-retaliation under TRIPS can be a very powerful tool, especially for developing countries, as it does not trigger some of the adverse effects such as increased consumer prices caused by higher tariffs or greater costs for domestic producers who may be obliged to switch to other suppliers. Such retaliatory measures allow smaller WTO member states to create pressure against economically powerful trading partners that would most likely be unharmed by the suspension of concessions in goods alone. Brazil constitutes a relatively small market for the US, accounting for less than three percent of total US exports.

Based on the recent reports, Brazil might set a precedent for the suspension of IPRs. Cross-retaliation under TRIPS has been authorised in only two previous cases: Ecuador was granted permission to do so in a dispute with the EU over banana tariffs, and Antigua was allowed to do the same in a dispute with the US over its internet gambling laws. However the developing country complainants in both instances have not imposed such retaliation measures, despite strong urging from some of their domestic interests. Thus, the current case could be a crucial test of how cross-retaliation in IP could work in practice.

And this latest ruling has a slightly different slant from the previous cross-retaliation cases, says Frederick Abbott, a law professor at Florida State University.

"From a purely legal standpoint, I would say this represents a ‘step backward' from the Ecuador and Antigua panel decisions that were more sensitive to development concerns," Abbott said in an email message. "Having said that, it was to a certain extent foreseeable because Brazil is not Ecuador or Antigua, and has a lot more trade flow to play with in terms of withdrawal of concessions," he added.

According to a Brazilian newspaper the government has already prepared a "provisional measure" - a presidential decree that takes immediate effect, although it must later be ratified by Congress - to allow Brazilian pharmaceuticals companies to produce medicines protected by US patents.

However the ruling allows cross-retaliation in TRIPS only if Brazil's amount of total annual sanctions exceeds US$ 409.7 million. Because of the complexities of calculating that total subsidy figure, it is difficult to know at this point whether that threshold has been reached.

But the Brazilian government has already launched an in-depth examination to determine the concrete amounts based on the panel's methodology, and claims that it is entitled to around US$ 340 million in cross-retaliation under GATS and TRIPS annually.

Brazil busy preparing its sanction list

Brazil's Foreign Minister Celso Amorim said that Brazil would carefully examine how to impose the maximum leverage with its sanctions. "We'll be having meetings all along next week and hopefully in ten, 15 days we can have a list," he told Reuters.

"We are going to choose the sectors that least affect us and most affect the US," Amorim added, according to the Estado news agency.

On Tuesday, Brazil said it wanted to enter into negotiations with the US before starting retaliation.

Even if a new deal on cotton in the Doha Round is not connected to the actual case, Roberto Azevedo has said that a Doha deal that leads to a substantial cut in US subsidies would automatically solve the trade dispute and end the need for sanctions.

Brazil will have to request final authorisation for retaliation and cross-retaliation with the WTO's Dispute Settlement Body. However, the request could only be refused if all WTO members in attendance (including Brazil) were to reject the arbitrators' ruling.

ICTSD reporting; "EXCLUSIVE - Brazil readies list of US goods to sanction," REUTERS, 3 September 2009.

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