A WTO dispute panel has determined that the US failed to bring its cotton subsidy programmes fully into compliance with an earlier ruling, potentially opening the door to billions of dollars worth of sanctions from Brazil.

The panel's final report, released confidentially to the US and Brazil on 15 October, confirmed its interim findings from July, a senior Brazilian official told the Associated Press (see BRIDGES Weekly, 1 August 2007). The report will be made public at a later date.

The panel was examining the US' compliance with a 2004 WTO ruling against a range of its subsidy and credit programmes for cotton growers and exporters. That decision was confirmed by the Appellate Body in 2005 (see BRIDGES Weekly, 9 March 2005).

Since the ruling, Washington has abolished some export credit schemes, as well as the 'step 2' programme that paid US cotton mills and exporters the difference between American cotton prices and world benchmark rates. It argued that this was sufficient to bring its policy into line with the WTO decision.

Brazil disagreed, prompting the creation of the current 'compliance panel' in autumn 2006 (see BRIDGES Weekly, 4 October 2006). It said that not only did the 'step 2' repeal come over ten months after the deadline specified in the ruling, the US had taken "no measures whatsoever" to scrap its programmes on marketing loans and countercyclical payments, which rise when world prices fall. Brazil also said that US subsidies were depressing the world price for cotton and increasing the US' share in the world market for the commodity, thus contravening WTO subsidy rules.

A US trade official confirmed "that the panel found that the changes made by the United States were insufficient to bring the challenged measures - certain support payments under the 2002 farm bill and export credit guarantees - into conformity with US WTO obligations." "We continue to believe that payments and export credit guarantees under our programs are now fully consistent with our WTO obligations," said the official. "We are studying the report closely." Washington is expected to appeal the ruling.

Brazil has sought the right to impose annual sanctions totalling up to $4 billion on the US. Furthermore, it has indicated that it would seek not only to impose retaliatory duties on US goods, but also to 'cross-retaliate' against services providers and intellectual property such as patents and trademarks. Brasilia may lower the total amount since the US has stopped some of the subsidy payments. Bloomberg reports that Brazilian Agriculture Minister Reinhold Stephanes, speaking in Brussels, suggested that Brazil may even elect not to implement penalties against the US at all, settling instead for a "moral" victory. He cited the difficulty of adopting such measures against the world's largest economy.

"The US must act immediately to reform its trade distorting cotton subsidies" to preserve its credibility in international trade and avoid damage to the multilateral trading system, said international advocacy organisation Oxfam in response to the panel's decision. "This ruling reinforces the need for reductions in US cotton subsidies in both the context of the Doha Round and the 2007 farm bill," said Isabel Mazzei, head of Oxfam's Geneva office. The group also criticised the proposed new farm bill, which is still being negotiated in the US Congress, for ignoring the WTO ruling and even going back on previous reforms.

The US National Cotton Council, which represents the industry, called the compliance panel's ruling "disappointing," noting that world cotton prices had increased.

US cotton payments have been a controversial issue in the troubled Doha Round trade talks, with a group of four West African countries (Benin, Burkina Faso, Chad, and Mali) pushing for deep subsidy cuts, citing harm to their cotton growers from depressed prices.

A draft agreement put forward in July by the chair of the agriculture negotiations called for cotton subsidies to be cut by over 80 percent - more than those for other products. At the time, the US' lead agriculture negotiator described the proposed provisions as "not acceptable."

ICTSD reporting; "WTO Rules Against US Cotton Subsidies," ASSOCIATED PRESS, 15 October 2007; "US loses cotton subsidies fight," BBC NEWS, 15 October 2007; "Brazil May Avoid Punishing U.S. Over Cotton Aid, Stephanes Says," BLOOMBERG, 16 October 2007.