Lessons from the Cotton Dispute: A View from Brazilian Industry

31 December 2008

The cotton case made history at the WTO and opened the way to possible disputes in the future. This article discusses the potential gains for Brazil from such litigation, as well as outstanding issues surrounding retaliation.

Brazilian cotton producers have competed against US cotton for decades. The US government has subsidised its cotton production since 1933, and eliminating such practices is difficult, particularly when the beneficiaries are large agribusiness corporations. The damage caused by this support to the competitiveness of Brazilian cotton in the international market was one of the reasons behind Brazil's decision to launch a dispute against the US in the WTO.

When dispute settlement consultations began in 2002, few believed in a Brazilian victory. Even after a favourable panel ruling, upheld on appeal, many doubt that the US will in fact eliminate the subsidies found to be inconsistent with its WTO obligations.

Farm Trade Liberalisation

When the case was brought, it was widely expected that budgetary problems would lead to a reduction in US farm subsidies. It quickly transpired, however, that agricultural support represents such a small fraction of industrialised countries' budgets that taxpayers do not feel the impact in their pockets and therefore do not press for reform. The dispute thus became a vehicle to pressure the US to carry out the cuts originally expected in the new farm bill.

Market liberalisation will only benefit Brazilian and other developing country cotton growers if they are able access international markets now occupied by subsidised US exports. In addition, the effort to open markets for cotton was seen as the first step of a push to increase market access for all agricultural products, similar to the way average industrial tariffs fell from 40 to 4 percent during the Uruguay Round negotiations.

The financial crisis has rekindled expectations that the next US administration will cut spending, including farm support. That, however, is by no means certain, and trade retaliation through the WTO once again looks like the most effective tool to to access international markets.

Lessons from the Cotton Case

Optimistically, the Brazilian cotton industry expected that a favourable verdict would prompt the US to at least remove WTO-inconsistent subsidies to their cotton producers. While it now seems that those hopes will be frustrated, some benefits from the WTO dispute can already be observed.

First and foremost, it has bolstered developing countries' confidence that they can win a case against a strong developed economy. Although it is not easy to bring a dispute in the WTO, it is no longer thought to be impossible. Indeed, in collaboration with other countries, Brazil is currently considering the initiation of a new case against unfair competition from a number of other US agricultural exports.

Second, the cotton dispute strengthened Brazil's negotiating position in the Doha Round. It served not only as an example, but as an element of pressure.

Third, the dispute opened new frontiers for co-operation between the public and private sectors. Collaboration between Ministry of Foreign Affairs and the cotton producers' association ABRAPA was a key element in the successful outcome of the litigation. ABRAPA, however, is an exception in the Brazilian agricultural sector, which is generally characterised by a lack of adequately mobilised producer associations. As a result, the bargaining power of Brazilian producer associations seldom matches that of the companies they must deal with.

The Difficulties of Retaliation

Now that litigation is over, Brazil faces the difficulty of finding a form of retaliation that does not upset domestic consumers. Nevertheless, having come this far in the dispute and negotiations - without full US compliance with WTO rulings - it does not make sense to miss the opportunity. Brazil should apply retaliatory measures and, if possible, find a way to benefit its cotton sector in the process. While this is an issue that the government should discuss internally as part of a state strategy, authorities should not lose sight of the various interests involved.

In its arbitration request, Brazil initially requested authorisation of  trade sanctions worth US$4 billion,  three-quarters of which would be in compensation for violations of export subsidy disciplines and the remaining one billion corresponding to WTO-inconsistent domestic support. Brazil also indicated that it would be necessary to have recourse to ‘cross-retaliation' involving economic sectors beyond agricultural and industrial goods. A WTO panel will determine in the near future the amount of trade sanctions and the manner in which it is carried out (see page 13). The areas of intellectual property and services, proposed for cross-retaliation by Brazil, are most sensitive to the US and could harm Brazilian consumers less than punitive tariff hikes on goods.

In order to avoid damage to important export sectors and its international image, the US could propose to negotiate compensation, most likely in the form of increased import quotas for one or more other products. In any case, Brazil should continue until the end in this dispute.

Hélio Tollini is a consultant to the Brazilian Association of Cotton Producers (ABRAPA).

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