US, Brazil Clash on Cotton Sanctions

31 December 2008

Brazil and the US have submitted wildly different estimates to WTO arbitrators with regard to the damage inflicted on the Brazilian economy by US cotton subsidies. The two sides also disagree on whether Brazil should be allowed cross-retaliate in the intellectual property and services sectors.

The Appellate Body ruled in June that the US had failed to comply with previous dispute settlement rulings on cotton subsidies (Bridges Year 12 No.4 page 13). At the request of Brazil, an arbitration panel was established in October to determine the level of trade retaliation it would be authorised to undertake as a consequence of US non-compliance. Both countries have now made their initial submissions to the arbitrators, who have already overshot the 60-day period foreseen for the authorisation of trade retaliation in the Dispute Settlement Understanding.

Prohibited Subsidies: US$1.3 billion vs Zero

Brazil is seeking the right to impose sanctions worth US$1.294 billion annually to counter the effects of the prohibited subsidies the US was found to provide under three export guarantee programmes, plus a one-off payment of US$350 million to compensate for the Step 2 programme, which compensated US millers and exporters for using domestically grown cotton. The US counters that it stopped providing export guarantees under two of the programmes in 2005 and repealed Step 2 in 2006. No countermeasures should be awarded for any of these, no longer existing, measures, the US argues.

The US further maintains that since 2005 the remaining export guarantee programme has operated at no long-term net cost to government, and that no countermeasures are thus appropriate for this programme either. The US strongly emphasises that the determination of the existence and value of a subsidy must be based on a programme's cost to government, not on its benefit to recipients, as it alleges Brazil is doing. The US also claims that Brazil wrongly included in its calculation of adverse effects caused by the prohibited subsidies the impacts Brazil had found them to cause throughout the world instead of in Brazil alone.

Although the US does provide an estimate of US$9.5 million as the average amount of export loan guarantees provided by the government between 2005 and 2007, it asks the arbitrators to dismiss all claims related to prohibited subsidies since there had been no defaults on the guaranteed loans and therefore no net cost to government.

Actionable Subsidies: A Difference Exceeding US$1 Billion

Some subsidies are ‘actionable', i.e. deemed to violate the Agreement on Subsidies and Countervailing Measures, only if the complainant can prove that they cause ‘adverse effects', such as price suppression. Brazil asks the panel to award countermeasures worth US$1.037 billion annually for such actionable subsidies, but the US again claims that not only do Brazil's calculations include programmes no longer in existence (Step 2 and market loss assistance payments), but also adverse effects not limited to Brazil alone. According to US calculations, the total effects of US counter-cyclical and marketing loan payments on Brazil amounted US$30.4 million on average between 2005 and 2007. The US also argues that the ‘serious prejudice to the interests of Brazil'caused by these subsidies was less than their total effects, and that the countermeasures awarded should therefore be somewhere between zero and US$30.4 million.

All in all, the difference between the two countries' estimates of the appropriate level of annual countermeasures for both prohibited and actionable subsidies amounts to a staggering US$2,300,600,000.

Cross-retaliation

As a rule, trade retaliation should happen within the sector where the violation was found, which in this case would essentially mean punitive tariffs on US goods. Brazil, however, has argued that limiting retaliation to the goods sector alone would not be ‘practicable or effective' because additional import duties would have a much greater negative impact on Brazil than on the US due to the asymmetries between the two economies. For instance, higher duties would negatively affect the cost of inputs and capital goods to Brazilian industry, as well as have a ‘significant negative impact' on efforts to control inflation.

Brazil has therefore requested authorisation to suspend certain obligations under the intellectual property rights and services agreements as well. These potentially  include the protection of copyrights, trademarks, industrial designs, patents and undisclosed information, as well as withdrawal of concessions in services sectors related to communication, construction, distribution, finance, tourism and transport.

The US strongly objects to this request. Cross-retaliation rights have been awarded only twice in WTO history so far, but the US contends that those were exceptional cases involving small and undiversified economies - Ecuador and Antigua, neither of which has exercised the right.

The US argues that Brazil, unlike Ecuador or Antigua, is a ‘large and diverse' economy that will have no trouble in retaliating effectively and practicably' in the good sector alone, and thus does not qualify for the cross-retaliation exception available to Members under Article 22.3(c) of the Dispute Settlement Understanding. According to the US, Brazilian imports of US goods were worth between US $15.3 billion and US $24.6 billion annually from 2005 to 2007.

The US also rejects Brazil's claim that cross-retaliation would be justified because such countermeasures would ‘maximise the likelihood of compliance' on the part of the United States. The authorisation of countermeasures is tied to the effects of the ‘nullification or impairment' of the complainant's benefits, not the level of sanctioning that would motivate a Member to comply with a ruling, the US stated in its submission to the arbitrators.

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