US, Brazil Clinch Deal Resolving Cotton Trade Row

2 October 2014

Brazil and the US have reached an agreement to bring their long-running WTO dispute (DS267) over Washington’s cotton subsidies to an end, officials confirmed on Wednesday.

“Through this negotiated solution, the United States and Brazil can finally put this dispute behind us,” said US Secretary of Agriculture Tom Vilsack, who announced the deal together with US Trade Representative Michael Froman.

“Without this agreement, American businesses, including agricultural businesses and producers, could have faced countermeasures in the way of increased tariffs totalling hundreds of millions of dollars every year,” he continued.

Under the terms of the deal, the US will make a one-off payment of US$300 million to the Brazilian Cotton Institute, a technical fund for Brazilian farmers. The payment will be sent within the next three weeks.

According to the Memorandum of Understanding released on Wednesday, the money provided to the Brazilian Cotton Institute (IBA, by its acronym in Portuguese), can be used for technical assistance and capacity-building activities involving the Brazilian cotton sector. These could include, for example, promotion of the use of cotton; pest and disease control and eradication; natural resources management and conservation; and the use of technologies to improve cotton quality.

The funds can also be used for international cooperation in cotton in sub-Saharan African countries, an apparent nod to the C-4 group of cotton producers – Benin, Burkina Faso, Chad, and Mali – who have long had a particular interest in the results of this dispute. Fellow members and associate members of South American customs bloc Mercosur, along with Haiti and any other developing country that the two sides agree on, could also benefit.

The US has also agreed to a series of rules regarding how it administers export credit guarantees under its GSM-102 programme, which was one of the schemes found to be in violation of WTO law.

Unlike some other programmes found to be WTO-illegal, it was not removed following the global trade body's’ ruling, but rather changed.

Specifically, Washington has now said that it will not offer guarantees under the programme for loans lasting longer than 18 months, nor it will extend or renew any guarantees once issued. Fees under the GSM-102 programme will also have to meet a series of conditions.

The US will also provide Brazil with information on the GSM-102 programme on a semi-annual basis.

In return, Brasilia will make sure that the IBA meets all applicable terms of Brazilian law, for instance in terms of auditing and accounting, while also providing the US with regular reports of IBA disbursements and activities.

Furthermore, Brazil will no longer hold onto its right to retaliate against the US on this particular issue. It has also committed not to file any WTO challenges to the GSM-102 export credit guarantee programme under the GATT articles referring to consultations or nullification of benefits, as long as the US scheme meets the criteria listed in the Memorandum.

Brasilia will also not challenge any existing cotton domestic support programmes, notably the Stacked Income Protection Programme (STAX) included in the latest Farm Bill, under those GATT articles. STAX is a supplemental crop insurance initiative that builds on top of traditional crop insurance.

Dozen-year dispute

The dispute dates back to 2002, when Brazil first challenged a series of US support schemes to its cotton producers. In both the original panel stage, as well as in the subsequent appeals process, the US was faulted by the global trade arbiter as having violated its WTO obligations.

After a compliance panel then deemed that the US had not brought its WTO-illegal measures in line with global trade rules, Brazil was then granted the option of retaliating both in goods and intellectual property, to the tune of over US$800 million.

The decision to grant Brazil the latter option was a rare one for the WTO – countermeasures, when granted, are usually in the same sector as the product in question.

Brazil had requested the option of cross-retaliation based on the concern that retaliation in goods alone would only hurt its own economy, and thus make it an inappropriate countermeasure.

Just days before the countermeasures were set to come into force, the two sides clinched a “framework deal” in 2010 that put the cross-retaliation on hold until a new revision of the US Farm Bill – the omnibus legislation that governs US government spending on agriculture – could be passed. (See Bridges Weekly, 23 June 2010)

In the meantime, the US agreed to pay US$147.3 million per year in compensation to Brazilian cotton farmers via the Cotton Institute.

A new Farm Bill was concluded earlier this year, and covers spending over the next five years. Brazilian officials had suggested at the time that they were dissatisfied with the resulting legislation with regards to how it handled the cotton question, and indicated that they could pursue further WTO action. (See Bridges Weekly, 30 January 2014)

Significantly, the entry into force of the new Farm Bill essentially meant that the framework deal agreed in 2010 expired, giving an additional impetus to negotiators to find a solution to the dispute.

Next steps

To formally end the dispute, the solution will need to be notified to the WTO’s Dispute Settlement Body. The parties have said that this will occur within 21 days following this Memorandum of Understanding.

The Memorandum will be in force until 30 September 2018.

ICTSD reporting.

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