Critical Trade Issues WTO Dispute Settlement Understanding Brazil- U.S. Cotton (DS 267)

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Critical Trade IssuesWTO Dispute Settlement
UnderstandingBrazil-U.S. Cotton (DS 267)

• George Mason University
• ITRN 603 002
• Professor Stuart Malawer
• 7 October, 2009

Presented by Solaiman Afzal, Junaid Abu, Brian
Adams
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WTO Dispute Settlement Rules and Procedures

• Made out of 27 Articles and 4 Appendices
• Focus on
• Article 1 Coverage and Application
• Article 4 Consultation
• Article 6 Establishment of Panels

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U.S. and Brazil Agricultural Sectors

• U.S.
• Highly productive agriculture sector but less
  than 1 of GDP
• Heavily subsidized
• Dependent on exports
• Brazil
• Growing industry, but less than 6 of GDP
• Accounts for 20 of formal jobs
• Share of exports to U.S. is in decline (14 in
  2006, 11 in 2007)
• Little success in multilateral negotiations with
  U.S., E.U.
• Dispute with E.U. on sugar subsidies, and U.S.
  for cotton and orange subsidies

Source Economist Intelligence Unit
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WTO Agricultural Products Disputes
Defendant Complainant Issue Case Id
Australia Philippines Certain Measures Affecting the Importation of Fresh Pineapple DS271
Australia Philippines Fresh Fruit and Vegetables DS270
Australia EU Quarantine Regime DS287
Canada U.S. Wheat Exports and Grain DS276
Chile Guatemala Price Band System and Safeguard Measures Relating to Certain Agricultural Products DS220
Chile Argentina Price Band System DS207
EU Argentina, Canada, U.S. Approval and Marketing of Biotech Products DS293, DS292, DS 291
EU Australia, Brazil, Thailand Export on Sugar DS265, DS266, DS283
EU Australia, U.S. Trademarks and Geographical Indications DS290, DS174
Hungary Argentina, Australia, Canada, New Zealand, Thailand, U.S. Agricultural Products DS35
Japan U.S. Agricultural Products II DS76
Japan U.S. Apples DS245
Korea U.S. Measures concerning the Testing and Inspection of Agricultural Products DS3
Korea U.S. Measures concerning Inspection of Agricultural Products DS41
Mexico U.S. Anti-Dumping Measures on rice DS295
Mexico Nicaragua Certain Measures Preventing the Importation of Black Beans from Nicaragua DS284
Peru Chile Tax Treatment on Certain Imported Products DS255
U.S. Brazil Florida Excise Tax DS250
U.S. Brazil Upland Cotton DS267
U.S. Canada Determination of the International Trade Commission in Hard Red Spring Wheat from Canada DS310
Venezuela U.S. Import Licensing Measures on Certain Agricultural Products DS275
WTO http//www.wto.org/english/tratop_e/dispu_e/d
ispu_subjects_index_e.htmagricultural_products
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WTO Agricultural Products Disputes Analysis

• Two out three cases brought up against the U.S.
  are from Brazil
• U.S. generally files complaints against Japan and
  Korea
• Overall most complaints are filed by developing
  countries against developed countries

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Timeline
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Outline

• Claim 1 Peace Clause
• Claim 2 U.S. Direct Payments
• Claim 3 Step-2 Payment as Export Subsidy
• Claim 4 Export Credit Guarantees as Export
  Subsidy
• Claim 5 U.S. subsidies cause Serious
  Prejudice
• Claim 6 FSC-ETI Act of 2000 as Export Subsidy
  

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Claim 1Peace Clause Violation

• Brazil claimed that U.S. no longer exempt from
  WTO dispute proceedings under Peace Clause.
• U.S. claimed that agricultural subsidies could
  not be eliminated immediately, to be exempted
  from Subsidies and Countervailing Measures (SCM)
  Agreement and GATT 1994 subsidies discipline.
• Source United States Subsidies on Upland
  Cotton, Report of the Panel, WTO, WT/DS267/R,
  Sept. 8, 2004 p. 157

billion MY 1992 MY1999 MY2000 MY2001 MY2002
Total 2.1 3.4 2.4 4.1 3.1
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Finding

• The panel found that Brazil had successfully
  discharged its burden to show that U.S. domestic
  cotton support measures were in excess of WTO
  commitments (of 2.0 billions) during MY1992.

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Claim 2 U.S. Direct Payments

• Brazil claimed that two types of U.S. Payments
  should therefore count against the U.S. Peace
  Clause
• Production Flexibility Contract (PFC)
• Under the 1996 farm bill
• Direct Payment (DP)
• Under the 2002 Farm bill
• U.S. argued that PFC and DP were consistent with
  WTO agreements

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Finding 2

• The panel found (and was upheld by the AB) that
  U.S. payments made under the PFC and DP programs
  they should be counted as domestic subsidies
  directly affecting cotton production.

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Claim 3 The Step-2 Program Functions as Export
Subsidy

• Brazil argued that Step-2 Payments made under the
  U.S. cotton program function as export subsidies
  and are inconsistent with the U.S. WTO
  obligations as specified under the SCM Agreement.
  
• The United States argued that Step-2 Payments
  were part of its domestic support program they
  were targeted to domestic cotton users as well as
  to exporters.

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Finding 3

• In its finding, the panel considered Step-2
  program payments as following
• Payments to exporters were found to be
  contingent upon export performance and
  therefore qualified as prohibited export
  subsidies in violation of WTO commitments.
• Payments to domestic users were found to be
  contingent on the use of domestic over imported
  goods and therefore qualified as prohibited
  import substitution subsidies.

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Claim 4 U.S. Export Credit Guarantee Function as
Export Subsidies

• Brazil claimed that the terms under U.S. export
  credit guarantee programs GSM 102, GSM103 and
  the Supplier Credit Guarantee Program (SCGP) are
  inconsistent with WTOs AA and SCM Agreements.
• U.S. Trade officials argued that Article 10.2
  of the AA reflected the deferral of disciplines
  on export credit guarantee programs contemplated
  by WTO members to the next WTO multilateral
  negotiating round the Doha Round.
• Finding The panel found that U.S. was found to
  Violate Annex I (j) of SCM, WTO Legal Texts, p.
  267

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Claim 5 U.S. Subsides have caused Serious
Prejudice

• Brazil claimed that U.S. cotton Subsidy led to
  three market conditions
• By increasing the U.S. share of the world upland
  cotton market
• By displacing or impeding Brazilian upland cotton
  sales in third-country markets and
• By contributing to a steep decline in world
  cotton prices
• U.S. argued that Subsidies were within allowable
  limits of WTO.

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Finding

• The panel found (and was upheld by the AB) that
  U.S. domestic support measures that are directly
  contingent on market price levels caused serious
  prejudice in terms of market price suppression
  for the period 1999 to 2002
• The panel also did not find in favor of Brazils
  alleged serious prejudice in terms of an effect
  on international market share.

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Claim 6 FSC-ETI Act of 2000 Acts as an Export
Subsidy to Upland Cotton

• Brazil claimed that under FSC-ETI Act of 2000, by
  eliminating tax liabilities for U.S. upland
  cotton exporters constituted as export subsidy.
• The United States asserted that Brazil failed to
  make any specific case with respect to FSC-ETI
  Act of 2000 and Upland cotton exports.
• Finding The panel concurred with U.S. in
  stating that Brazil failed to present any new
  arguments or evidence concerning effects upon
  Upland Cotton.

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Compliance and Retaliation Phase of the Dispute

• Brazil Seeks Authority for Retaliatory Trade
  Measures
• Brazil Requests a Compliance Panel
• Brazil Requests Resumption of Arbitration Review
  of Proposed Countermeasures

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The Potential Implications of WTO Panel Ruling

• An arbitration ruling in favor of both Brazils
  retaliation amounts and the requested
  crossretaliation feature could raise the stakes
  in this particular dispute by expanding
  retaliation into TRIPS and the General Agreement
  on Trade in Services.
• The U.S. response to the WTO cotton ruling is
  being watched closely by developing countries,
  particularly by a consortium of four African
  cotton-producing countries that has submitted its
  own proposal to the WTO calling for a global
  agreement to end all production-related support
  for cotton growers of all WTO-member countries.
• Trade experts have expressed concern that the
  panel findings could extend beyond cotton to
  other major field crops, particularly as concerns
  the potential limits on export credit guarantees.
  
• Some trade and market analysts, as well as
  legislators, have expressed concern that a broad
  finding against U.S. farm program provisions
  under the actionable subsidies ruling could
  necessitate legislative changes to the U.S. farm
  bill to bring existing program operations into
  compliance.

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What has happened concerning implementation and
sanctions if any.

• Brazil claimed the right to impose 2.5 billion
  in retaliatory sanctions against the United
  States.
• Brazils proposed sanctions total comprises three
  separate components
• 1. One-time countermeasure of 300 million.
• 2. An annual countermeasure of 1.2 billion based
  on the prohibited subsidies ruling concerning the
  U.S. export credit guarantee program.
• 3. Annual countermeasure of 1 billion based on
  the actionable subsidies ruling concerning
  price-contingent programs (e.g., the
  counter-cyclical and marketing loan programs).
• As part of its prohibited subsidy countermeasure,
  Brazil is seeking cross-retaliation rights that
  would permit retaliation in sectors other than
  just the goods sector

Source CRS report
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US Latest Claims

• The United States has expressed strong
  disagreement with both the amount of
  countermeasure requested and with any right of
  cross-retaliation.
• Great interest to Us because if granted,
  cross-retaliation could involve retaliation in
  intellectual property rights and services
  agreements as well

Source CRS Report
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The Ruling

• The US faces annual trade sanctions of about
  295m (181m) for failing to scrap illegal
  subsidies paid to its cotton growers.
• A WTO panel upheld last year's ruling that
  subsidies helped US cotton growers undercut
  foreign competitors.
• Brazil said that its farmers and those in West
  Africa had suffered the most.
• It made reference to the 4bn figure in documents
  it filed with the WTO about three years ago.
• WTO rule that Brazil could take retaliatory
  sanctions against the US and "suspend concessions
  or other obligations".

Source BBC News
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The Effects

• US cotton subsidies were one of the most
  contested issues in the Doha round of world trade
  talks.
• Producers in developing countries, especially in
  Africa, say the US subsidies squeeze their own
  farmers out of the market.
• About 12.5bn was paid to American farmers by the
  US government between August 1999 and July 2003,
  Brazil had claimed.
• A WTO-proposed draft released two years ago calls
  on the U.S. to make an 82 percent cut in
  trade-distorting handouts to American cotton
  farmers as part of the trade accord. Washington
  has rejected the cuts, but never proposed an
  alternative.

Source BBC News
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Further Effects

• The WTO panel said Brazil could target other
  American goods for retaliation if U.S. cotton
  supports rise significantly beyond current levels
  for its 25,000 farmers. Brazil, which has a
  robust pharmaceuticals and generic-drug industry,
  has targeted patented U.S. drugs for potential
  retaliation. That means the country could allow
  domestic drug makers to manufacture copies of
  U.S. pharmaceuticals that are still under patent
  protection.
• The issue of "cross retaliation" in global trade
  disputes is contentious. Many smaller countries
  need U.S. capital goods in order to grow, leaving
  them without effective tools to fight back with
  when the WTO finds that U.S. trade policy has
  injured the smaller nations.
• The WTO cotton ruling for Brazil is, therefore,
  "the big banana in terms of smaller countries
  having effective means of retaliation," said Gary
  Hufbauer, a trade expert at the Peterson
  Institute for International Economics in
  Washington. "This will cause the
  intellectual-property community a few shakes and
  quivers."

Source Wall Street Journal
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Other Considerations

• Brazil, the world's biggest exporter of coffee,
  sugar, beef, chicken and iron ore, imports 18
  billion a year of American goods and has long
  complained that many of its products face unfair
  obstacles to the U.S. markeet. It still needs
  most of those U.S. goods, but som of its sectors
  -- particularly pharmaceuticals -- could profit
  from import tariffs.
• Some experts said the possibility of retaliating
  against the U.S. by flouting U.S. patents on
  medicines, films and other intellectual property
  gives Brazil an important new weapon.

Source Wall Street Journal
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Brazils Opinion

• In a statement, Brazil said that these damage
  figures were calculated using 2006 trade figures,
  and that it will seek a bigger payout of around
  800 million to reflect current trade flows.
• "Brazil hopes that the United States will bring
  itself promptly and effectively into compliance
  with the WTO rulings, so that the imposition of
  the countermeasures authorized today is not
  necessary," Brazil's Foreign Ministry said in a
  statement.
• But the ruling opened an important door to
  retaliatory measures that, under certain
  circumstances, could punish American
  pharmaceuticals companies and other owners of
  intellectual property.

Source Wall Street Journal
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US Take

• The US Trade Representative's office said it was
  "disappointed" with the overall outcome. But
  added that it was "pleased" that arbitrators had
  "awarded Brazil far below the amount of counter
  measures it asked for".
• Still, the U.S. seeks closer ties with Brazil as
  a way to improve its broader standing in the
  region, where governments in Venezuela,
  Argentina, Ecuador and Bolivia have become
  opponents to U.S. influence.
• Brazil is an important player in sputtering
  global trade talks.

Source Wall Street Journal

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Observations concerning the dispute in the
context of the global trading system.  

• This issue should be solved by negotiation, but
  absent that developing countries should invoke
  past legislation through the WTO dispute
  settlement system.
• Agriculture lobby unlikely to quit protecting its
  generous industry.
• It was a small step in the right direction.

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Sources

• Brazils WTO Case Against the U.S. Cotton. CRS
  Report, By Randy Schnepf Specialist in
  Agricultural Policy. March 17, 2009
• U.S. Loses Ruling on Cotton Payouts. Wall Street
  Journal, By PETER FRITSCH and JOHN LYONS.
  SEPTEMBER 1, 2009
• US faces sanctions in cotton row. BBC. August 31,
  2009
• http//www.ustr.gov/
• http//www.wto.org/
• http//www.gao.gov/