WTO Case DS267 U.S.-Brazil Cotton Subsidy Dispute. By R. Seth Billings Lewis Anderson Johanna Aguilar

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WTO Case DS267U.S.-Brazil Cotton Subsidy
Dispute.By R. Seth Billings Lewis Anderson
Johanna Aguilar
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Background on the U.S. Cotton Sector

• The cotton industry is a major component of the
  U.S. agricultural sector, accounting for an avg.
  of 4.6 billion per year during 1997-2002.
  
  
• 
  
• The U.S. is the second largest producer of cotton
  in the world behind China.
  
• The U.S. is the worlds largest exporter of
  cotton, making up 40 of global trade.

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Points in dispute on Upland Cotton case

• U.S. support for the cotton industry represent a
  violation of the Peace Clause.
• U.S. Direct Payments do not qualify for exemption
  from reduction commitments.
• The Step-2 program functions as an Export
  Subsidy.
• U.S. Credit Guarantees function as Export
  Subsidies.
• U.S. Subsidies have caused Serious Prejudice to
  Brazil.
• FSC-ETI Act of 2000 acts as an Export Subsidy to
  Upland Cotton.

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Brazils Argument
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Claim 1 Peace Clause Violation

• U.S. domestic and export cotton subsidies exceed
  WTO Commitments
• Agreement on Agriculture (AA)
• Subsidies not to exceed 1992 benchmark of 2
  billion
• 2004 over 4 billion
• U.S can no longer seek protection under peace
  clause.

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Claim 2 US Direct Payments Do Not Qualify As
Exempt

• 2 types of payments
• Production Flexibility Contract (1996 Farm Bill)
• Direct Payments (2002 Farm Bill)
• 
  
• Dont meet conditions of AA therefore should
  count against peace clause

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Claim 3 Step-2 Program Functions as Export
Subsidy

• Step-2 payments are made to keep upland cotton
  competitive.
• 
  
• Payments made to exporters and domestic mill
  users to compensate for high price of US cotton.

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Claim 4 Export Credit Guarantees are Export
Subsidies

• Credit increases the foreign demand for US
  commodity exporters
• It provides to foreign buyers
• attractive interest rates
• decent time to pay back financing

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Claim 5 Subsidies Have Caused Serious Prejudice

• Subsidies to US growers stimulated cotton surplus
  that resulted in surge of exports
• Exports led to three market conditions
• Increased US world market share in cotton
• Displaced Brazils cotton sales in 3rd country
  markets
• Contributed to a steep decline in world cotton
  prices

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Claim 6 FSC-ETI Act of 2000

• Repeal Foreign Sales Corporation and
  Extraterritorial Income Act of 2000 (tax law)
• functions like an export subsidy by eliminating
  tax liabilities for cotton exporters who sell to
  foreign markets.
• Simply put, foreign income from exported cotton
  isnt taxed.

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U.S. report to WTO Panel on Upland Cotton case
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Claim 1 - U.S. is violating the Peace Clause

• Article 13 of the WTO Agreement on Agriculture is
  commonly referred to as the Peace Clause.
• It states that if a member nation meets the
  criteria set out in Article 13, other WTO members
  are prohibited from challenging the measures
  through the DSU process, during the
  implementation period of the agreement.

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• The U.S. is not violating the Peace Clause,
  because when the agreement was signed, it was
  agreed upon that agricultural subsidies could not
  be eliminated immediately.
• The words exempt from actions as used in
  Article 13 of the Agriculture Agreement, are of
  overarching importance and preclude any legal
  steps taken.
• The immunity granted by the Peace Clause is
  still important, because even if a country is no
  longer in compliance, it is incumbent on the
  complaining party to prove there has been injury.
  

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Claim 2 - U.S. Direct Payments do not qualify
for exemption from reduction commitments

• The U.S. considers both, the Production
  Flexibility Contract (PFC), and the Direct
  Payments (DP) programs to be consistent with WTO
  language for exempt domestic support.
• The U.S. PFC and DP programs have no trade
  distorting effects and minimal effects on
  production.
• Both of these programs are categorized as Green
  Box programs, not Amber Box programs.

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Claim 3 - Step-2 Programs function as Export
Subsidies

• Step-2 payments are part of a special cotton
  marketing provision authorized under U.S. farm
  program litigation to keep U.S. upland cotton
  competitive on the world market.
• Step-2 payments are made to exporters and
  domestic mill users to compensate them for their
  purchase of higher priced U.S. upland cotton.

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• Under the 2002 Farm Act, the Step-2 payment rate
  is calculated as the difference between the price
  of U.S. upland cotton, delivered c.i.f. (cost,
  insurance, freight) in Europe, and the average of
  the five lowest prices of upland cotton delivered
  to Europe from any source.
• Step-2 Payments are notified to the WTO as Amber
  Box domestic support payments and not as export
  subsidies.
• Therefore, Step-2 payments are not subject to the
  limitations placed on export subsidies.

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Claim 4- U.S. Export Credit Guarantees function
as Export Subsidies

• The U.S. export credit guarantee programs are
  consistent with our WTO obligations and article
  10.2 of the Agriculture Agreement.
• Brazil argues that many of our commodities are
  unscheduled, meaning that we are not permitted
  to grant subsidies.
• In fact many of our commodities are scheduled,
  meaning that the U.S. is permitted to provide
  export subsidies up to the scheduled level.

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Claim 5 - U.S. Subsidies have caused Serious
Prejudice

• The subsidies provided to U.S. cotton growers
  have been within the allowable WTO limits, and
  are consistent with U.S. obligations.
• The decline in U.S. domestic use has contributed
  to larger raw cotton exports, and not due to
  government support programs.
• International market forces have played a large
  role in determining the weak price level during
  the period in question.

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

• The Foreign Sales Corporation and
  Extraterritorial Income Act of 2000 does not
  eliminate tax liabilities for U.S. upland cotton
  exporters.
• This act is not a subsidy, and Brazil has failed
  to probe that it has any relevance on upland
  cotton and low world prices.

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Findings by the Dispute Settlement Panel
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Claim 1 (Peace Clause Violation)

• The U.S. domestic cotton support measures during
  MY1999 MY2002 were in excess of WTO
  commitments.
• Average measure 3.28 billion
• WTO commitments 2 billion
• U.S. domestic cotton support measures lose peace
  clause protection.
• (Finding was upheld by the Appellate Body)

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Claim 2 (U.S. Direct Payment do not qualify for
exemption from reduction commitments as decoupled
income support)

• The U.S. payments made under PFC and DP programs
  do not qualify for the WTOs green box category
  of domestic spending.
• Instead, they should be
• counted as domestic subsidies directly affecting
  cotton production
• and included with other commodity program outlays
  to evaluate whether the U.S. has met or exceeded
  its peace clause limits.
• (Finding was upheld by the Appellate Body)

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Claim 3 The Step-2 Program functions as an
export subsidy

• Step-2 payments to domestic users of U.S. Upland
  Cotton
• were subsidies contingents on the use of
  domestic over imported goods
• and qualified as prohibited import substitution
  subsidies
• Step-2 payments to exporters of U.S. Upland
  Cotton
• were contingent upon export performance
• and qualified as prohibited export subsidies in
  violation of WTOs commitments
• (Finding was upheld by the Appellate Body)

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Claim 4 U.S. Export credit guarantees function
as export subsidies

• U.S. export credit guarantees did serve as export
  subsidies
• The financial benefits returned by these programs
  failed to cover their long-term operating cost.
• Furthermore, the panel found that this applies to
  all commodities.
• Exemption of unscheduled commodities and
  scheduled agricultural products
• (Finding was upheld by the Appellate Body)

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Claim 5 U.S. Subsidies have caused serious
prejudice

• The U.S. domestic support measures that are
  directly contingent on market price levels caused
  serious prejudice in term of market price
  suppression for the period 1999-2002.
• However, Brazils alleged serious prejudice in
  terms of an effect on international market share
  was not found.
• Note Article 6.3 of the SCM lists several
  factors indicating serious prejudice. The panel
  only had to find one of these factors in
  violation to rule in Brazils favor on the claim.
• (Finding was upheld by the Appellate Body)

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Claim 6 Foreign Sales Corporation
Repeal-Extraterritorial Income Act of 2000 acts
as an export subsidy to Upland Cotton.

• The panel concurred with the United States
• Brazil failed to present any new arguments or
  evidence concerning effects upon upland cotton.
• Instead, Brazil simply repeated the arguments
  that the European Union made in its WTO dispute
  settlement case with the US (DS108).
• (Finding was upheld by the Appellate Body)

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Panel recommendations

• Final report
• The United States withdraw those programs
  identified as prohibited subsidies within six
  months of the date of adoption of the panel
  report by the Dispute Settlement Body or July 1,
  2005.

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Conclusions

• We agree with the reports made by the DSU Panel
  and the Appellate Body of the WTO
• Questions ???