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Brazil’s Case Against U.S. Subsidies to Upland Cotton

Brazil’s Case Against U.S. Subsidies to Upland Cotton. William Connelly Krasimir Angelov Jeffrey Braddock. The cotton industry.

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Brazil’s Case Against U.S. Subsidies to Upland Cotton

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  1. Brazil’s Case Against U.S. Subsidies to Upland Cotton • William Connelly • Krasimir Angelov • Jeffrey Braddock

  2. The cotton industry • The cotton industry is a major component of the U.S. agricultural sector. From 1994 to 2008 U.S. Cash receipts from cotton production averaged $4.9 billion per year, while export sales averaged nearly $2.9 billion. In 2002, 17 states reported cotton production valued at over $20 million • The United States is the third-largest producer of cotton in the world, behind China and India. • The United States is the world’s largest cotton exporter. Since 2001, U.S. exports have accounted for nearly 39% of world cotton trade.

  3. History • Case initiated on September 27, 2002 when Brazil made a “request for consultations” • After the Consultations were unsuccessful the WTO Dispute Settlement Body (DSB) established a panel (WT/DS267/15) • The panel issued its final ruling on June 18, 2004 that confirmed its interim ruling against the United States • On October 18, 2004 the United States announced it intended to appeal the DSB panel’s findings • On March 3, 2005 the Appellate Body (AB) issued its report confirming most of the DSB panel’s findings

  4. History continued • The DSB adopted the AB’s findings and ordered the removal of subsidies that were deemed prejudicial to Brazil’s interests and inconsistent with WTO regulations on March 23, 2005 • On July 1, 2005 the deadline for the U.S. to implement changes to its subsidy programs expired, and • On July 4, 2005 Brazil attempted to gain authority for $3.0 Billion in retaliatory trade measures • The U.S. objected to the extent of Brazil’s measures throughout 2005-2006 • On August 18, 2006 the WTO established a panel to determine if the U.S. had complied with the DSB and AB’s findings and recommendations

  5. History continued • The panel released its findings that the U.S. had not complied with the DSB and AB findings on December 18, 2008 • The U.S. announced that it would appeal the findings of the compliance panel on February 12, 2008, and • On June 2, 2008 the AB announced it would uphold the compliance panel’s findings • August 25 2008- Brazil and the U.S. began arbitration proceedings regarding countermeasures

  6. Positions of the main parties and panel findings • Brazil’s Claim 1 -U.S. policies violate the “Peace Clause” (Article 13b, ii) of the WTO’s Agreement on Agriculture (AA) • The United State’s export subsidies to its cotton growers exceeded the 1992 benchmark allowed for under the “Peace Clause of the Agreement on Agriculture • The US position - U.S. trade officials argued that WTO members agreed that agricultural subsidies could not be eliminated immediately and needed, under certain conditions, to be exempted from the Subsidies and Countervailing Measures (SCM)Agreement and GATT 1994 subsidies disciplines • DSB Panel Finding: Found with Brazil that the U.S. subsidies violated provisions under Article 13 of the AA • Appellate Body: Upheld DSB ruling

  7. Positions of the main parties and panel findings • Brazil’s Claim 2- Production Flexibility Contract (PFC) under the 1996 Farm Bill, and payments and Direct Payments, under the 2002 Farm Bill, were not exempted by the “Peace Clause” • These payments were not exempt under the provisions of the Peace Clause because they were directly linked to a certain type of production (cotton) and as a result could not be considered “decoupled income support” but were instead a subsidy • The US Position- PFC and DP programs to be consistent with WTO language for exempt domestic support that has “no, or at most minimal, trade-distorting effects or effects on production.” • DSB Panel Finding: Found with Brazil that these payment constituted a subsidy • Appellate Body: Upheld DSB ruling

  8. Positions of the main parties and panel findings • Brazil’s Claim 3 - The U.S. “Step 2 Program” constituted a subsidy • Brazil claimed that Step 2 payments made loans to cotton producers on terms that were sufficiently favorable to constitute subsidies and also compensated domestic users of U.S. cotton for the higher price of the product, and as a result was discriminatory against foreign products • The US position - Step 2 payments were part of its domestic support program. As a result, Step 2 payments were notified to the WTO as “amber” box (trade-distorting) domestic support payments and not as export subsidies. • DSB Panel Finding: Found that both Step 2 loans and payments to domestic users constituted subsidies. • Appellate Body: Upheld the DSB panel finding

  9. Positions of the main parties and panel findings • Brazil’s Claim 4 - U.S. export credit guarantees are illegal subsidies • The interest rates and time periods that countries were given to pay back financing under GSM 102 and 103 programs caused these loans to function as subsidies because they were guaranteed by the U.S. government • The US position - U.S. trade officials argued that the U.S. export credit guarantee programs were consistent with WTO obligations • DSB Panel Finding: The panel found for Brazil that the payments were subsidies because the gains for the program did not cover their costs and were thus not wise investments but loss producing industry support. • Appellate Body: Upheld the DSB finding

  10. Claims continued • Brazil’s Claim 5 -Subsidies have caused “Serious Prejudice” to Brazil’s interests as defined in the SCM Agreement • Subsidies caused “serious prejudice” to Brazilian interests by increasing U.S. market share, undermining sales of Brazilian cotton in foreign markets, and decreasing the world price of cotton • The US Position – the subsidies provided to U.S. cotton growers have been within the allowable WTO limits and are consistent with U.S. WTO obligations • DSB Panel Finding: Panel found that direct payments to producers that were triggered by price levels resulted in “serious prejudice” and suppressed price levels but that they could find no evidence that this had resulted in an increased market share for U.S. producers. • Appellate Body: Upheld the DSB Panel finding

  11. Claims continued • Brazil’s Claim 6 - FSC ETI Act of 2000 acts as an export subsidy • Brazil claimed that because the act removed tax liabilities for income gained from cotton export, it functioned as a subsidy • The US Position- The United States asserted throughout the proceedings that Brazil failed to make any specific case with respect to the ETI Act of 2000 and U.S. upland cotton exports. • DSB Panel Finding: The Panel found that Brazil had not presented sufficient evidence to prove the tax reduction acted as a subsidy • Appellate Body: Upheld the DSB Panel finding

  12. Table of Contested U.S. Measures

  13. Aid to The U.S. Upland Cotton Industry 1991-2008

  14. Source: Brazil’s WTO Case Against the U.S. Cotton Program. Randy Schnepf. March 17, 2009

  15. Support to the U.S. Cotton Industry vs. World Price of Cotton (index) 1992-2008 Source: Brazil’s WTO Case Against the U.S. Cotton Program. Randy Schnepf. March 17, 2009

  16. The U.S. Response to the DS Panel Ruling • On July 1, 2005, USDA instituted a temporary fix for its export credit guarantee programs- the Commodity Credit Corporation stopped accepting applications for payment guarantees under GSM-103. • On August 1, 2006, the Step 2 cotton program, which was authorized by the 2002 farm act (P.L.107-171, Section 1207), was eliminated by a provision (Section 1103) in the Deficit Reduction Act of 2005 (P.L. 109-171). • On June 18, 2008, the date of enactment of the 2008 farm bill (P.L. 110-246), a provision (Sec.3101(a)) in the Trade Title (Title III) eliminated the GSM-103 and SCGP programs, and removed the 1% cap on fees that can be charged under the GSM-102 program, thus bringing U.S. export credit programs into apparent full compliance with WTO rules.

  17. Compliance and Retaliation Phase of the Dispute • According to WTO rules, trade sanctions are limited to a value not to exceed the level of lost benefits. • On July 4,2005 Brazil sought authorization from the WTO to impose $3 billion in countermeasures against the prohibited U.S. subsidies. This value corresponds to (1) Step 2 payments made in the then-most-recently-concluded marketing year (2004/05) and (2) the total of exporter applications received under the three export credit guarantee programs, for all unscheduled commodities and for rice, for the then-most-recent fiscal year (2004). • The amount was later reduced to $1.155 billion.

  18. Further Implications • According to WTO rules, trade retaliation should take place within the sector where the violation occurred. In this case, retaliation would be restricted to punitive tariffs on U.S. goods entering Brazil. However, Brazil argued that limiting retaliation to the goods sector alone would have a more deleterious effect on the Brazilian economy (via higher input costs) and Brazilian consumers (via higher inflation) than on U.S. exporters due to the asymmetries between the two economies. • Brazil proposed to suspend tariff concessions as well as obligations under the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Services. This type of “cross-retaliation” has been permitted twice previously in WTO dispute settlement cases, so it is not without precedent.

  19. The outcome • On November 19,2009 the Dispute Settlement Body officially recognized the August 2009 Arbitration Panel finding. Under the ruling, Brazil can impose up to $147 million annually in countermeasures related to the U.S. cotton program.

  20. The Outcome, continued • Brazil and the U.S. entered arbitration to resolve the extent of counter measures that Brazil would impose. • Brazil has been hesitant to enforce countermeasures through a repudiation of TRIPS obligations because: • Brazil is seeking to increase the global presence of its bio-fuels and alternative energy industries; • Such action would contradict their declarations respecting IP rights that were made to reassure competitors in the 2016 Olympic games; and • Repudiating TRIPS commitments with the U.S. would seriously damage Brazil’s efforts to become a global economic power. • As a result proposed countermeasures are expected to focus mainly on traditional trade.

  21. What is next ?

  22. Resolving the Cotton Subsidy Issue A brief yet interesting addendum

  23. Voluntary Trade Associations • Innovation of production methods • Standardization • Public Affairs/ Marketing for members • Agricultural associations share these and add another- • PRICE Stabilization

  24. Voluntary Cotton Association in the United States • Violence • Coercion • Compulsion • Ultimate Recourse

  25. The American Cotton Shipper’s Association • 80% of all US Cotton • Approximately 2.8 million MT/Year  out of a total production of 2.97 million MT • US is in top three Cotton Producers

  26. International Actors • Argentina;  Australia; Benin; Canada;  Chad, China,  Chinese Taipei; European Communities; India; New Zealand; Pakistan; Paraguay; Venezuela; Japan; Thailand • AND Their RESPECTIVE COTTON ASSOCIATIONS

  27. Di POWAH o’ Productivitee’ • Metric for measuring productivity • US Cotton Farms produce .65 MT/Hectare • Brazilian Farms produce 1.15 MT/Hectare

  28. What next? • Arbitration • Tariffs on 50 products totaling US$ 560m • Cross retaliation on US Intellectual Property Rights, potentially breaking patents in pharmaceuticals, tech, and media industries. • US officials have little room to maneuver unless they secure Congressional approval to changes on the farm bill • Technology transfer a possible solution

  29. Conclusions • US hands are tied by the power of groups advocating the gospel of high agricultural products • Unilateral Technology transfers from the US to Brazil is a possible but would further increase Brazil productivity. • Brazil is reluctant to take action.

  30. Bibliography • http://www.nationalaglawcenter.org/assets/crs/RL32571.pdf • http://www.crowell.com/NewsEvents/Newsletter.aspx?id=1315 • http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=1832432 • http://www.dfat.gov.au/trade/negotiations/disputes/downloads/267_cotton_oralstatement.pdf • http://www.ustr.gov/about-us/press-office/press-releases/2009/august/ustr-statement-awards-brazil-cotton-dispute • http://www.heritage.org/research/tradeandeconomicfreedom/wm2815.cfm • http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds267_e.htm • http://www.wto.org/english/docs_e/legal_e/14-ag_01_e.htm • http://www.worldtradelaw.net/uragreements/scmagreement.pdf

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