Order Code RL32571
CRS Report for Congress
Received through the CRS Web
U.S.-Brazil WTO Cotton Subsidy Dispute
September 10, 2004
Randy Schnepf
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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U.S.-Brazil WTO Cotton Subsidy Dispute
Summary
The United States is the world’s second-leading cotton producer and the world’s
leading cotton exporter. As a result, the U.S. cotton sector plays a highly visible role
in international cotton markets. U.S. cotton exports and international market share
have grown substantially over the past five years (1999-2003). During that same
period, U.S. farm subsidies for cotton production expanded to an annual average of
over $2.7 billion per year.
In late 2002, Brazil requested consultation with the United States to discuss
complaints about alleged effects of U.S. cotton program payments. The request —
made under the auspices of the World Trade Organization (WTO) — initiated a
dispute settlement process (case DS267) by Brazil against specific provisions of the
U.S. cotton program, and set in motion a sequence of events designed to produce
resolution of the dispute within a 12-15 month time frame. The eventual charges
made against U.S. agricultural programs by Brazil in the documentation filed as part
of the dispute settlement process are both far-reaching and comprehensive.
A WTO dispute settlement panel issued confidential interim and final reports
on the dispute settlement case in April and June of 2004. The final report — made
public on September 8, 2004 — confirmed panel findings against the United States
on several key issues: first, U.S. domestic cotton subsidies have exceeded WTO
commitments, thereby losing the protection afforded by the “Peace Clause” which
shielded them from substantive challenges; second, the two major types of direct
payments made under U.S. farm programs — Production Flexibility Contract
payments of the 1996 Farm Act and the Direct Payments of the 2002 Farm Act — did
not qualify for WTO exemptions from reduction commitments as fully decoupled
income support and should therefore count against the “Peace Clause” limits; third,
Step-2 program payments are prohibited export subsidies; fourth, U.S. export credit
guarantees are effectively export subsidies, making them subject to previously
notified export subsidy commitments; and fifth, U.S. domestic support measures
have resulted in excess cotton production and exports that, in turn, have caused low
international prices and have resulted in “serious prejudice” to Brazil.
The United States has announced that it will appeal the negative final rulings.
Such an appeal would likely extend the dispute settlement process into 2005.
Resolution of the WTO case in Brazil’s favor could result in a WTO decision
concerning implementation of U.S. program provisions for cotton, and possibly other
major field crops.
This report provides background to the dispute, as well as the details of the
ongoing WTO dispute settlement case. It will be updated as events warrant.

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Contents
Background on the U.S. Cotton Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Arguments in the U.S.-Brazil WTO Cotton Case . . . . . . . . . . . . . . . . . . . . . 3
Claim 1: Peace Clause Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Finding 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Claim 2: U.S. Direct Payments Do Not Qualify for Exemption
from Reduction Commitments as Decoupled Income Support . . . 5
Finding 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Claim 3: The Step-2 Program Functions as an Export Subsidy . . . . . . . 5
Finding 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Claim 4: U.S. Export Credit Guarantees Function as Export Subsidies 6
Finding 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Claim 5: U.S. Subsidies Have Caused “Serious Prejudice” . . . . . . . . . 7
Finding 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Claim 6: FSC-ETI Act of 2000 Acts as an Export Subsidy to
Upland Cotton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Finding 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Panel Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Potential Implications of WTO Panel Ruling
. . . . . . . . . . . . . . . . . . . . . . 11
What’s Next? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Other Cotton-Related Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Role of Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. U.S. Cotton Production, Use, and Exports . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. U.S. Cotton Exports and International Cotton Price Index . . . . . . . . . 10
Figure 3. China Cotton Imports and International Cotton Price Index . . . . . . . . 10
List of Tables
Table 1. U.S. Upland Cotton Program Outlays, Fiscal 1991-2004 . . . . . . . . . . . . 2
Table 2. Comparison of Support in Accordance with Article 13(b)(ii) . . . . . . . . 5
Table 3. Timeline: U.S.-Brazil WTO Dispute Settlement Case 267 . . . . . . . . . 15

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U.S.-Brazil WTO Cotton Subsidy Dispute
Background on the U.S. Cotton Sector
The cotton industry is a major component of the U.S. agricultural sector. From
1997 to 2002, U.S. cash receipts from cotton production averaged $4.6 billion per
year, while export sales averaged over $2.1 billion. Cotton is grown across the
southern tier of states stretching from Virginia down through the Carolinas and into
Georgia, then westward through a belt of contiguous states stretching to California.
Texas is the largest cotton-producing state, accounting for an average of 26% of U.S.
production since 1993. In 2002, 17 states reported cotton production valued at over
$10 million.
Cotton is one of the principal U.S. program crops, along with wheat, rice, feed
grains, soybeans, and peanuts. Qualifying U.S. cotton producers are eligible for
direct payments, counter-cyclical payments, loan deficiency payments, Step-2
payments, and other program benefits.1 From FY1991 to FY2004, U.S. farm
subsidies for cotton production averaged $1.7 billion per year. (See Table 1.)
The United States is the second-largest producer of cotton in the world. In
recent years, the United States has been exporting an increasing share of its annual
production, due in large part to a decline in domestic mill use. (See Figure 1.) U.S.
exports as a share of production have averaged 59% since 2001, up from a 42%
average during the early 1990s.
The United States is the world’s largest cotton exporter. During the 2001-03
period, U.S. exports accounted for 40% of world trade, on average. Large U.S.
subsidy levels coupled with U.S. prominence in global markets have directed much
international attention to U.S. cotton program outlays in recent years.
1 For more details on U.S. cotton program operations, see CRS Report RL32442, Cotton
Production and Support in the United States, June 24, 2004.

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CRS-2
Figure 1. U.S. Cotton Production, Use,
and Exports
25
1999-2002
Production
20
15
Domestic Use
10
5
Exports
0
1992
1994
1996
1998
2000
2002
Source: USDA, ERS, Cotton Yearbook, November 2003.
Table 1. U.S. Upland Cotton Program Outlays, Fiscal 1991-2004a
Fiscal yearb
Total Outlays ($ million)c
1991
382
1992
1,443
1993
2,239
1994
1,539
1995
99
1996
685
1997
561
1998
1,132
1999
1,882
2000
3,809
2001
1,868
2002
3,307
2003
2,889
2004e
1,659
Average: 1991-2004
1,678
Source: USDA, Farm Service Agency, Budget Division, History of Budgetary Expenditures of the
Commodity Credit Corporation, Books 3 (April 9, 2001) and 4 (July 15, 2003), available at
[http://www.fsa.usda.gov/dam/bud/bud1.htm].

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CRS-3
a Data are for outlays within the reported fiscal year. Payments may be specific to cotton from several
different crop or marketing years.
b The fiscal year starts Oct. 1 and ends Sept. 30 of the following year. Fiscal year identification is with
the second year. For example, FY1993 starts Oct. 1, 1992, and runs through Sept. 30, 1993.
c Includes deficiency payments, production flexibility contract payments, loan deficiency payments,
user market payments (Step 2), marketing loss payments, outlays from general loan operations, and
other miscellaneous payments. Payments exclude loan repayment write-offs (otherwise referred to as
producer marketing loan gains) and certificate sales proceeds/losses, both of which are treated as non-
cash transactions.
e USDA estimate, Table 35, “CCC Net Outlays by Commodity and Function,” July 30, 2004, available
at [http://www.fsa.usda.gov/dam/bud/bud1.htm].
Arguments in the U.S.-Brazil WTO Cotton Case
In 2002, Brazil — a major cotton export competitor — expressed its growing
concerns about U.S. cotton subsidies by initiating a WTO dispute settlement case
(DS267) against certain features of the U.S. cotton program.2 Once initiated, a
dispute settlement case follows a sequence of events designed to produce resolution
of the dispute within a 12-15 month time frame. (See Table 3 for a timeline of the
dispute settlement case.) Brazil’s case was broadly written and touched on almost
every aspect of U.S. commodity programs, although focus has been on six principal
claims (see below).3
On April 26, 2004, the WTO dispute settlement panel issued a confidential
interim ruling on case DS267 to the two parties — Brazil and the United States.
Although confidential, news reports suggested at least a partial finding against the
United States on each of the five major claims.4 On June 18, 2004, the panel’s final
ruling was released, again on a confidential basis, to Brazil and the United States.
News reports suggested that the final ruling varied little from the interim ruling
against the United States.5 The final ruling was issued publicly on September 8,
2004, after translation into English, French, and Portugese.6
2 United States — Subsidies on Upland Cotton, WT/DS267 (WTO Dispute Settlement Case
267). Documentation is available at [http://www.wto.org/english/tratop_e/dispu_e/dispu_e.
htm].
3 Ministry of Foreign Affairs [Ministério das Relações Exteriores], Brasilia; “Brazil-U.S.A.
Dispute on Subsidies on Upland Cotton,” translation from the original in Portuguese, Nota
no 248-18/06/2004; Distribuição 22 e 23.
4 “Brazil Wins Key Points in Interim WTO Panel on U.S. Cotton Subsidies,” Inside U.S.
Trade, April 30, 2004; “WTO Panel Backs Brazil in Complaint Against U.S. Over Cotton
Subsidies,” International Trade Reporter, Vol. 21, No. 18, April 29, 2004; and “WTO Panel
Reportedly Rules Direct Payments are Trade Distorting and Thus ‘Amber Box,’”
AgWeb.com, April 30, 2004.
5 “WTO Ruling Against U.S. Cotton Subsidies is Not Limited to Cotton,” AgWeb.com, June
29, 2004; and “WTO Issues Final Ruling Condemning U.S. Cotton Subsidies; U.S. Plans
Appeal,” International Trade Reporter, Vol. 21, No. 26, June 24, 2004.
6 United States — Subsidies on Upland Cotton, “Report of the Panel,” WTO, WT/DS267/R,
Sept. 8, 2004; available at [http://www.wto.org/english/tratop_e/dispu_e/267r_a_e.pdf].

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CRS-4
Each of Brazil’s main claims is presented here along with the WTO dispute
settlement panel finding.
Claim 1: Peace Clause Violation. Brazil claimed that the United States is
no longer exempt from WTO dispute proceedings under the so-called “peace clause”
(Article 13) of the WTO’s Agreement on Agriculture (AA) because U.S. domestic
and export subsidies to its cotton sector are in excess of its WTO commitments.7
Article 13 exempts domestic support measures that comply with the AA’s
requirements from being challenged as illegal subsidies through dispute settlement
proceedings, as long as the level of support for a commodity remains at or below the
benchmark 1992 marketing year (MY) levels. Brazil argues that U.S. cotton
subsidies were about $2 billion in MY1992 compared with over $4 billion in
MY2001.8 Therefore, Brazil argues that the United States is no longer in compliance
with the requisite conditions and can no longer seek protection under the WTO’s
peace clause rule.
In response, U.S. trade officials argue that WTO members agreed to the peace
clause recognizing 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.
As a result, U.S. officials argue that the words “exempt from actions” as used in
Article 13 of the AA are of overarching importance and preclude not only the “taking
of legal steps to ... obtain a remedy,” as Brazil has argued, but also the “taking of
legal steps to establish a claim.”9 Furthermore, U.S. trade officials argue that the
immunity granted by the peace clause is still important, since even if a country is no
longer in compliance with the peace clause, it is incumbent on the complaining party
to prove there has been injury. (See “Claim 5,” below.)
Finding 1. The panel found that Brazil had successfully discharged its burden
to show that U.S. domestic cotton support measures exceeded WTO commitments
during the 1992 marketing year. (See Table 2.) As a result, U.S. domestic cotton
support measures lose the protection afforded by the “Peace Clause” which has
shielded them from substantive challenges in the past. This occurs in part because,
under Finding 2, PFC and DP outlays are re-classified by the WTO panel as “amber
box” payments and evaluated against “peace clause” limits.
7 WTO, The Legal Texts: The Results of the Uruguay Round of Multilateral Trade
Negotiations, Cambridge Univ. Press, ©World Trade Organization 1999; hereafter referred
to as WTO Legal Texts. Text of the Agreement on Agriculture is available online at
[http://www.wto.org/english/docs_e/legal_e/14-ag.pdf].
8 USDA reports commodity program outlays on a fiscal year (FY) basis. (See Table 1.)
However, marketing year data, not fiscal year, must be used in the WTO case. The U.S.
cotton marketing year starts Aug. 1 and ends July 31 of the following year, but identifies
with the first year, such that MY1992 starts Aug. 1, 1992, and ends July 31, 1993. The
principal period in question, MY1999-MY2002, corresponds roughly with FY2000-FY2003.
9 United States — Subsidies on Upland Cotton, WT/DS267, “Initial Brief of the United
States of America on the Question Posed by the Panel,” June 13, 2003; available from the
USTR website at [http://www.ustr.gov/enforcement/briefs.shtml].

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CRS-5
Table 2. Comparison of Support in Accordance
with Article 13(b)(ii)
$ million
MY1992
MY1999
MY2000
MY2001
MY2002
Total
$ 2,012.7
$ 3,404.4
$ 2,429.3
$ 4,144.2
$ 3,140.3
Source: United States — Subsidies on Upland Cotton, “Report of the Panel,” WTO, WT/DS267/R,
Sept. 8, 2004; p. 157.
Claim 2: U.S. Direct Payments Do Not Qualify for Exemption from
Reduction Commitments as Decoupled Income Support. Brazil claimed
that two types of U.S. payments — Production Flexibility Contract (PFC) payments
made under the 1996 farm bill and Direct Payments (DP) made under the 2002 farm
bill — fail to fully meet the conditions for decoupled income support in Annex 2 of
the Agreement on Agriculture and should be subject to WTO “amber box” limits.10
The United States considers both 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.”11 As a result, the United States notifies
both the PFC and DP outlays as “green box” where they are not subject to any limits.
Finding 2. The panel found that U.S. payments made under the PFC and DP
programs, because of the prohibition on planting fruits and vegetables on covered
program acreage, do not qualify for the WTO’s green box category of domestic
spending. (The green box contains only non-distorting program payments and is not
subject to any limit). Instead, they should be counted as domestic subsidies directly
affecting cotton production (i.e., distorting) and be notified as amber box payments.
Amber box payments are subject to limitations agreed upon as part of each country’s
WTO commitments.
Claim 3: The Step-2 Program Functions as an Export Subsidy.
Brazil argued that Step-2 payments made under the U.S. cotton program function as
export subsidies and are inconsistent with U.S. WTO obligations regarding export
subsidies.
Step-2 payments are part of special cotton marketing provisions authorized
under U.S. farm program legislation 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. Under the
2002 Farm Act, the Step-2 payment rate for the 2002-2005 marketing years is
calculated as the difference between the price of U.S. upland cotton, delivered c.i.f.
10 Amber box programs are deemed trade and/or production distorting and, as such, are
subject to limitations. For more information, see CRS Report RS21905, The Agriculture
Framework Agreement in the WTO Doha Round.
11 WTO, “Annex 2 — Domestic Support: The Basis for Exemption from the Reduction
Commitments,” WTO Legal Texts, p. 48.

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CRS-6
(cost, insurance, freight) in Northern Europe and the average of the five lowest prices
of upland cotton delivered c.i.f. Northern Europe from any source.12
The United States argued that Step-2 payments are part of its domestic support
program since they are targeted to domestic cotton users as well as exporters. As a
result, Step-2 payments are notified to the WTO as “amber” box (trade-distorting)
domestic support payments and not as export subsidies. Consequently, U.S. trade
officials contend that Step-2 payments are not subject to any limitations placed on
export subsidies.

Finding 3. In its finding, the panel considered Step-2 program payments to
eligible exporters separately from payments to domestic users.
! 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 contingent on the use of domestic over
imported goods were found to be prohibited import substitution
subsidies.
Claim 4: U.S. Export Credit Guarantees Function as Export
Subsidies. Brazil claimed that the favorable terms (i.e., the interest rate and time
period that countries have to pay back the financing) provided under U.S. export
credit guarantee programs — GSM102, GSM103, and the Supplier Credit Guarantee
Program (SCGP)13 — are effectively export subsidies inconsistent with the WTO’s
AA and SCM. Further, the subsidy effects of export credit guarantees apply not only
to cotton, but to other eligible commodities.14
U.S. trade officials argued that the U.S. export credit guarantee programs are
consistent with WTO obligations. Furthermore, the United States asserted that
Article 10.2 of the AA reflected the deferral of disciplines on export credit guarantee
programs contemplated by WTO members.
Finding 4. The panel found that U.S. export credit guarantees were effective
export subsidies because the financial benefits returned by these programs failed to
12 Only prices for Middling (M) 1-3/32-inch upland cotton are used in the calculation. Also,
certain price triggers must be met and held for a specified period of time before payments
can be made. For information on the Step-2 program and other U.S. cotton program
features, see USDA, ERS, “Cotton Briefing Room,”at [http://www.ers.usda.gov/
Briefing/Cotton/].
13 For information on U.S. export credit programs, see USDA, Foreign Agricultural Service
(FAS), “Export Credit Guarantee Programs,” at [http://www.fas.usda.gov/excredits/
default.htm]. For information on MAP, see USDA, FAS, “Export Programs — Market
Accesss Program (MAP),” at [http://www.fas.usda.gov/export.html].
14 For a list of commodities eligible for export credit guarantees see USDA, Foreign
Agricultural Service, USDA Amends Commodity Eligibility under Credit Guarantee
Programs, News Release, Sept. 24, 2002; available at [http://www.fas.usda.gov/
scriptsw/PressRelease/pressrel_dout.asp?Entry=valid&PrNum=0346-02].

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CRS-7
cover their long-run operating cost.15 Furthermore, the panel found that this applies,
not just to cotton, but to all commodities that benefit from U.S. commodity support
programs and receive export credit guarantees. As a result, export credit guarantees
for any recipient commodity are subject to previously scheduled export subsidy
commitments for that commodity. This refers to those U.S. export subsidies under
the Export Enhancement Program (EEP).16 Under these criteria, export credit
guarantees benefits extended to cotton and other “unscheduled” commodities (that
are supported under U.S. agricultural programs) are found to be in violation of
previous WTO commitments. With respect to “scheduled” commodities, export
credit guarantees extended to U.S. rice exports were found to be in violation of
previous EEP volume commitments.
The panel found that “unscheduled” commodities not supported under U.S.
agricultural programs, as well as scheduled agricultural products that remain within
WTO commitments are exempt from actions under this dispute settlement case.
Claim 5: U.S. Subsidies Have Caused “Serious Prejudice”. Brazil
argued that the subsidies provided to U.S. cotton growers contributed to significant
overproduction and resulted in a surge in U.S. cotton exports, particularly during the
1999-2002 marketing years, when unusually large outlays were made under
provisions of the U.S. cotton program (see Table 1 and Figure 1). Brazil claimed
that the resultant rise in U.S. exports led to three market conditions, each of which
contributed to serious injury to Brazilian cotton exporters: (i) by increasing the U.S.
share of the world upland cotton market; (ii) by displacing or impeding Brazilian
upland cotton sales in third-country markets; and (iii) by contributing to a steep
decline in world cotton prices (see Figure 2).17 In particular, Brazil claims that injury
to its economy due to low cotton prices, measured as the sum of individual negative
impacts on income, foreign trade revenue, fiscal revenues, related services
(transportation and ginning), and employment, exceeded $600 million in 2001 alone.
Brazil asserts that injury under each of these three circumstances are in violation of
15 Found to violate Annex I(j) of the SCM, WTO Legal Texts, p. 267, which identifies as an
export subsidy, “The provision by governments (or special institutions controlled by
governments) of export credit guarantee or insurance programmes, of insurance or guarantee
programmes against increases in the cost of exported products or of exchange risk
programmes, at premium rates which are inadequate to cover the long-term operating costs
and losses of the programmes.”
16 The United States has scheduled export subsidy reduction commitments for the following
thirteen commodities: wheat, coarse grains, rice, vegetable oils, butter and butter oil, skim
milk powder, cheese, other milk products, bovine meat, pigmeat, poultry meat, live dairy
cattle, and eggs. For more information on the EEP program and U.S. export subsidy
commitments see CRS Report RS20399, Agricultural Export Programs: The Export
Enhancement Program (EEP). See also Export Enhancement Program, Foreign
Agricultural Service, USDA at [http://www.fas.usda.gov/excredits/eep.html].
17 Articles 5(c) and 6.3(b) of the Agreement on Subsidies and Countervailing Measures
(SCM) deal with subsidies that result in adverse effects in other WTO-member countries.
Brazil specifically identified Argentina, Bangladesh, Colombia, Germany, India, Indonesia,
Italy, Portugal, Philippines, Slovenia, South Africa, South Korea, Switzerland, Thailand, and
Turkey as the relevant third-country markets. WTO “Communication from Brazil,”
WT/DS267/9, March 21, 2003.

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CRS-8
the Agreement on Subsidies and Countervailing Measures (SCM).18 In addition,
Brazil argued that these same programs would be harmful (i.e., threatened serious
prejudice) in future years.
U.S. trade officials argue that the subsidies provided to U.S. cotton growers
have been within the allowable WTO limits and are consistent with U.S. WTO
obligations. Furthermore, they argue that the decline in U.S. domestic use (due to
declining U.S. competitiveness in textile and apparel production), rather than
government support program outlays, has contributed to larger U.S. raw cotton
exports. In addition, they contend that international market forces — including
weakness in world demand for cotton due to competing, low-priced synthetic fibers,
and weak world economic growth — have played a larger role in determining the
generally weak price level during the period in question, rather than U.S. export
levels. For example, see Figure 3 for a visibly strong correlation between China
cotton imports and the international cotton “A-index.”
In evaluating this particular claim, the panel separated U.S. cotton support
programs into two groups: those that are directly contingent on market price levels
(marketing loan gains, loan deficiency payments, counter-cyclical payments, and
Step-2 payments), and those that are not (PFC and Direct Payments, and the federal
crop insurance program).
Finding 5. The panel found 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. However, U.S. domestic support
measures that are not contingent on market price levels were not included in this
finding. The panel also did not find in favor of Brazil’s alleged serious prejudice in
terms of an effect on international market share. Article 6.3 of the SCM lists several
factors indicating serious prejudice; the panel only had to find one of the factors in
violation to rule in Brazil’s favor on the claim of serious prejudice during the 1999
to 2002 period.

With respect to Brazil’s claim of a threat of serious prejudice going forward
(i.e., 2003 to 2007 — the remaining life of the 2002 farm act), the panel stated in its
final report that those “prohibited” subsidies that cause the serious prejudice during
the 1999-to-2002 period — namely, user marketing (Step-2) payments to exporters
and domestic users; and export credit guarantees in respect of certain products under
the GSM 102, GSM 103, and SCGP programs — must be withdrawn “without delay”
pursuant to Article 4.7 of the SCM Agreement.19 According to the panel, required
withdrawal of the prohibited subsidies, within the time frame set by the panel, would
curtail the threat posed by U.S. cotton support programs. As a result, the panel stated
18 Text of the Agreement on SCM is available online at [http://www.wto.org/english/docs_e/
legal_e/24-scm.pdf].
19 Report of the Panel, “United States — Subsidies on Upland Cotton,” WTO,
WT/DS267/R, Sept. 8, 2004, p. 345.

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CRS-9
that “...it is not necessary or appropriate to address Brazil’s claims of threat of serious
prejudice...”20
Claim 6: FSC-ETI Act of 2000 Acts as an Export Subsidy to Upland
Cotton. Brazil contends that the Foreign Sales Corporation Repeal and
Extraterritorial Income Act of 2000 (ETI Act of 2000), by eliminating tax liabilities
for U.S. upland cotton exporters who sell to foreign markets, constitutes an export
subsidy and is inconsistent with U.S. export subsidy commitments for cotton.
The United States asserted throughout the proceedings that Brazil has failed to
make any specific case with respect to the ETI Act of 2000 and U.S. upland cotton
exports.
Finding 6. The panel concurred with the United States in stating that Brazil
failed to present any new arguments or evidence concerning effects upon upland
cotton, but instead simply repeated the arguments that the European Union made in
its WTO dispute settlement case with the United States (DS108).21 As a result, the
panel declined to further examine Brazil’s claims on this particular issue.
20 Ibid.
21 For more information, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S.
Compliance in Pending Cases.

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CRS-10
Figure 2. U.S. Cotton Exports and
International Cotton Price Index
3
a
100
1999-2002
A-Index
80
2
60
1
40
Exports
0
20
1992 1994 1996 1998 2000 2002
aThe A-index is an average of the five lowest priced types of
1-3/32 inch staple length cotton offered on the European
market.
Source: USDA, ERS, Cotton Yearbook, November 2003.;
and USDA, PSD online data base.
Figure 3. China Cotton Imports and
International Cotton Price Index
2
100
a
A-Index
85
1
70
55
Imports
0
40
1992 1994 1996 1998 2000 2002
aThe A-index is an average of the five lowest priced types
of 1-3/32 inch staple length cotton offered on the European
market.
Source: USDA, ERS, Cotton Yearbook, Nove mber 2003;
and USDA, PSD online database.

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Panel Recommendations
In its final report, the panel recommends that the United States withdraw those
support programs identified as prohibited subsidies within six months of the date of
adoption of the panel report by the Dispute Settlement Body or by July 1, 2005
(whichever is earlier). The list of prohibited subsidies subject to withdrawal “without
delay” includes:
Prohibited export subsidies:
! export credit guarantees under GSM 102, GSM 103, and SCGP that
assist exports of upland cotton and other unscheduled agricultural
products that are supported under government agricultural support
programs; and
! Step-2 program payments to exporters of upland cotton.
Prohibited import substitution subsidy:
! Step-2 payments to domestic users of upland cotton.
The panel also issued recommendations concerning the “actionable” subsidies
identified as contributing to serious prejudice to the interests of Brazil. Specifically,
this involves those U.S. subsidy measures singled out as price-contingent —
marketing loan provisions, Step-2 payments, and CCP payments. The panel
recommends that, upon adoption of its final report, the United States take appropriate
steps to remove the adverse effects or to withdraw the subsidies.
Potential Implications of WTO Panel Ruling
Trade experts have expressed concern that the panel findings could extend
beyond cotton to other major field crops, not only for the potential limits on export
credit guarantees, but also with respect to the reclassification of PFC and Direct
Payments from non-trade-distorting green box support to the trade-distorting amber
box.22 During FY2000 to FY2003, PFC and Direct Payments averaged nearly $5
billion per year and accounted for 32% of total U.S. agricultural program outlays.
Shifting this amount to amber box could have important implications for future
dispute settlement cases, as well as for the United States’ ability to meet its WTO
amber box commitments. As a result, some market analysts have expressed concern
that a broad finding against the U.S. cotton program, as well as other general
commodity programs such as direct payments and export credit guarantees, could
necessitate legislative changes to bring existing program operations into compliance;
and that such potential program changes could necessitate that the U.S. farm bill be
reopened well before its scheduled expiration in 2007.
In public testimony to the House Agriculture Committee on April 28, 2004, U.S.
Trade Representative (USTR) Robert Zoellick stated that U.S. farm programs are
22 “Brazil Wins Key Points in Interim WTO Panel on U.S. Cotton Subsidies,” Inside U.S.
Trade, April 30, 2004.

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fully consistent with WTO rules.23 In addition, Zoellick added that “the United States
has been willing to negotiate its subsidies and willing to negotiate its tariffs.... [I]t
would be a very big mistake to try to solve these very complex agricultural issues
through the process of litigation.”24 Following the release of the panel’s final report
on September 8, 2004, Ambassador Zoellick stated that the United States intends to
appeal aspects of the panel’s final report.25 Zoellick also stressed to the committee
that the ruling would have “no immediate impact for farmers and ranchers” since the
WTO process, including an appeal, would last months or possibly years.
In public testimony to the House Committee on Agriculture on May 19, 2004,
Woody Anderson, chairman of the National Cotton Council (NCC), stated that,
although the U.S. cotton industry had not been allowed to see the confidential interim
report, the NCC “will fight this decision and its ramifications ... but we will also
work to ensure that the U.S. cotton program complies with WTO disciplines.”26
What’s Next? Once the final report was issued to the WTO Dispute
Settlement Body (DSB) on September 8, 2004, the clock started ticking on a series
of sequential events.
Within 20 to 60 days of its release, the report will be adopted by the DSB unless
all members, including the party initiating the dispute (i.e., Brazil), vote not to do so
(“reverse consensus rule”) or if a party to the dispute formally notifies the DSB of its
decision to appeal. If appealed, the panel report will not be considered for adoption
by the DSB until after the appellate report is issued.27
Either side can appeal a panel’s ruling, although appeals have to be based on
points of law and legal interpretation — they cannot reexamine existing evidence or
examine new evidence. In a September 8, 2004, press conference, USTR agricultural
negotiator Allen Johnson stated that the United States plans to appeal the WTO
cotton subsidies decision, but that USTR is reviewing “very thoroughly” how it will
proceed. The United States must notify its appeal no later than 60 days from
September 8.
Once appealed, the case would be submitted to the WTO’s standing Appellate
Body (AB) for review. Each appeal is heard by three members of a permanent
seven-member AB set up by the Dispute Settlement Body (DSB). Under an appeal,
23 Statement of USTR Robert B. Zoellick, before the Committee on Agriculture, U.S. House
of Representatives, April 28, 2004; available at [http://agriculture.house.gov/hearings/108/
10829.pdf].
24 Ibid.
25 WTO Panel Issues Mixed Verdict in Cotton Case, USTR Press Release, Sept. 8, 2004;
available at [http://www.ustr.gov/].
26 Statement of Woody Anderson, chairman, National Cotton Council, before the Committee
on Agriculture, U.S. House of Representatives, May 19, 2004; available at [http://
agriculture.house.gov/hearings/108/10829.pdf].
27 “Understanding on Rules and Procedures Governing the Settlement of Disputes,” Article
16 (4), Adoption of Panel Reports, WTO Legal Texts, p. 365.

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the AB would review the case, then issue a report to the DSB. The AB must issue
its report 60 days after notification of appeal; however, this is extendable to 90 days.
Requisite translation of the report (into English, French, and Portugese) increases the
likelihood of extension to the full 90 days. The DSB would then adopt the report
under the reverse consensus rule. The entire process from the release of the dispute
settlement panel’s final report through the appeal process could potentially take
several months.
If the report adopted by the DSB (whether the panel’s final report alone, or the
Appellate Body report and the panel report with any modifications by the Appellate
Body) decides that the disputed measures do violate a WTO agreement or obligation,
the report will recommend that the measures be made to conform with WTO rules.
The dispute settlement panel may suggest how this is to be done.
Within 30 days after the report or reports are adopted, the United States would
be expected to present an implementation plan to the DSB. If complying with the
recommendation immediately is impracticable, a compliance period will be
established. If the United States fails to comply by the end of this period, Brazil
could request negotiations with the United States to determine mutually acceptable
compensation (e.g., tariff reductions in areas of particular interest). If the two sides
are unable to agree on compensation, Brazil may ask the DSB for permission to
impose limited trade sanctions against the United States.
Other Cotton-Related Trade Issues
Besides Brazil’s WTO-initiated dispute settlement case (DS267), U.S. cotton
subsidies are being challenged at the WTO on two additional fronts.
! First, the Doha Development Agenda negotiating round has
substantial reductions in trade-distorting domestic program support
as one of its principal modalities.28 If realized, a new round of
domestic spending limitations could potentially represent a “real”
ceiling on U.S. commodity spending and could result in lower
program outlays.
! Second, a consortium of four African cotton-producing countries —
Benin, Burkina Faso, Chad, and Mali — has submitted a WTO
proposal calling for a global agreement to end all production-related
support for cotton growers of all WTO-member cotton producing
nations.29 In acknowledgment of the concerns of African cotton-
producing countries, the United States — while not agreeing with
the African proposal — worked with the African countries on a
formulation in the recently completed agriculture framework (July
28 WTO, Doha Ministerial Declaration, WT/MIN(01)/DEC/1, Nov. 20, 2001.
29 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO
Agriculture Negotiations.

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31, 2004) of the WTO’s ongoing Doha Round.30 Although no
specific cotton program concessions were mentioned in the
framework, the United States committed “to achieve ambitious
results expeditiously” under the framework. Further, it is notable
that cotton is the only commodity singled out for special mention in
the framework.
Role of Congress
Given the importance of cotton in the U.S. agricultural economy and the
potential for WTO-imposed limitations on U.S. cotton program operations, Congress
likely will be closely monitoring developments in the U.S.-Brazil cotton dispute.
Since the confidential release of the WTO dispute settlement panel’s interim report,
the House Committee on Agriculture has already held two hearings (April 28 and
May 19, 2004) on agricultural trade negotiations.31 Among the trade issues discussed
during these hearings, both U.S. Trade Representative Zoellick and Woody
Anderson, chairman of the National Cotton Council, provided testimony on and
responded to questions regarding the U.S.-Brazil WTO cotton case.
In his testimony to the House Committee on Agriculture, May 19, 2004, Mr.
Anderson expressed his support for the WTO negotiations stating that “[a] rational,
rules-based international trading system is superior to the alternative. We will do our
part, working with this committee and the administration, to maintain an effective
U.S. cotton program that complies with WTO rules.”32 However, he also expressed
his concern that U.S. programs such as the export credit guarantees and decoupled
direct payments — programs that he felt were clearly exempted from reduction
commitments under the Uruguay Round Agreement — might fail to withstand
challenges under the WTO dispute settlement process.
In addition to congressional hearings, under fast track or Trade Promotion
Authority (TPA) legislation, Congress will be engaged in consultations with the
Administration on negotiations of the Free Trade Agreement for the Americas
(FTAA) and the agriculture negotiations in the WTO. Such consultations will be a
major vehicle for Members to express their views on this dispute and on the
negotiating issues it raises.
Ultimately Congress is responsible for passing farm program legislation that
complies with U.S. commitments in international trade agreements. With respect to
the potential acceptability of a new trade agreement under the ongoing Doha Round,
Mr. Anderson stated that the cotton case at the WTO “should raise a caution flag for
30 For more information, see CRS Report RS21905, The Agriculture Framework Agreement
in the WTO Doha Round.
31 House of Representatives, 108th Congress, Committee on Agriculture, Agricultural Trade
Negotiations, Serial No. 108-29; available at [http://agriculture.house.gov/hearings/108/
10829.pdf].
32 Statement of Woody Anderson, chairman, National Cotton Council, before the Committee
on Agriculture, U.S. House of Representatives, May 19, 2004; available at [http://
agriculture.house.gov/hearings/108/10829.pdf].

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this Congress, for our current negotiators, and for the private sector.... The job of
drafting an agreement that should pass muster in the U.S. Congress just got a lot
more difficult.”33
Table 3. Timeline: U.S.-Brazil WTO Dispute Settlement Case 267
Date
Event
Sept. 27,
Brazil made a formal “request for consultations” with the United
2002
States.
Oct. 2002 to
Brazil and the United States held three consultations to discuss the
Jan. 2003
dispute over U.S. cotton subsidies. The consultations were
unsuccessful.
Feb. 7, 2003
Brazil’s first request for the establishment of a dispute panel to rule on
its complaint is vetoed by the United States.
Mar. 18,
Upon Brazil’s second request, the WTO’s Dispute Settlement Body
2003
(DSB) established a panel at its meeting on March 18, 2003.
May 19,
Appointment of the panelists by the WTO Director-General. Once
2003
formed, a panel normally has six months to hold hearings and gather
testimony before issuing its final report to both parties.
July 22-24,
First meeting with the DSB panel. The panel decides to review the
2003
peace clause issue and Brazil’s challenge to U.S. cotton subsidies
separately.
Sept. 2003
The panel reversed an earlier procedural decision and stated that it
would decide both the peace clause issue and Brazil’s challenge to
U.S. cotton subsidies together.
Nov. 17,
The panel chairman informed the DSB that the panel would not be
2003
able to complete its work in six months due to the complexity of the
matter. An extension was announced.
April 26,
The panel’s interim report is released confidentially to the two parties.
2004
Both parties will review the Interim Report and submit written
comments by May 10, at which time they will have an additional three
weeks to review each other’s comments and respond.
June 18,
The panel’s final report is released confidentially to the two parties.
2004
Sept. 8,
The translated final report is delivered to the WTO Dispute Settlement
2004
Body (DSB) — all Members.
30 days after
Where a panel finds that a prohibited subsidy or injurious domestic
release of
subsidy exists, the SCM Agreement requires that the report be adopted
final report
by the DSB under the reverse consensus rule within 30 days after
circulation unless appealed.
Appeal
The United States must formally announce its intention to appeal after
notification
release of the final report but prior to its adoption by the DSB.
33 Ibid.

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