Order Code RL32571
Brazil’s WTO Case Against
the U.S. Cotton Program
Updated October 16, 2007
Randy Schnepf
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Brazil’s WTO Case Against
the U.S. Cotton Program
Summary
In late 2002, Brazil initiated a World Trade Organization (WTO) dispute
settlement case (DS267) against specific provisions of the U.S. cotton program. On
September 8, 2004, a WTO dispute settlement (DS) panel ruled against the United
States on several key issues in case DS267. The United States appealed the case to
the WTO’s Appellate Body (AB) which, on March 3, 2005, confirmed the earlier DS
panel findings against U.S. cotton programs. Key findings include (1) U.S. domestic
cotton subsidies have exceeded WTO commitments of the 1992 benchmark year,
thereby losing the protection afforded by the “Peace Clause,” which shielded them
from substantive challenges; (2) 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 — do not qualify for WTO
exemptions from reduction commitments as fully decoupled income support and
should therefore count against the “Peace Clause” limits; (3) Step-2 program
payments are prohibited subsidies; (4) U.S. export credit guarantees are effectively
export subsidies, making them subject to previously notified export subsidy
commitments; and (5) U.S. domestic support measures that are “contingent on
market prices” 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 AB recommended that the United States remove certain “prohibited
subsidies” by July 21, 2005, and remove the adverse effects resulting from certain
“actionable subsidies” by September 21, 2005. When the United States failed to
meet these deadlines, Brazil claimed the right to retaliate against $3 billion in U.S.
exports to Brazil based on the prohibited subsidies, and $1 billion based on the
actionable subsidies. The United States objected to these retaliation amounts and
requested WTO arbitration on the matter. However, in mid-2005 the United States
and Brazil reached a procedural agreement to temporarily suspend both retaliation
proceedings. The case was resumed on August 21, 2006, when Brazil submitted a
request for a WTO compliance panel to review whether the United States had fully
complied with the panel and AB rulings. A compliance panel was established on
October 25, 2006. On October 15, 2007, the compliance panel released its final
report to the United States and Brazilian governments that found, according to news
reports, that the United States had not fully complied with the panel and AB rulings.
The United States is expected to appeal the compliance panel’s ruling. An
unsuccessful appeal could necessitate further U.S. farm program changes or, if no
further changes are forthcoming, clear the way for Brazil to request WTO
authorization for retaliatory trade sanctions.
This report provides background, as well as details of the WTO dispute
settlement case. It will be updated as events warrant. An abbreviated version of this
report is available as CRS Report RS22187, Brazil’s WTO Case Against the U.S.
Cotton Program: A Brief Overview.
Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background on the U.S. Cotton Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Sequence of Events in WTO Case DS267 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Brazil’s WTO Case Against The U.S. Cotton Program . . . . . . . . . . . . . . . . . 7
Claim 1: Peace Clause Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Finding 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Claim 2: U.S. Direct Payments Do Not Qualify for Exemption
from Reduction Commitments as Decoupled Income Support . . . 8
Finding 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Claim 3: The Step-2 Program Functions as an Export Subsidy . . . . . . . 9
Finding 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Claim 4: U.S. Export Credit Guarantees Function as Export
Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Finding 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Claim 5: U.S. Subsidies Have Caused “Serious Prejudice” . . . . . . . . 11
Finding 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Claim 6: FSC-ETI Act of 2000 Acts as an Export Subsidy to
Upland Cotton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Finding 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Panel Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prohibited Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Prohibited Export Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Prohibited Import Substitution Subsidy . . . . . . . . . . . . . . . . . . . . 15
Actionable Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Implementation Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
WTO Rules Suggest Two Potential Time Tracks . . . . . . . . . . . . . . . . 16
Prohibited Subsidies Potential Time Track . . . . . . . . . . . . . . . . . 16
Actionable Subsidies Potential Time Track . . . . . . . . . . . . . . . . . 17
U.S. Response to the DS Panel Ruling . . . . . . . . . . . . . . . . . . . . . . . . 17
Brazil Seeks $4 Billion in Retaliatory Trade Measures . . . . . . . . . . . . 18
Brazil Requests a Compliance Panel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Potential Implications of WTO Panel Ruling
. . . . . . . . . . . . . . . . . . . . . . 20
Other Cotton-Related Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Role of Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. U.S. Cotton Production, Use, and Exports . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. U.S. Cotton Exports and International Cotton Price Index . . . . . . . . . 11
Figure 3. USDA CCC Cotton Support Outlays, 1992 to 2007 . . . . . . . . . . . . . . 12
Figure 4. China cotton imports and international cotton price index . . . . . . . . . 13
Figure 5. U.S. AMS Outlays — As Notified Without Direct Payments
versus With Addition of Direct Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Tables
Table 1. U.S. Upland Cotton Program Outlays and Harvest-Time Value
of Production, FY1991-FY2008a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 2. Timeline: U.S.-Brazil WTO Dispute Settlement Case 267 . . . . . . . . . . 4
Table 3. Comparison of U.S. Domestic Cotton Support in Accordance with
Article 13(b)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Brazil’s WTO Case Against
The U.S. Cotton Program
Overview
This report provides a description and status report on Brazil’s WTO challenge
of certain aspects of the U.S. cotton program.1 It begins with some brief background
on the U.S. cotton sector. Then a timetable of the WTO dispute settlement process
of the case is provided, followed by a description of both Brazil’s specific charges
against the U.S. cotton program and the WTO panel’s ruling on those charges. Next,
a description of U.S. compliance with the panel’s ruling, Brazil’s charges of
inadequate compliance, and the WTO compliance dispute settlement process is
covered. Finally, the report discusses the potential implications of this WTO case for
both the U.S. cotton sector and Congress. An abbreviated version of this report is
available as CRS Report RS22187, Brazil’s WTO Case Against the U.S. Cotton
Program: A Brief Overview.
Background on the U.S. Cotton Sector
The cotton industry is a major component of the U.S. agricultural sector. From
1994 to 2006, U.S. cash receipts from cotton production averaged $4.8 billion per
year, while export sales averaged over $2.9 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 1990. In 2002, 17 states reported cotton production valued at over
$20 million.
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. Since 2001, U.S.
exports have accounted for nearly 40% of world cotton trade. U.S. prominence in
global markets coupled with large U.S. subsidy levels have directed much
international attention to U.S. cotton program outlays in recent years.
1 Official WTO documents as cited in Table 2 and throughout this report are available at
[http://docsonline.wto.org/] under a simple search using the specific “document symbol”
cited, e.g., WT/DS267/1.
CRS-2
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.2 Since FY2000, U.S. farm subsidies for
cotton production averaged $3.1 billion per year, while the harvest-time value of
production has averaged $4.2 billion (Table 1).
Figure 1. U.S. Cotton Production, Use, and Exports
2 5
1 9 9 9 - 2 0 0 2
P r o d u c t i o n
2 0
1 5
D o m e s t i c U s e
1 0
E x p o r t s
5
0
1 9 9 2
1 9 9 5
1 9 9 8
2 0 0 1
2 0 0 4
2 0 0 7
S o u r c e : U S D A , P S D d a t a b a s e , A u g u s t 1 0 , 2 0 0 7 .
Sequence of Events in WTO Case DS267
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. 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. However, the WTO dispute settlement
(DS) process that reviewed Brazil’s charges against the U.S. cotton program has
extended well beyond the hypothetical 15-month time frame. In this particular case,
the initial WTO panel review took 18 months from the establishment of the panel to
its final ruling. Furthermore, substantial additional time has since been added to the
dispute settlement process — first, for an Appellate Body review of the initial ruling
on appeal and second, for a WTO compliance panel review followed by a dispute
over U.S. compliance with the initial panel’s ruling. The compliance panel review
is still ongoing, with a final report expected sometime in October 2007; however, the
DS process could potentially be extended further into 2008 by a likely appeal of the
compliance panel’s ruling. See Table 2 for a timeline of the dispute settlement case.
2 For more details on U.S. cotton program operations, see CRS Report RL32442, Cotton
Production and Support in the United States, June 24, 2004.
CRS-3
Table 1. U.S. Upland Cotton Program Outlays and Harvest-Time
Value of Production, FY1991-FY2008a
Fiscal yearb
Total Outlaysc
Value of productiond
$ million
$ million
1991
382
4,894
1992
1,443
4,728
1993
2,239
4,082
1994
1,539
4,367
1995
99
6,631
1996
685
6,358
1997
561
6,137
1998
1,132
5,709
1999
1,882
3,924
2000
3,809
3,534
2001
1,868
4,073
2002
3,307
2,834
2003
2,889
3,497
2004
1,372
5,266
2005
4,245
4,540
2006
3,982
5,319
2007e
2,639
4,801
Sum: 1991-2007
36,501
80,692
Average: 1991-1999
1,274
5,203
Average: 2000-2007
3,129
4,233
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].
a Data are for program 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.
d Production is valued at harvest-time prices. Each production value is for the crop harvested during
the crop year preceding the designated fiscal year.
e USDA estimate, Table 35, “CCC Net Outlays by Commodity and Function,” Sept. 11, 2007,
available at [http://www.fsa.usda.gov/dam/bud/bud1.htm].
CRS-4
Table 2. Timeline: U.S.-Brazil WTO Dispute Settlement Case 267
Date
Event
Sept. 27, 2002
Brazil made a formal “request for consultations” with the United
States (WT/DS267/1).
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 (WT/DS267/7).
Mar. 18, 2003
Upon Brazil’s second request, the WTO’s Dispute Settlement Body
(DSB) established a panel (WT/DS267/15).
May 19, 2003
Appointment of the panelists by the WTO Director-General. Once
formed, a panel normally has six months to hold hearings and gather
testimony before issuing its final report to both parties.
July 22, 2003
First meeting with the DSB panel. The panel decides to review the
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, 2003
The panel chairman informed the DSB that the panel would not be
able to complete its work in six months due to the complexity of the
matter. An extension was announced (WT/DS267/16).
Apr. 26, 2004
The panel’s interim report is released confidentially to the two
parties. Both parties review the interim report and submit written
comments by May 10, at which time they have three additional
weeks to review each other’s comments and respond. Although the
report was released confidentially, news reports suggested at least a
partial finding against the United States on each of the five major
claims.3
June 18, 2004
The panel’s final report is released confidentially to the two parties.
News reports suggested that the final ruling varied little from the
interim ruling against the United States.4
Sept. 8, 2004
After translation into English, French, and Portuguese, the final
report is delivered to the WTO Dispute Settlement Body (DSB), as
well as to the public (WT/DS267/R).
3 “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.
4 “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.
CRS-5
Date
Event
Oct. 18, 2004
The United States notified its intention to appeal 14 specific points
of the final report to the Appellate Body. The 14 points identify
certain issues of law covered in the panel’s final report and certain
legal interpretations developed by the panel in the dispute. An
appeal cannot reexamine existing evidence or examine new
evidence (WT/DS267/17).
Nov. 16, 2004
Several additional countries filed a third participant’s submission,
while others notified their intention to appear at the oral hearing.
Dec. 10, 2004
Due to the extent and complexity of issues under review, both the
United States and Brazil agreed to an extension to March 3, 2005,
for circulation of the Appellate Body’s (AB’s) final report
(WT/DS267/18).
Mar. 3, 2005
The AB issued its report upholding most of the panel’s rulings
(WT/DS267/ABR). Deadlines of July 1, 2005 for removal of
prohibited subsidies, and Sept. 21, 2005, for removal of prejudicial
effects from actionable subsidies are announced by AB.
Mar. 21, 2005
The DSB adopted the AB and panel reports, thus initiating a
sequence of compliance deadlines (WT/DS267/20).
Apr. 20, 2005
The United States announced to the DSB that it intended to
implement the recommendations and rulings of the DSB.
June 30, 2005
USDA announced temporary fix for its export credit guarantee
programs, including adoption of risk-based fee structure for GSM
102 and cessation of use of GSM 103 program. In addition, USDA
sent proposed legislation to Congress to repeal the Step 2 cotton
program.
July 1, 2005
AB deadline for U.S. removal of prohibited subsidies expires.
July 4, 2005
Brazil requested authorization from WTO to impose $3 billion in
retaliatory measures against prohibited U.S. subsidies
(WT/DS267/21).
July 5, 2005
USDA proposed statutory changes be made by Congress: remove
1% fee cap on GSM 102 program and terminate GSM 103 program.
July 5, 2005
United States objected to the amount of Brazil’s proposed sanctions
on the prohibited subsidies and requested WTO arbitration
(WT/DS267/23).
July 14, 2005
The DSB assigned role of arbitration on the prohibited-subsidy
sanctions to the original panel (WT/DS267/24).
Aug. 17, 2005
Brazil and United States reached procedural agreement to
temporarily suspend arbitration proceedings concerning the
prohibited subsidies (WT/DS267/25).
Sept. 1, 2005
AB deadline for U.S. removal of prejudicial effects from actionable
subsidies expired.
Oct. 6, 2005
Brazil requested authorization from WTO to impose $1 billion in
retaliatory measures against actionable U.S. subsidies to offset their
adverse effects (WT/DS267/26).
CRS-6
Date
Event
Oct. 17, 2005
United States objected to the amount of Brazil’s proposed sanctions
on the actionable subsidies and requested WTO arbitration
(WT/DS267/27).
Oct. 18, 2005
The DSB assigned role of arbitration on the actionable-subsidy
sanctions to the original panel (WT/DS267/28).
Nov. 21, 2005
Brazil and United States reached procedural agreement to
temporarily suspend arbitration proceedings concerning the
actionable subsidies (WT/DS267/29).
July 24, 2006
Doha round of WTO trade negotiations suspended indefinitely.5
Aug. 1, 2006
Step 2 cotton program eliminated (Sec. 1103, P.L. 109-171; the
Deficit Reduction Act of 2005).
Aug. 21, 2006
Brazil requested the establishment of a WTO compliance panel to
review whether the United States had fully complied with the AB’s
ruling of March 3, 2005 (WT/DS267/30).
Sept. 28, 2006
The DSB agreed to establish a panel (WT/DS267/31). The panel
members were announced by the WTO’s Director-General on Oct.
25, 2006.
Jan. 9, 2007
The DSB announced that, because of the particular circumstances
of the case, the compliance panel would not complete its work
before July 2007.
July 27, 2007
The WTO compliance panel issued its confidential interim ruling to
Brazil and the United States. News reports suggest a ruling that the
United States has not fully complied with the March 2005 ruling.6
Source: Compiled by CRS from official WTO documents and news sources as cited.
5 For more information, see CRS Report RL33144 WTO Doha Round: The Agricultural
Negotiations, by Charles Hanrahan and Randy Schnepf.
6 For example, see Financial Times, “Brazil Claims WTO Cotton Victory,” July 27, 2007.
CRS-7
Brazil’s WTO Case Against The U.S. Cotton Program
Brazil’s case was broadly written and touched on almost every aspect of U.S.
commodity programs, although the focus has been on the six principal claims
described below along with the WTO dispute settlement panel finding (of September
8, 2004) and Appellate Body (AB) ruling (of March 3, 2005).7
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.8
Prior to its expiry in January of 2004, Article 13 exempted domestic support
measures that complied 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 remained at or below the benchmark 1992 marketing year (MY) levels.9
Brazil argued that U.S. cotton subsidies were about $2 billion in MY1992 compared
with over $4 billion in MY2001. Therefore, Brazil argued that the United States was
no longer in compliance with the requisite conditions and could no longer seek
protection under the WTO’s peace clause rule.
In response, U.S. trade officials argued 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 argued that the words “exempt from actions” as used in
Article 13 of the AA were of overarching importance and precluded 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.”10 Furthermore, U.S. trade officials argued
that the immunity granted by the peace clause was still important, since even if a
country was no longer in compliance with the peace clause, it was incumbent on the
complaining party to prove there had been injury. (See “Claim 5,” below.)
7 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.
8 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].
9 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 August 1 and ends July 31 of the following year, but identifies
with the first year, such that MY1992 starts August 1, 1992, and ends July 31, 1993. The
principal period in question, MY1999-MY2002, corresponds roughly with FY2000-FY2003.
10 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/assets/Trade_Agreements/Monitoring_Enforcement/
Dispute_Settlement/WTO/Dispute_Settlement_Listings/asset_upload_file376_5598.pdf].
CRS-8
Finding 1. The panel found (and was upheld by the AB) that Brazil had
successfully discharged its burden to show that U.S. domestic cotton support
measures during MY1999-MY2002 (which averaged $3.28 billion) were in excess
of WTO commitments (of $2.0 billion) during MY1992. (See Table 3.) As a result,
U.S. domestic cotton support measures lost the protection afforded by the “Peace
Clause,” which had shielded them from substantive challenges in the past. This
occurred in part because, under Finding 2, Production Flexibility Contract and Direct
Payment outlays were included with other commodity program outlays and evaluated
against “peace clause” limits.
Table 3. Comparison of U.S. Domestic Cotton 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 — failed to fully meet the conditions for decoupled income support in Annex 2
of the Agreement on Agriculture and should therefore be counted against the U.S.
“Peace Clause” domestic support benchmark limit.
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.
Furthermore, the United States argued strongly against including such “minimally
distorting, non-commodity specific” payments in evaluating whether the United
States has met or exceeded its “peace clause” limits.
Finding 2. The panel found (and was upheld by the AB) that U.S. payments
made under the PFC and DP programs, because of the prohibition on planting fruits,
vegetables, and wild rice on covered program acreage,12 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 included with other commodity program outlays to evaluate whether the
United States has met or exceeded its “peace clause” limits.
11 WTO, “Annex 2 — Domestic Support: The Basis for Exemption from the Reduction
Commitments,” Agreement on Agriculture, WTO Legal Texts, p. 48.
12 For more information on these restrictions see USDA, Farm Service Agency, Fact Sheet,
Direct and Counter-Cyclical Payment Program Wild Rice, Fruit, and Vegetable Provisions,
February 2003, at [http://www.fsa.usda.gov/pas/publications/facts/html/fav03.htm].
CRS-9
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 as specified under the SCM Agreement.
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.
(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.13
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 were found to be “contingent on the use
of domestic over imported goods” and therefore qualified as
prohibited import substitution subsidies.
The DS panel finding was upheld by the Appellate Body.
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)14 — are effectively export subsidies inconsistent with the WTO’s
13 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/].
14 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].
CRS-10
AA and SCM Agreements. Further, the subsidy effects of export credit guarantees
apply not only to cotton, but to other eligible commodities.15
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 to the next WTO multilateral negotiating
round — the Doha Round.
Finding 4. The panel found (and was upheld by the AB) that U.S. export
credit guarantees effectively functioned as export subsidies because the financial
benefits returned by these programs failed to cover their long-run operating cost.16
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) and the Dairy Export Incentive Program (DEIP).17 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.18 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 (and was upheld by the AB) 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.
15 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, September 24, 2002; available at [http://www.fas.usda.gov/
scriptsw/PressRelease/pressrel_dout.asp?Entry=valid&PrNum=0346-02].
16 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.”
17 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 and DEIP programs, see CRS Report
RL33553, Agricultural Export and Food Aid Programs.
18 Those agricultural products which did not receive U.S. farm program support payments,
but whose exports were otherwise assisted by export credit guarantee program are excluded
from this case; WT/DS267/R, p. 348(d)(ii).
CRS-11
Claim 5: U.S. Subsidies Have Caused “Serious Prejudice”. Brazil
argued that domestic farm 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 Figures 2 and 3).19
Figure 2. U.S. Cotton Exports and International Cotton Price Index
4
a
1 0 0
A - I n d e x
1 9 9 9 - 2 0 0 2
3
8 0
2
6 0
1
4 0
E x p o r t s
0
2 0
1 9 9 2
1 9 9 5
1 9 9 8
2 0 0 1
2 0 0 4
2 0 0 7
a T h e A - i n d e x i s a n a v e ra g e o f th e fi v e l o w e s t p r i c e d t y p e s o f 1 -
3 / 3 2 i n c h s t a p le l e n g t h c o t t o n o f fe r e d o n t h e E u r o p e a n m a r k e t .
S o u r c e : U S D A , P S D o n l i n e d a t a b a s e , A u g u s t 1 0 , 2 0 0 7 .
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 the SCM Agreement.20 In
19 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.
20 Text of the Agreement on SCM is available online at [http://www.wto.org/english/docs_e/
CRS-12
addition, Brazil argued that these same programs would be harmful (i.e., threatened
serious prejudice) in future years.
Figure 3. USDA CCC Cotton Support Outlays, 1992 to 2007
5
1 0 0
a
A - I n d e x
4
8 5
3
7 0
2
5 5
1
C C C
O u t l a y s
0
4 0
1 9 9 2
1 9 9 5
1 9 9 8
2 0 0 1
2 0 0 4
2 0 0 7
a T h e A - i n d e x is a n a v e r a g e o f th e f i v e lo w e s t p r i c e d t y p e s o f 1 - 3 / 3 2
i n c h s t a p l e l e n g t h c o t to n o f f e r e d o n t h e E u r o p e a n m a r k e t .
S o u r c e : U S D A , P S D o n l i n e d a t a b a s e , A u g u s t 1 0 , 2 0 0 7 .
U.S. trade officials argued 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 argued 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, contributed to larger U.S. raw cotton exports.
In addition, they contended 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 4 for a visibly strong correlation between China cotton imports
and the international cotton “A-index.”
In evaluating this particular claim, the DS panel separated U.S. cotton support
programs into two groups: those that are directly contingent on market price levels
(i.e., loan deficiency payments, marketing loss assistance payments, counter-cyclical
payments, and Step-2 payments), and those that are not (i.e., PFC and Direct
Payments, and the federal crop insurance program).
20 (...continued)
legal_e/24-scm.pdf].
CRS-13
Figure 4. China cotton imports and international cotton price index
5
1 0 0
a
A -I n d e x
4
8 5
3
7 0
2
5 5
1
I m p o r t s
0
4 0
1 9 9 2
1 9 9 5
1 9 9 8
2 0 0 1
2 0 0 4
2 0 0 7
a T h e A - in d e x is a n a v e ra g e o f th e fi v e l o w e st p ri c e d t y p e s o f 1 - 3 /3 2 in c h
s ta p l e l e n g t h c o tt o n o f f e r e d o n t h e E u r o p e a n m a r k e t.
S o u r c e : U S D A , P S D o n li n e d a ta b a se , A u g u s t 1 0 , 2 0 0 7 .
Finding 5. 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.
However, U.S. domestic support measures that are not contingent on market price
levels were not included in this finding as the panel could not find enough of a
connection between the direct payments program and cotton planting decisions to
declare the direct payments program a serious factor in price suppression.21
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”
21 WT/DS267/R, paragraph 7.1307, p. 307.
CRS-14
pursuant to Article 4.7 of the SCM Agreement.22 According to the panel, required
withdrawal of the prohibited subsidies, within the time frame set by the panel, would
curtail the future threat posed by U.S. cotton support programs. As a result, the panel
stated that “...it is not necessary or appropriate to address Brazil’s claims of threat of
serious prejudice...”23
Claim 6: FSC-ETI Act of 2000 Acts as an Export Subsidy to Upland
Cotton. Brazil claimed 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 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 (and was upheld by the
AB) 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).24 As a result, the panel declined to further examine Brazil’s claims on this
particular issue.
Panel Recommendations
The initial panel’s final ruling was released publicly on September 8, 2004. The
following month (October 18, 2004) the United States notified the WTO of its intent
to appeal the panel’s ruling. A WTO Appellate Body (AB) reviewed the legality of
the case and issued its final report on March 3, 2005, upholding most of the initial
panel’s rulings. The policy recommendations that emerged from the panel and AB
rulings are described below.
Prohibited Subsidies. The AB 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 (DSB) or by July
1, 2005 (whichever is earlier).25 Since the DSB adopted the AB and panel reports on
March 21, 2005, the relevant deadline for withdrawal was July 1, 2005. The list of
prohibited subsidies subject to withdrawal “without delay” includes:
22 Report of the Panel, “United States — Subsidies on Upland Cotton,” WTO,
WT/DS267/R, para 7.1503, September 8, 2004, p. 345; hereafter referred to as WTO,
WT/DS267/R.
23 Ibid.
24 For more information on DS108, see CRS Report RL32014, WTO Dispute Settlement:
Status of U.S. Compliance in Pending Cases by Jeanne Grimmett.
25 Done in accordance with SCM, Article 4.7.
CRS-15
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;
! export credit guarantees under GSM 102, GSM 103, and SCGP that
assist exports of one scheduled agricultural product (rice), but in
excess of the scheduled volume; and
! Step-2 program payments to exporters of upland cotton.
Prohibited Import Substitution Subsidy.
! Step-2 payments to domestic users of upland cotton.
In contrast, unscheduled agricultural products not supported under government
agricultural support programs and scheduled agricultural product exports that remain
within their schedules were judged not to circumvent U.S. export commitments and
therefore were not subject to trade remedy actions in this case.
Actionable Subsidies. The panel recommended that the United States take
appropriate steps by September 21, 2005, to remove the adverse effects or to
withdraw those U.S. subsidy measures singled out as price-contingent — marketing
loan provisions, Step-2 payments, and CCP payments. These subsidies were
identified as “actionable” subsidies that contributed to serious prejudice to the
interests of Brazil during the marketing years 1999-2002.
It is noteworthy that the actionable subsidies remedy is dealing with serious
prejudice and injury that occurred during a historical time period and not future
prejudice or injury. In support of this concept, the panel stated (in its original ruling
on the “threat of serious prejudice” by actionable subsidies) that U.S. compliance
with recommendations on prohibited subsidies — i.e., the Step-2 provisions and
export credit guarantees — could so significantly transform the basket of measures
currently in question that it is not necessary or appropriate to address Brazil’s claims
of threat of serious prejudice.26 This appeared to leave open the possibility that
removal of the prohibited subsidies may resolve the dispute under the actionable
subsidies recommendation.
Implementation Phase27
Following is a discussion of how the implementation phase could potentially
unfold in accordance with WTO rules, how actual implementation has unfolded to
date, and the nature and effects of U.S. compliance decisions. A summary of current
U.S. compliance actions and their implications for the U.S. cotton sector are covered
26 WTO, WT/DS267/R, para. 7.1503, p. 354.
27 For details, see Understanding the WTO: Settling Disputes, “The Case Has Been Decided,
What Next?” at [http://www.wto.org/english/thewto_e/whatis_e/tif_e/disp1_e.htm].
CRS-16
in CRS Report RS22187, Brazil’s WTO Case Against the U.S. Cotton Program: A
Brief Overview.
WTO Rules Suggest Two Potential Time Tracks. In accordance with
WTO rules, the evolution of the implementation phase depends on how both parties
choose to respond to the different sequence of events as they unfold. In addition to
the potential time tracks described below, the implementation phase also provides
opportunities for the disputing parties to mutually resolve the dispute. If the United
States were to fail to comply, Brazil could (upon visible evidence of noncompliance)
request negotiations with the United States to determine mutually acceptable
compensation (e.g., tariff reductions in areas of particular interest). Furthermore, if
Brazil does not want to press ahead full force with imposing sanctions, there is
considerable opportunity to delay compliance steps.
The time track for U.S. compliance with panel and AB recommendations may
diverge depending on whether the United States chooses to respond separately to the
rulings on prohibited subsidies and actionable subsidies. This is because prohibited
subsidies are given expedited treatment under SCM, Article 4.12, which states that,
“except for time-periods specifically prescribed in [SCM, Article 4], time-periods
applicable under the DSU for the conduct of such disputes shall be half the time
prescribed therein.”
Prohibited Subsidies Potential Time Track. As a result of their
expedited treatment, the AB recommended that the United States remove the
prohibited export subsidies by July 1, 2005. Within 15 days after the AB and panel
reports were adopted by the DSB (done on March 21, 2005),28 the United States was
expected to present an implementation plan to the DSB, although precedence
suggests that such a plan could be as minimal as stating intentions to work with
Congress to bring U.S. policies into compliance. This was indeed the case when, on
April 20, the U.S. representative to the WTO announced that the United States
intended to implement the recommendations and rulings of the DSB in a manner that
respected U.S. WTO obligations.29 The representative noted, however, that
determining acceptable options would take a reasonable period of time and requested
that Brazil be willing to consult on the potential timetable.
If, 10 days after the designated period (July 1, 2005) expires, no satisfactory
compensation is agreed to, the complaining side (Brazil) may ask the DSB for
permission to impose limited trade sanctions against the United States.30 The trade
sanctions are limited to a value equivalent to no more than the level of nullification
28 Normally a 30-day period is given to respond (DSU, Article 21.3); however, this is halved
under SCM, Article 4.12.
29 U.S. Mission to the United Nations in Geneva, Press Release, “Statements by the U.S.
Representative at the meeting of the WTO Dispute Settlement Body,” April 20, 2005.
30 Normally a 20-day period is given (DSU, Article 22.2); however, for disputes involving
prohibited subsidies the prescribed time is halved (SCM, Article 4.12).
CRS-17
or impairment of benefits. The DSB must grant this authorization within 15 days of
expiry of the “reasonable” time period unless a consensus exists against the request.31
If the United States objects to the amount proposed by Brazil, the level of
suspension would be arbitrated (by the original panel if available). Arbitration shall
be completed within 30 days after the date of expiry of the designated period (July 1,
2005).32 No trade sanctions are to be imposed during the arbitration period.
Once armed with the authority to impose trade sanctions, Brazil could still
choose to wait. A precedent for this occurred under the WTO Dispute Settlement
case (DS108) involving the U.S. Foreign Sales Corporation Statute. Under DS108,
the European Communities (EC) requested and received authorization to impose
retaliatory measures against the United States on May 7, 2003.33 However, the EC
refrained from immediate action, stating that it would review U.S. actions for a
period of time before proceeding. The EC eventually began imposing additional
duties on U.S. products in March 2004.
Actionable Subsidies Potential Time Track. In contrast to the July 1,
2005, deadline, the removal of actionable subsidies is subject to a six-month period
starting on the date of adoption of the AB and panel reports (March 21, 2005).34 As
a result, the panel recommended that, upon adoption of its final report, the United
States take appropriate steps to remove the adverse effects or to withdraw those
subsidies identified as contributing to serious prejudice to the interests of Brazil —
marketing loan provisions, Step-2 payments, and CCP payments — by September 21,
2005. Thus, in every other respect, the timetable for actionable subsidies would
follow the same sequence of events listed above for prohibited subsidies, but subject
to the full time allotment for each event as described in the preceding footnotes rather
than the “halved” time periods.
U.S. Response to the DS Panel Ruling. A spokesperson for the Office
of the U.S. Trade Representative (USTR) expressed disappointment in the AB ruling,
but also said that USTR would study the AB report carefully and work closely with
Congress and U.S. farmers on its next steps.35 However, U.S. officials have said that
they prefer to resolve the cotton case through trade negotiations in the WTO Doha
Round rather than a separate settlement.36 The National Cotton Council (NCC) of
America — the principal national organization representing the interests of U.S.
31 Normally a 30-day period is given for authorization (DSU, Article 22.6); however, for
disputes involving prohibited subsidies the prescribed time is halved (SCM, Article 4.12).
32 Normally a 60-day period is given for arbitration (DSU, Article 22.6); however, for
disputes involving prohibited subsidies the prescribed time is halved (SCM, Article 4.12).
33 For more information, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S.
Compliance in Pending Cases, by Jeanne Grimmett.
34 In accordance with SCM, Article 7.9.
35 Inside U.S. Trade, “Appellate Body Favors Brazil in Cotton Subsidies Challenge,” Vol.
23, No.9, March 4, 2005.
36 Congressional Daily, “Comply Quickly With WTO Ruling, Brazil Urges U.S.” March 15,
2005.
CRS-18
producers, ginners, warehousers, merchants, cottonseed processors/dealers,
cooperatives and textile manufacturers — also expressed disappointment in the AB
ruling, but has stated that it would work with USTR and USDA to coordinate a
response to the decision.37
On July 1, 2005, USDA instituted a temporary fix for its export credit guarantee
programs, whereby the Commodity Credit Corporation (CCC) would use a risk-based
fee structure for the GSM-102 and SCGP programs. The new structure responded
to a key finding by the WTO that the fees charged by the programs should be risk-
based. User fees for GSM-102, the primary export credit program, presently are
capped at 1% of the value of the export product (7 U.S.C. 5641). Higher fees are
needed to ensure that the financial benefits returned by these programs fully cover
their long-run operating costs; thereby eliminating their subsidy component. In
addition, the CCC stopped accepting applications for payment guarantees under
GSM-103. On July 5, 2005, USDA Secretary Johanns proposed that Congress
implement statutory changes to comply with the prohibited subsidy ruling that
included the removal of the 1% cap on fees that can be charged under the GSM-102
program and termination of the GSM-103 program.38
On August 1, 2006, the Step 2 cotton program, which was authorized by the
2002 farm act (P.L. 107-171; Sect. 1207), was eliminated by a provision (Sec. 1103)
in the Deficit Reduction Act of 2005 (P.L. 109-171). At this point the
Administration felt that sufficient program changes had been enacted to fully comply
with the “actionable subsidies” portion of the WTO ruling. Furthermore, it is likely
that the Administration deemed that Congress would have the opportunity to make
further adjustments, if needed, when it passed new farm legislation in 2007 (as
current farm law expires in 2007).
Brazil Seeks $4 Billion in Retaliatory Trade Measures. According to
WTO rules, trade sanctions are limited to a value not to exceed the level of lost
benefits. As the reform deadlines under the two different subsidy types expired,
Brazil first requested (July 4, 2005) 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).39 To achieve $3 billion in retaliation, Brazil proposed
to suspend tariff concessions as well as obligations under the WTO Agreement on
Trade-Related Intellectual Property Rights and the General Agreement on Trade in
Services. The United States objected to the amount of Brazil’s proposed sanctions,
37 NCC, “NCC Statement on WTP Appellate Ruling,” March 3, 2005; available at
[http://www.cotton.org/news/releases/2005/wtostatement.cfm].
38 USDA press release No. 0242.05, July 5, 2005.
39 For details, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S.
Compliance in Pending Cases, by Jeanne J. Grimmett.
CRS-19
and requested WTO arbitration.40 However, on August 18, 2005, the United States
and Brazil reached a procedural agreement temporarily suspending arbitration
proceedings concerning the prohibited subsidies.41
Second, as the September 21, 2005, deadline to address the actionable subsidy
ruling expired, Brazil charged that the United States had neither taken nor announced
any specific initiative for the price-contingent programs deemed to cause prejudicial
impact to Brazil’s trade interest. Brazil then requested authorization from the WTO
to impose countermeasures valued at $1 billion as retaliation against the actionable
programs. Once again, the United States requested (October 18, 2005) WTO
arbitration over the level of the proposed sanctions.42 Again, the United States and
Brazil reached a procedural agreement (December 7, 2005), thereby temporarily
suspending further retaliation proceedings on the actionable subsidies.43
Brazil Requests a Compliance Panel
Initially Brazil showed a willingness to permit the U.S. legislative process —
motivated by the 2007 expiration of U.S. farm programs and by the prospects of a
successful Doha Round of trade negotiations — to make the changes needed to bring
U.S. farm programs into compliance with the WTO ruling, even if this process
extended well beyond the deadlines established under the WTO dispute settlement
ruling. However, in July 2006, the Doha Round talks were suspended indefinitely.
Shortly thereafter, on August 21, 2006, Brazil submitted a request for a WTO
compliance panel to review whether the United States had fully complied with panel
and AB rulings. The WTO’s Dispute Settlement Body (DSB) agreed to establish a
compliance panel at the September 28, 2006, DSB meeting. On October 15, 2007,
the compliance panel released its final report to the United States and Brazilian
governments. According to news reports, the panel’s ruling confirmed an earlier
(July 27, 2007) interim ruling that the United States has not fully complied with a
March 2005 WTO ruling against certain U.S. cotton support programs.44
The United States is expected to appeal the compliance panel’s ruling. If appealed,
an Appellate Body decision would not be likely until mid-2008. The ruling against
the United States (barring a successful U.S. appeal) could necessitate further U.S.
farm program changes or, if no further changes are forthcoming, clear the way for
Brazil to request WTO authorization for retaliatory trade sanctions. First, however,
Brazil would likely ask the WTO arbitration panel to resume its work, with a
decision within 60 days, according to the U.S.-Brazil agreement on prohibited
subsidies. U.S. failure to comply with any decision could result in WTO-sanctioned
40 WTO official document WT/DS267/24, July 19, 2005. Official WTO documents are
accessible online at [http://docsonline.wto.org/gen_search.asp?searchmode=simple].
41 WT/DS267/25, August 18, 2005.
42 WT/DS267/27, October 18, 2005.
43 WT/DS267/29, December 7, 2005.
44 For example, see The Financial Times, “WTO Rules Against U.S. Cotton Subsidies,”
October 15, 2007.
CRS-20
trade retaliation by Brazil against the United States. 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.45
Potential Implications of WTO Panel Ruling
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, which is scheduled to expire in 2007, to bring existing program operations
into compliance.
Concerns have also been expressed regarding the reclassification of PFC and
Direct Payments away from non-trade-distorting green box support.46 However, the
panel finding that U.S. direct payments do not qualify for WTO exemptions from
reduction commitments as fully decoupled income support (i.e., they are not green
box compliant) appears to have no further consequences within the context of this
case and does not involve any compliance measures. This is because direct payments
were deemed “non-price contingent” and were evaluated strictly in terms of the Peace
Clause violation.
The panel did not specifically reclassify U.S. PFC and DP payments as “amber
box,” nor did the panel recommend that the United States should notify such future
payments as “amber box.” This is a subtle but critical distinction because of the
enormity of PFC and DP payments. During FY1996 to FY2006, PFC and DP
payments averaged $5 billion per year and accounted for 26% of total U.S. farm
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.
U.S. cotton industry and government officials are concerned that the specific
finding on the apparent failure of U.S. “decoupled” payments to meet WTO green
box criteria leaves such programs open to future charges, and that third countries may
feel emboldened by knowing how a WTO panel is likely to rule on such matters. The
European Union (EU) is also likely to be concerned about this finding since the EU’s
agricultural program (following agricultural policy reforms of June 2003) relies
heavily on “decoupled” payments similar to the those of the U.S. program. These
concerns appear to have merit, as both Canada and Brazil have initiated the first
phases of WTO dispute settlement proceedings contending that the United States has
indeed incorrectly notified PFC and DP payments as green box and that their
45 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO
Agriculture Negotiations, by Charles Hanrahan.
46 “Brazil Wins Key Points in Interim WTO Panel on U.S. Cotton Subsidies,” Inside U.S.
Trade, April 30, 2004.
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inclusion in the U.S. amber box results in the United States exceeding its WTO-
agreed AMS spending limit on several occasions in recent years (Figure 5).47
Figure 5. U.S. AMS Outlays — As Notified Without Direct Payments
versus With Addition of Direct Payments
2 5
2 0
A M S L i m i t
D ir e c t
P a y m e n t s
1 5
1 0
5
A M S a s n o t i f i e d w i t h o u t
D ir e c t P a y m e n t s
0
1 9 9 5
1 9 9 8
2 0 0 1
2 0 0 4
2 0 0 7
2 0 1 0
S o u r c e : 1 9 9 5 - 2 0 0 1 a r e U .S . W T O n o t i f i c a t i o n s ; 2 0 0 2 - 2 0 0 8 a r e C R S
c a l c u l a ti o n s b a s e d o n U S D A d a t a ; 2 0 0 9 -2 0 1 2 a r e C R S c a l c u la t i o n s b a s e d o n
F A P R I b a s e l i n e p r o j e c t i o n s .
S o u r c e : U S D A , P S D o n l i n e d a t a b a s e , A u g u s t 1 0 , 2 0 0 7 .
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.48 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
47 For more information on the Canada case see CRS Report RL33853, Canada’s WTO Case
Against U.S. Aggregate Measure of Support (AMS) by Randy Schnepf. Brazil’s request for
WTO consultations concerning U.S. AMS limits is WT/DS365/1, July 17, 2007.
48 WTO, Doha Ministerial Declaration, WT/MIN(01)/DEC/1, November 20, 2001.
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support for cotton growers of all WTO-member cotton producing
nations.49 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
31, 2004) of the WTO’s ongoing Doha Round.50 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 WTO cotton case and the
impending compliance panel’s final ruling. Both the Senate and House Agriculture
Committees regularly hold hearings on agricultural trade negotiations. In addition
to congressional hearings, Congress will likely be engaged in consultations with the
Administration on the bilateral trade negotiations as well as the Doha Round of WTO
trade negotiations. 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. The United
States has already complied with at least a portion of the AB’s recommendation by
eliminating the Step 2 program. However, additional permanent modifications to
U.S. farm programs may still be needed to fully comply with the AB’s ruling pending
a final determination by the WTO compliance panel.
When confronted with a negative WTO dispute settlement ruling, a country has
essentially five options to choose from: eliminate the subsidy; reduce the subsidy to
diminish its adverse effect; revise the program function to reduce the linkage between
the subsidy and the adverse effect (referred to as decoupling); pay a mutually
acceptable compensatory payment to offset the adverse effects of the subsidy; or
suffer the consequences of trade retaliation.
The legislation authorizing current farm programs expires in late 2007. The
House passed its version of the 2007 farm bill — H.R. 2419 — on July 27, 2007. In
H.R. 2419, the House proposes several changes specifically relevant to the Brazil
cotton case, but also germane to the broader issue of program vulnerability to WTO
49 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO
Agriculture Negotiations.
50 For more information, see CRS Report RS21905, Agriculture in the WTO Doha Round:
The Framework Agreement and Next Steps.
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challenge.51 Sec. 3002 repeals the GSM 103 and SCGP programs and lifts the 1%
origination fee cap on GSM 102 export credit. These statutory changes appear likely
to eliminate the “subsidy” component of export credit guarantees and bring them into
compliance with WTO rules.
However, H.R. 2419 appears to do very little in response to the serious prejudice
charge related to price-contingent subsidies. Instead, H.R. 2419 extends both current
marketing loan provisions (Sec. 1201-1205) and the CCP program (Sec. 1103). The
target price for upland cotton is adjusted downward by 2.4 cents to 70 cents per
pound, which should marginally lower expected CCC outlays for cotton; however,
H.R. 2419 offers producers an additional revenue-based CCP option (Sec. 1104) that
includes significantly higher per-acre revenue guarantees for cotton than under the
2002 farm bill (i.e., $496.93 under H.R. 2419 versus $416.73 under current law). In
addition, H.R. 2419 proposes changing the world price used by USDA to determine
marketing loan repayment rates from a Northern European price to a Far Eastern
price, which presumably would result in larger payments under the provisions of the
program. H.R. 2419 (Sec. 1207(c)) also creates a new cotton user payment of 4 cents
per pound. This payment is similar to the WTO-illegal Step 2 payment except that
cotton from all origins (not just domestic sources) is eligible for the payment. Since
the United States imports very little cotton, most payments would still likely go to
domestically sourced cotton. As a result, this subtle technical loophole might be
subject to WTO challenge if it survives the congressional legislative process and
emerges as part of a new farm bill.
Finally, H.R. 2419 fails to address the issue surrounding the disqualification of
direct payments from WTO’s green box AMS exclusion as decoupled payments due
to the planting restriction on fruits, vegetables, and wild rice on program base acres.
Instead, direct payments are extended with no change to current planting restrictions
(except for a small pilot program on 10,000 acres in Indiana). This glaring retention
of the status quo has important WTO implications, as both Canada and Brazil have
recently initiated WTO cases against the United States (as mentioned earlier)
charging that the United States has exceeded its total AMS limit on several occasion
in recent years if direct payments are included in the AMS calculation (Figure 5).
The Senate Agriculture Committee is expected to mark up its version of a 2007
farm bill in October. In response to the negative WTO compliance panel interim
ruling in July, Senate Agriculture Committee Chairman Tom Harkin stated, “It would
be far preferable to settle these disputes through careful negotiation instead of WTO
litigation. While, of course, the United States needs to defend our programs in the
WTO, we also must recognize reality, solve the problems in our programs and move
on. It is far more important to prepare for the future so American agriculture can
succeed in this new century than to continue fighting losing cases before the WTO.”52
51 For more information on this issue, see CRS Report RS22522, Potential Challenges to
U.S. Farm Subsidies in the WTO: A Brief Overview by Randy Schnepf and Jasper Womach.
52 “Harkin Disappointed with WTO Decision on Compliance in Brazil Cotton Case,”
Senator Tom Harkin, Press Release, July 27, 2007.