Order Code RL32571
Brazil’s WTO Case Against
the U.S. Cotton Program
Updated June 17, 2008
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 ruling was upheld on appeal to the
WTO’s Appellate Body (AB) on March 3, 2005. Key findings included (1) U.S.
domestic cotton subsidies exceeded WTO commitments of the 1992 benchmark year,
thereby losing the protection afforded by the “Peace Clause,” which had previously
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,
caused low international prices and resulted in “serious prejudice” to Brazil.
The AB recommended removal of the “prohibited subsidies” by July 21, 2005,
and the serious prejudice resulting from “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
requested WTO arbitration on the retaliation amounts; however, in mid-2005 the
United States and Brazil reached a procedural agreement to temporarily suspend both
arbitration proceedings.
The case was resumed in August 2006, when Brazil requested a WTO
compliance panel review whether the United States had fully complied with the
March 2005 ruling. On December 18, 2007, the compliance panel ruled that the
United States had not fully complied with the March 2005 WTO ruling against
certain U.S. cotton support programs. On June 2, 2008, after an appeal by the United
States, a WTO Appellate Body upheld the December 2007 compliance panel ruling
that the United States had not fully complied with earlier WTO recommendations.
The ruling against the United States 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. The AB ruling must first be
adopted by the WTO's Dispute Settlement Body (within 30 days of the ruling's
release); then the United States and Brazil will likely resume arbitration over the
value of sanctions authority requested by Brazil (to be completed within 60 days).
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
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” . . . . . . . . 10
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 Suggested 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 Cotton Support, 1992 to 2008 . . . . . . . . . . . . . . . . . . . . . . . . . 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 challenge of
certain aspects of the U.S. cotton program under the rules of the WTO Dispute
Settlement process in case DS267.1 The report 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,
the report addresses U.S. compliance with the panel’s ruling, Brazil’s charges of
inadequate compliance, and the WTO compliance dispute settlement process
(including the subsequent U.S. appeal of the compliance panel's ruling). Finally, the
potential implications of this WTO case for both the U.S. cotton sector and Congress
are discussed. 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 2008 U.S. cash receipts from cotton production averaged $5.0 billion per
year, while export sales averaged nearly $3.0 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 third-largest producer of cotton in the world, behind
China and India. 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 67% since 2001,
up from a 40% average during the early 1990s.
The United States is the world’s largest cotton exporter. Since 2001, U.S.
exports have accounted for nearly 39% 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
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 io n
2 0
1 5
D o m e s t i c U s e
1 0
5
E x p o r t s
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 , J u n e 1 0 , 2 0 0 8 .
Cotton is one of the principal U.S. program crops, along with wheat, rice, feed
grains, soybeans, and peanuts. Traditionally, qualifying U.S. cotton producers were
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 $2.8 billion per year, while the harvest-time value of
production has averaged $4.6 billion (Table 1).
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 next for a WTO compliance panel review, followed by a dispute over
U.S. compliance with the initial panel’s ruling. The compliance panel ruled in
December 2007 that the United States had not fully complied with the March 2005
WTO ruling against certain U.S. cotton support programs; an appeal by the United
States followed, and in June 2008 a WTO Appellate Body upheld the compliance
panel ruling. See Table 2 for a timeline of the dispute settlement case.
2 The Step 2 cotton-user payments program was ended on Aug. 1, 2006, by P.L. 109-171.
For more details on traditional 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
Outlays
Value of
Fiscal yearb
productione
Cashc
Non-Cashd
Total
$ million
1991
382
13
395
4,894
1992
1,443
373
1,816
4,728
1993
2,239
572
2,810
4,082
1994
1,539
292
1,831
4,367
1995
99
3
101
6,631
1996
685
0
685
6,358
1997
561
0
561
6,137
1998
1,132
25
1,157
5,709
1999
1,882
230
2,112
3,924
2000
3,809
862
4,671
3,534
2001
1,868
381
2,249
4,073
2002
3,307
1,818
5,125
2,834
2003
2,889
689
3,578
3,497
2004
1,372
169
1,541
5,266
2005
4,245
1,458
5,703
4,540
2006f
3,982
939
4,921
5,319
2007f
2,592
973
3,565
4,801
2008f
1,491
398
1,889
9,377
Sum: 1991-2008
35,516
9,194
44,710
88,357
Average: 1991-1999
1,107
167
1,274
5,266
Average: 2000-2008
2,839
854
3,694
4,552
Source: USDA, Farm Service Agency (FSA), Budget Division, History of Budgetary Expenditures
of the Commodity Credit Corporation, Books 3 (April 9, 2001) and 4 (July 15, 2003), ; and FSA
Budget Table No. 35 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.
d Includes 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 Production is valued at harvest-time prices. Each production value is for the crop harvested during
the crop year preceding the designated fiscal year.
f USDA estimate, Table 35, “CCC Net Outlays by Commodity and Function,” Feb. 4, 2008, available
at [http://www.fsa.usda.gov/dam/bud/bud1.htm]; and USDA Mid-Session Review, Commodity
Estimates Book, July 2007.

---

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 United States held three consultations to discuss dispute
Jan. 2003
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 DSB panel. Panel decides to review 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 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
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). Such arbitration shall be carried out by the original
panel and completed within 60 days.
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 on Oct. 25, 2006.
Jan. 9, 2007
The DSB announced that, because of particular circumstances, the
compliance panel would not complete its work before July 2007.
July 27, 2007
The WTO compliance panel issued confidential interim ruling to
Brazil and the United States. News reports suggest a ruling that the
United States had not fully complied with the March 2005 ruling.6
Oct. 15, 2007
TheWTO compliance panel released its confidential final report to
the United States and Brazilian governments. News reports
suggested a ruling that the United States had not fully complied with
the March 2005 ruling.
Dec. 18, 2007
The WTO compliance panel issued its final ruling publicly
(WT/DS267/RW) confirming earlier news reports that the panel had
found that the United States was not in full compliance.
Feb. 12, 2008
The United States notified its intention to appeal certain issues of
law covered in the report of the WTO compliance panel
(WT/DS267/33).
June 2, 2008
The Appellate Body (AB) issued its report upholding most of the
compliance panel’s rulings (WT/DS267/ABR).
+30 days
The DSB will decide whether to adopt the AB report.
+60 days
Adoption would likely signal the resumption of arbitration
proceedings.
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 was 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
was 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 were in excess of its 1992
benchmark level.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,” paragraphs 5 and 6, Agreement on Agriculture, WTO Legal Texts.
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 functioned
as export subsidies and were inconsistent with U.S. WTO obligations regarding
export subsidies as specified under the SCM Agreement.
Step 2 payments were 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 were 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 was
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 were part of its domestic support
program since they were targeted to domestic cotton users as well as exporters. As
a result, Step 2 payments were notified to the WTO as “amber” box (trade-distorting)
domestic support payments and not as export subsidies. Consequently, U.S. trade
officials contended that Step 2 payments were 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 — GSM-102, GSM-103, and the Supplier Credit
Guarantee Program (SCGP)14 — were effectively export subsidies inconsistent with
the WTO’s AA and SCM Agreements. Further, the subsidy effects of export credit
guarantees applied not only to cotton, but to other eligible commodities.15
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].
15 For a list of commodities eligible for export credit guarantees see USDA, Foreign
(continued...)

---

CRS-10
U.S. trade officials argued that the U.S. export credit guarantee programs were
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) were 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.
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
15 (...continued)
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
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
In particular, Brazil claimed 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 asserted that injury under
each of these three circumstances are in violation of the SCM Agreement.20 In
addition, Brazil argued that these same programs would be harmful (i.e., threatened
serious prejudice) in future years.
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 - in d e x i s a n a v e r a g e o f th e f i v e l o w e s t p r i c e d ty 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 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 l in e d a ta b a s e , J u n e 1 0 , 2 0 0 8 .
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/
legal_e/24-scm.pdf].

---

CRS-12
Figure 3. USDA Cotton Support, 1992 to 2008
6
1 0 0
A - I n d e x a
5
8 5
4
3
7 0
2
5 5
1
U S D A T o t a l S u p p o r t
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
aT h e A - i n d e x is a n a v e r a g e o f th e f iv e l o w e s t p r i c e d ty p e s o f 1 - 3 / 3 2 in c h s ta p le
l e n g t h c o t t o n o ff 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 rc e : U S D A , F S A b u d g e t d a t a (c a s h a n d n o n - c a s h s u p p o r t ) .
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).

---

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 - i n d e x i s a n a v e r a g e o f th e f iv e l o w e s t p r ic e d t y p e s o f 1 - 3 / 3 2 in c h
s ta p l e le 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 in e d a ta b a s e , J u n e 1 0 , 2 0 0 8 .
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
21 WT/DS267/R, paragraph 7.1307, p. 307.

---

CRS-14
delay” 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 recommended 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 was 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” included:
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 dealt 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 was 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 might resolve the dispute under the actionable subsidies
recommendation.
Implementation Phase27
Following is a discussion of how the implementation phase was to 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 in
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
CRS Report RS22187, Brazil’s WTO Case Against the U.S. Cotton Program: A Brief
Overview.
WTO Rules Suggested 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 sequences 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
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
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).
31 Normally a 30-day period is given for authorization (DSU, Article 22.6); however, for
(continued...)

---

CRS-17
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.
producers, ginners, warehousers, merchants, cottonseed processors/dealers,
cooperatives and textile manufacturers — also expressed disappointment in the AB
31 (...continued)
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
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. The 1% cap on user fees for GSM-102, the primary export credit
program, was cited by the DS panel as contributing to the subsidy component of the
GSM program. Higher fees would ensure that the financial benefits returned by these
programs would fully cover their long-run operating costs, and eliminate the subsidy
component. USDA could not remove the cap administratively as it is required by
statute (7 U.S.C. 5641). In addition, the CCC stopped accepting applications for
payment guarantees under GSM-103. The final 2008 farm bill (H.R. 6124) contains
provisions to eliminate the GSM-103 and SCGP programs, and to remove the 1% cap
on fees that can be charged under the GSM-102 program.
On August 1, 2006, the Step 2 cotton program, which was authorized by the
2002 farm act (P.L. 107-171, Section 1207), was eliminated by a provision (Section
1103) in the Deficit Reduction Act of 2005 (P.L. 109-171). At this point the
Administration likely felt that sufficient program changes had been enacted to fully
comply with the “actionable subsidies” portion of the WTO ruling.
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).38 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,
and requested WTO arbitration.39 However, on August 18, 2005, the United States
and Brazil reached a procedural agreement temporarily suspending arbitration
proceedings concerning the prohibited subsidies.40
37 NCC, “NCC Statement on WTP Appellate Ruling,” March 3, 2005; available at
[http://www.cotton.org/news/releases/2005/wtostatement.cfm].
38 For details, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S.
Compliance in Pending Cases, by Jeanne J. Grimmett.
39 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].
40 WT/DS267/25, August 18, 2005.

---

CRS-19
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.41 Again, the United States and
Brazil reached a procedural agreement (December 7, 2005), thereby temporarily
suspending further retaliation proceedings on the actionable subsidies.42
The suspensions were likely intended to permit policy reform to occur in a less
confrontational forum under either the then-ongoing congressional debate on an
extension or revision of U.S. farm legislation (as current farm law was set to expire
in 2007) or the ongoing Doha negotiations.
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 the prospects of a
successful Doha Round of trade negotiations43 — 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, on
August 21, 2006, Brazil requested the establishment of 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 July 27, 2007, the compliance panel released
a confidential interim ruling to the two countries that the United States has not fully
complied with the March 2005 WTO ruling against certain U.S. cotton support
programs. On October 15, 2007, the compliance panel’s final report was released
confidentially to the U.S. and Brazilian governments and, two months later on
December 18, 2007, it was released publicly. The panel’s final ruling confirmed the
earlier interim ruling against the United States.
In February 2008, the United States appealed the compliance panel’s ruling. In
June 2008, a WTO Appellate Body (AB) publicly released its final report upholding
the compliance panel's ruling that the United States had not fully complied with the
March 2005 WTO ruling. The ruling against the United States 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. The
AB report must first be adopted by the WTO's Dispute Settlement Body (within 30
days of the ruling's release); then the United States and Brazil will likely resume
41 WT/DS267/27, October 18, 2005.
42 WT/DS267/29, December 7, 2005.
43 For more information and an update on the status of Doha negotiations see, CRS Report
RL33144, WTO Doha Round: The Agricultural Negotiations, by Charles Hanrahan and
Randy Schenpf.

---

CRS-20
arbitration over the value of sanctions authority requested by Brazil (to be completed
within 60 days).
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.44
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 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.45 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 WTO dispute
44 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO
Agriculture Negotiations, by Charles Hanrahan.
45 “Brazil Wins Key Points in Interim WTO Panel on U.S. Cotton Subsidies,” Inside U.S.
Trade, April 30, 2004.

---

CRS-21
settlement proceedings against the United States charging that the United States has
indeed incorrectly notified PFC and DP payments as green box and that their
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).46
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 im it
D ir e c t
P a y m e n ts
1 5
1 0
5
A M S a s n o tifie d w ith o u t
D ir e c t P a y m e n ts
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 rc e : 1 9 9 5 -2 0 0 5 a re U .S . W T O n o ti fic a ti o n s; 2 0 0 6 - 20 0 8 a r e C R S
c a lc u la ti o ns b a s e d o n U S D A d a t a ; 2 0 0 9- 20 1 2 a r e C R S c a lc u la ti o n s b a s e d o n
F A P R I ba s e l in e p ro je c t io n s.
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.47 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
46 See CRS Report RL34351, Brazil and Canada’s WTO Cases Against U.S. Agricultural
Support by Randy Schnepf.
47 WTO, Doha Ministerial Declaration, WT/MIN(01)/DEC/1, November 20, 2001.

---

CRS-22
proposal calling for a global agreement to end all production-related
support for cotton growers of all WTO-member cotton producing
nations.48 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.49 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 Doha
Round of trade negotiations. 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. 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.
Ultimately, Congress is responsible for passing farm program legislation that
complies with U.S. commitments in international trade agreements. The United
States would appear to have already complied with most, if not all, of the AB’s
recommendation concerning "prohibited subsidies" by eliminating the Step 2, GSM-
103, and SCGP programs, and by removing the fee cap on GSM-102 credit
guarantees (i.e., by eliminating the “subsidy” component of export credit guarantees).
However, some questions remain as to what extent the 2008 farm bill (P.L. 110-234)
has addressed the serious prejudice charge related to price-contingent subsidies.
Instead of eliminating or reducing program triggers, the 2008 farm bill appears to
offer higher levels of price and income support that potentially could aggravate the
48 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO
Agriculture Negotiations.
49 For more information, see CRS Report RS21905, Agriculture in the WTO Doha Round:
The Framework Agreement and Next Steps.

---

CRS-23
perception (if not the reality) of “serious prejudice” in the marketplace. Several of
the proposed changes are specifically relevant to the Brazil cotton case, but also
germane to the broader issue of program vulnerability to WTO challenge.50 For
example, the enacted 2008 farm bill:51
! extends the counter-cyclical payments (CCP) program and current
marketing loan provisions (Sections 1104 and 1201 of P.L. 110-
234);
! raises both target prices and loan rates for several commodities,
while only lowering (marginally) the target price for upland cotton
(Sections 1104 and 1202);
! offers producers the choice (subject to a 30% reduction in marketing
loan rates and in lieu of 100% of CCP and 20% of direct payments)
of a revenue-based support option under the Average Crop Revenue
Election program (ACRE, Section 1105) with potentially higher per-
acre revenue guarantees for several crops than under the previous
2002 farm bill; and
! creates a new cotton-user payment of 4 cents per pound (Section
1207). This payment appears 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 ultimately be subject to a WTO challenge, but would
not be part of the current WTO cotton case.
Finally, the 2008 farm bill does not address the issue surrounding the
disqualification of direct payments from the WTO’s green box 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 the
current planting restriction, except for a small pilot program on 75,000 acres in seven
states (P.L. 110-234, Section 1107). This retention of the status quo has important
WTO implications, as both Canada and Brazil have recently initiated WTO cases
against the United States charging that the United States has exceeded its total limit
for the aggregate measure of support (AMS) on several occasions in recent years if
direct payments are included in the AMS calculation (Figure 5).52
Additional uncertainty arises from the ongoing Doha Round of trade
negotiations, where a successful conclusion could potentially mitigate or end Brazil’s
interest in continuing its case against the U.S. farm programs. Both agriculture
committees (House and Senate) of the 110th Congress will likely continue to monitor
developments in the WTO cotton case and the Doha negotiations, as well as the
aftermath of the compliance panel’s final ruling.
50 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.
51 See CRS Report RL33934, Farm Bill Legislative Action in the 110th Congress.
52 See CRS Report RL34351, Brazil and Canada’s WTO Cases Against U.S. Agricultural
Support by Randy Schnepf.

---