Brazil’s WTO Case Against the U.S. Cotton
Program
Randy Schnepf
Specialist in Agricultural Policy
January 5, 2011
Congressional Research Service
7-5700
www.crs.gov
RL32571
CRS Report for Congress
P
repared for Members and Committees of Congress
Brazil’s WTO Case Against the U.S. Cotton Program
Summary
The so-called “Brazil cotton case” is a long-running World Trade Organization (WTO) dispute
settlement case (DS267) initiated by Brazil—a major cotton export competitor—in 2002 against
specific provisions of the U.S. cotton program. In September 2004, a WTO dispute settlement
panel found that certain U.S. agricultural support payments and guarantees—including (1)
payments to cotton producers under the marketing loan and counter-cyclical programs, and (2)
export credit guarantees under the GSM-102 program—were inconsistent with WTO
commitments. In 2005, the United States made several changes to both its cotton and GSM-102
programs in an attempt to bring them into compliance with WTO recommendations. However,
Brazil argued that the U.S. response was inadequate. A WTO compliance panel ruled in favor of
Brazil’s non-compliance charge against the United States in December 2007, and the ruling was
upheld on appeal in June 2008.
In August 2009, a WTO arbitration panel—assigned to determine the appropriate level of
retaliation—announced that Brazil’s trade countermeasures against U.S. goods and services could
include two components: (1) a fixed amount of $147.3 million in response to U.S. cotton program
payments, and (2) a variable amount based on U.S. GSM-102 program spending. In response to
Brazil’s argument that insufficient trade in goods occurred between the two countries, the
arbitrators also ruled that Brazil would be entitled to cross-retaliation if the overall retaliation
amount exceeded a formula-based variable annual threshold. Cross-retaliation involves
countermeasures in sectors outside of the trade in goods, most notably in the area of U.S.
copyrights and patents. Based on the arbitrators’ formulas, using 2008 data, Brazil announced in
December 2009 that it would impose trade retaliation starting on April 6, 2010, against up to
$829.3 million in U.S. goods, including $268.3 million in eligible cross-retaliatory
countermeasures.
The threat of sanctions led to intense negotiations between Brazil and the United States to find a
mutual agreement and avoid the trade retaliation. In April 2010, the two parties reached a
preliminary memorandum of understanding (MOU) spelling out certain actions which, if
undertaken by the United States, would lead to suspension of Brazil’s threatened retaliation.
On June 17, 2010, U.S. and Brazilian trade negotiators concluded the Framework for a Mutually
Agreed Solution to the Cotton Dispute in the WTO (WT/DS267). The framework agreement—
which lays out a number of “steps and discussions”—represents a path forward toward the
ultimate goal of reaching a negotiated solution to the dispute, while avoiding WTO-sanctioned
trade retaliation by Brazil against U.S. goods and services. As a result, Brazil has suspended trade
retaliation pending U.S. compliance with the framework agreement measures. Key aspects of the
framework agreement include (1) payment by the United States of a $147.3 million annual fund
to a newly created “Brazilian Cotton Institute” to provide technical assistance and capacity-
building for Brazil’s cotton sector, (2) quarterly discussions on potential limits of trade-distorting
U.S. cotton subsidies (recognizing that actual changes will not occur prior to the 2012 farm bill),
and (3) near-term modifications to the operation of the GSM-102 program coupled with a semi-
annual review of whether U.S. GSM-102 program implementation satisfies certain performance
benchmarks. A further U.S. commitment, made under the April MOU, includes modification of
the animal disease status of the Brazilian state of Santa Catarina to allow products such as pork
and live swine exports into the United States. These U.S. commitments are intended to delay any
trade retaliation until after the 2012 farm bill, when potential changes to U.S. domestic cotton
subsidies will be evaluated.
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Brazil’s WTO Case Against the U.S. Cotton Program
Contents
Overview .................................................................................................................................... 1
Report Phases ....................................................................................................................... 1
Phase I: Background on the U.S. Cotton Sector ........................................................................... 2
Domestic Program Support ................................................................................................... 3
Export Credit Guarantee Programs ........................................................................................ 3
Phase II: Brazil’s WTO Dispute Settlement Case Against the U.S. Cotton Program ..................... 5
Brazil’s Six Principal Claims Against U.S. Cotton Programs ................................................. 5
Claim 1: Peace Clause Violation...................................................................................... 5
Claim 2: U.S. Direct Payments Do Not Qualify for Exemption from Reduction
Commitments as Decoupled Income Support ............................................................... 6
Claim 3: The Step 2 Program Functions as an Export Subsidy ......................................... 7
Claim 4: U.S. Export Credit Guarantees Function as Export Subsidies............................. 8
Claim 5: U.S. Subsidies Have Caused “Serious Prejudice” .............................................. 9
Claim 6: FSC-ETI Act of 2000 Acts as an Export Subsidy to Upland Cotton ................. 11
Panel and Appellate Body Recommendations ...................................................................... 12
Prohibited Subsidies...................................................................................................... 12
Actionable Subsidies..................................................................................................... 13
Implementation of Panel/Appellate Body Recommendations ............................................... 13
Prohibited Subsidies Potential Time Track..................................................................... 14
Actionable Subsidies Potential Time Track.................................................................... 14
U.S. Compliance Actions .................................................................................................... 15
Phase III: WTO Compliance Panel Review and Ruling.............................................................. 16
Arbitration Requested, Then Suspended, Over Brazil’s Proposed Retaliation Amounts ........ 16
Brazil Requests WTO Compliance Panel............................................................................. 17
WTO Compliance Panel Rules Against the United States .................................................... 18
Phase IV: WTO Arbitration of Brazil’s Proposed Countermeasures............................................ 19
Brazil Requests Resumption of Arbitration.......................................................................... 19
Brazil Alters Its Countermeasure Request............................................................................ 19
Arbitration Panel Ruling ..................................................................................................... 20
First Finding ................................................................................................................. 21
Second Finding ............................................................................................................. 21
Third Finding................................................................................................................ 21
Fourth Finding .............................................................................................................. 22
Brazil’s Reaction........................................................................................................... 22
U.S. Reaction................................................................................................................ 23
Phase V: Retaliation or Settlement? ........................................................................................... 24
Brazil Targets Goods and Services for Countermeasures...................................................... 24
Negotiations Seek Mutual Settlement .................................................................................. 25
Brazil and United States Sign Memorandum of Understanding............................................ 26
Brazil and United States Reach Framework Agreement ....................................................... 27
Phase VI: Implementation of the MOU & Framework Agreement ............................................ 28
Payments to the Brazilian Cotton Institute ........................................................................... 28
Semi-Annual Operational Review of the GSM-102 Program ............................................... 29
Quarterly Discussions of U.S. Farm Programs..................................................................... 29
APHIS Rule Changing Animal Disease Status of Brazilian State of Santa Catarina.............. 30
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Brazil’s WTO Case Against the U.S. Cotton Program
Phase VII: Potential Policy Implications of WTO Panel Ruling ................................................. 30
Bringing GSM-102 into WTO Compliance ......................................................................... 30
Bringing Price-Contingent Programs into WTO Compliance ............................................... 31
Direct Payments Classification............................................................................................ 32
Other Cotton-Related Trade Issues ...................................................................................... 33
Role of Congress....................................................................................................................... 34
Figures
Figure 1. U.S. Cotton Production, Use, and Exports .................................................................... 2
Figure 2. USDA Cotton Support, 1992 to 2010.......................................................................... 10
Figure 3. U.S. Cotton Exports and International Cotton Price Index........................................... 10
Figure 4. U.S. AMS Outlays, as Notified Without Direct Payments versus With Addition
of Direct Payments................................................................................................................. 33
Tables
Table 1. U.S. Upland Cotton Program Outlays and Harvest-Time Value of Production,
FY1991-FY2010...................................................................................................................... 4
Table 2. Comparison of U.S. Domestic Cotton Support in Accordance with
Article 13(b)(ii)........................................................................................................................ 6
Table 3. Estimated Credit Subsidies on CCC Export Credit Guarantees ..................................... 18
Table 4. CCC Cotton Outlays under Marketing Loan Benefits and CCP Programs .................... 31
Table 5. Timeline: U.S.-Brazil WTO Dispute Settlement Case 267 ............................................ 36
Contacts
Author Contact Information ...................................................................................................... 39
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Brazil’s WTO Case Against the U.S. Cotton Program
Overview
This report provides a description and status report on Brazil’s challenge to certain aspects of the
U.S. cotton program under the rules of the World Trade Organization’s (WTO’s) dispute
settlement process in case DS267.1 The “Brazil cotton case” had its WTO origins in 2002 and has
since evolved into a sprawling legal enterprise that is still ongoing as of early 2011.
The report begins with a brief overview of the U.S. cotton sector and domestic support programs.
It then provides a detailed history of the case in chronological phases. Readers interested in the
current status of the dispute, and in particular details of the negotiations to avoid trade retaliation
against U.S. goods and services by reaching a mutual settlement, and a summary of the most
recent developments in the case should proceed directly to the report section entitled “Phase V:
Retaliation or Settlement?”
Report Phases
Along the way, this case has touched on many aspects of WTO legal procedure, including an
initial WTO panel and appeal phase, a compliance dispute phase, and the ongoing retaliation
phase. Because of the case’s longevity and complicated legal twists and turns, this report seeks to
keep the timeline clear and to footnote official reference documents. The report is broken into six
separate components, each representing a different (and somewhat independent) phase of the
case. These phases are followed by a summary of the potential role of Congress with respect to
the WTO case rulings and their implications for U.S. cotton programs.
1. Phase I: Pre-case background on the U.S. cotton sector and its global context.
2. Phase II: Brazil’s WTO dispute settlement case against U.S. cotton programs.
a. Brazil’s specific charges and the WTO panel’s findings.
b. WTO panel and Appellate Body (AB) recommendations.
c. Implementation timeline for panel and AB recommendations.
3. Phase III: WTO compliance panel and AB review of U.S. compliance with
dispute settlement panel’s and AB’s recommendations.
4. Phase IV: WTO arbitration of Brazil’s request for retaliatory countermeasures.
5. Phase V: Retaliation or settlement.
6. Phase VI: Implementation of the MOU & framework agreement
7. Phase VII: Discussion of the potential policy implications of this WTO case for
the U.S. cotton sector.
8. Role of Congress.
The report ends with a timetable of the WTO dispute settlement process (Table 5), to facilitate
the reader’s understanding of and access to the multifaceted legal procedures involved in the
case’s slow progression. However, the main thrust of this report is to provide an economic and
1 Official WTO documents as cited in Table 5 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.
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policy perspective on case developments. For more on the legal aspects of WTO dispute
settlement cases in general, and the cotton case in particular, see CRS Report RL32014, WTO
Dispute Settlement: Status of U.S. Compliance in Pending Cases, by Jeanne J. Grimmett.
Phase I: Background on the U.S. Cotton Sector
The cotton industry is a major component of the U.S. agricultural sector. From 1991 to 2010 U.S.
cash receipts from cotton production averaged $4.3 billion per year, while export sales averaged
nearly $3 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 to
California. Texas is the largest cotton-producing state, accounting for an average of 26% of U.S.
production since 1990. In 2002, when Brazil first originated its WTO dispute settlement case
against U.S. cotton programs, 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, and
the world’s largest cotton exporter. In the 1990s, U.S. exports accounted for 25% of world trade
in cotton. However, since 2000 the United States has accounted for an increasing share of world
trade (averaging over 37%). U.S. exports as a share of domestic production have averaged over
70% since 2000, up from a 40% average during the early 1990s, due in large part to a decline in
domestic mill use. (See Figure 1.) The expanding U.S. prominence in global markets since 2000,
coupled with large U.S. subsidy levels directed considerable international attention to U.S. cotton
program outlays.
Figure 1. U.S. Cotton Production, Use, and Exports
25
1999-2002
Production
s 20
le
15
-pound ba
0
8
Exports
10
illion 4
M
5
Domestic Mill Use
0
1990
1995
2000
2005
2010
Source: USDA, PSD database, December 10, 2010.
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Domestic Program Support
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 program (CCP) payments, marketing loan benefits, Step 2 payments, and other
program benefits.2 Since 2000, U.S. farm subsidies for cotton production have averaged $3.4
billion per year, while the harvest-time value of production has averaged $4.3 billion (Table 1).
Marketing loan program benefits and CCP payments are price-contingent in the sense that
payments are determined by market prices falling below their respective price triggers (i.e., the
loan rate and the adjusted target price). For upland cotton, the loan rate is set at $0.52 per pound
and the target price is set at $0.71 per pound for calendar years 2010 through 2012 by the 2008
farm bill (P.L. 110-246). The target price is adjusted by subtracting the direct payment for upland
cotton of $0.0667 per pound for calculating any CCP payment.
If the price triggers are set too far above market prices, they act as an incentive to encourage
greater production (and exports) than what the market would otherwise demand. This results in
lower domestic and international prices than would exist in the absence of these programs. It is
this “price effect” that was found by the WTO to cause adverse effects and serious prejudice in
the international cotton market, as described below. Indeed, a comparison of relative support
prices versus market prices for major U.S. program crops reveals that cotton producers receive
payments under these programs far more routinely than do other crops.3 This would suggest that
cotton support prices are set too high relative to general cotton market conditions, as well as to
other crop prices.
Export Credit Guarantee Programs
In 2002, at the time that Brazil first initiated WTO case DS267, the United States operated three
principal export credit guarantee programs to facilitate the export of U.S. agricultural products
(including but not limited to cotton). These were the GSM-102 program (which extended credit
for periods ranging from 90 days to three years), the GSM-103 program (which extended credit
for periods of more than three years, but not more than 10 years) and the Supplier Credit
Guarantee Program (SCGP). The GSM-103 and SCGP programs were part of Brazil’s original
case; however, they both were eliminated by congressional action in 2008, as described below.
The GSM-102 export credit guarantee program (hereafter referred to as the GSM-102 program) is
authorized under the Agricultural Trade Act of 1978 (7 USC Sec. 5622), as amended. The
program, backed by USDA’s Commodity Credit Corporation (CCC), guarantees the repayment of
credit made available to finance export sales of agricultural commodities on credit terms between
90 days and three years. Typically, 98% of principal and a portion of interest are covered by a
guarantee. To obtain a guarantee, an exporter has to pay a fee (or “premium”) calculated on the
basis of guaranteed value, according to a schedule of rates applicable to different credit terms and
repayment intervals. At the time that Brazil initiated DS267, the fee was capped by law at 1% of
the guaranteed value.
2 The Step 2 cotton-user payments program was ended on August 1, 2006, by P.L. 109-171. For a description of major
farm programs, see CRS Report RL34594, Farm Commodity Programs in the 2008 Farm Bill, by Jim Monke.
3 Calculations by CRS based on USDA data are available from the author upon request.
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Table 1. U.S. Upland Cotton Program Outlays and Harvest-Time Value
of Production, FY1991-FY2010
($ millions)
Outlays
Value of
Fiscal yeara
Cashc Non-Cashd Total productionb
1991 382
13
395
5,076
1992 1,443
373
1,816
4,912
1993 2,239
572
2,810
4,274
1994 1,539
292
1,831
4,523
1995 99
3
101
6,795
1996 685
0
685
6,573
1997 561
0
561
6,410
1998 1,132
25
1,157
5,972
1999 1,882
230
2,112
4,122
2000 3,809
862
4,671
3,812
2001 1,868
381
2,249
4,257
2002 3,307
1,818
5,125
2,904
2003 2,889
689
3,578
3,676
2004 1,372
169
1,541
5,417
2005 4,245
1,458
5,703
4,643
2006 3,982
939
4,921
5,470
2007 2,592
1,012
3,604
4,818
2008 1,604
1
1,605
5,467
2009 2,176
884
3,060
2,940
2010e 1,873
na
1,873
3,679
Sum: 1991-2010
39,678
9,721
49,399
95,739
Average: 1991-1999
1,107
167
1,274
5,406
Average: 2000-2010
2,702
747
3,448
4,280
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); FSA Budget Table No. 35,
Nov. 30, 2010; and USDA FY2011 Mid-Session Review, Commodity Estimates Book, August 2010.
Note: na = not available. Data are for program outlays within the reported fiscal year. Payments may be specific
to cotton from several different crop or marketing year.
a. 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.
b. Production is valued at harvest-time prices. Each production value is for the crop harvested during the crop
year preceding the designated fiscal year.
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 by USDA.
e. Forecast.
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Phase II: Brazil’s WTO Dispute Settlement Case
Against the U.S. Cotton Program
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 17 months from the establishment of the panel in March 2003
to its final ruling in September 2004.
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, then for a WTO compliance
panel to review a dispute over U.S. compliance with the initial panel’s ruling, and finally for an
arbitrator to review a disagreement between Brazil and the United States over Brazil’s proposed
retaliation amounts. See Table 5 for a timeline of the dispute settlement case and related events.
With respect to the initial dispute settlement case, it 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).4
Brazil’s Six Principal Claims Against U.S. Cotton Programs
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.5 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.6 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.
4 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.
5 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.
6 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.
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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.”7 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: U.S. Subsidies Have Caused “Serious Prejudice”,’” below.)
Finding 1
The panel found (and was upheld by the AB in finding) 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 2.) 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 2. 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.”8 As a result, the United States notifies both the PFC and DP outlays as “green box”
7 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.
8 WTO, “Annex 2—Domestic Support: The Basis for Exemption from the Reduction Commitments,” paragraphs 5 and
(continued...)
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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 in finding) 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,9 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.
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.10 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.11
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.
(...continued)
6, Agreement on Agriculture, WTO Legal Texts.
9 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.
10 The Step 2 cotton program was eliminated on August 1, 2006 (Sec. 1103, P.L. 109-171).
11 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/.
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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 AB.
Claim 4: U.S. Export Credit Guarantees Function as Export Subsidies
Brazil argued that the U.S. GSM-102 program operated as a prohibited export subsidy under item
(j) of Annex I of the Agreement on Subsidies and Countervailing Measures (SCM) because the
premium rates (i.e., fees) charged to GSM-102 program beneficiaries were inadequate to cover
the long-term operating costs of the program, thus imparting an implicit subsidy benefit.
Item (j) of Annex I identifies a prohibited export subsidy as:
[t]he provision by governments (or special institutions controlled by governments) of export
credit guarantee or insurance programs, of insurance or guarantee programs against increases in
the cost of exported products or of exchange risk programs, at premium rates which are
inadequate to cover the long term operating costs and losses of the programs.12
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)13—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.14
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.
12 Item (j), Annex I, Agreement on Subsidies and Countervailing Measures, The Legal Texts, The Results of the
Uruguay Round of Multilateral Trade Negotiations, World Trade Organization, Cambridge University
Press©WTO1999.
13 GSM-103 and SCGP were eliminated by the 2008 farm bill (P.L. 110-246; Sec. 3101(a)) upon its enactment on June
18, 2008. For information on the U.S. GSM-102 program, see USDA, Foreign Agricultural Service, “Export Credit
Guarantee Programs,” at http://www.fas.usda.gov/excredits/default.htm.
14 For a list of commodities eligible for export credit guarantees see USDA, Foreign Agricultural Service, USDA
Amends Commodity Eligibility under Credit Guarantee Programs, News Release, September 24, 2002; available at
http://www.fas.usda.gov/scriptsw/PressRelease/pressrel_dout.asp?Entry=valid&PrNum=0346-02.
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Finding 4
The panel found (and was upheld by the AB in finding) 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 as specified by item (j) of the SCM.
Furthermore, the panel found that this applied, 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 were subject to previously scheduled export
subsidy commitments for that commodity. This referred to those U.S. export subsidies under the
Export Enhancement Program (EEP) and the Dairy Export Incentive Program (DEIP).15 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.16 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 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: (1) an increase in the U.S. share of the world upland cotton market; (2) a
displacement of Brazilian upland cotton sales in third-country markets; and (3) a steep decline in
world cotton prices (see Figure 2 and Figure 3).17
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.18 In addition, Brazil argued that these same programs would be harmful (i.e.,
threatened serious prejudice) in future years.
15 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.
16 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).
17 Articles 5(c) and 6.3(b) of the Agreement on Subsidies and Countervailing Measures (SCM) deal with subsidies that
result in adverse effects in other WTO-member countries. Brazil specifically identified Argentina, Bangladesh,
Colombia, Germany, India, Indonesia, Italy, Portugal, Philippines, Slovenia, South Africa, South Korea, Switzerland,
Thailand, and Turkey as the relevant third-country markets. WTO “Communication from Brazil,” WT/DS267/9, March
21, 2003.
18 Text of the Agreement on SCM is available online at http://www.wto.org/english/docs_e/legal_e/24-scm.pdf.
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Figure 2. USDA Cotton Support, 1992 to 2010
6
140
A-Indexa
120
4
s
100
und
n
r po
illio
B
pe
$
s
80
nt
e
2
C
60
U.S. Government Support
0
40
1990
1995
2000
2005
2010
Source: USDA, FSA budget data (cash and non-cash support), see Table 1 for sources.
Note: Data for 2010 are forecasts.
a. The A-index is an average of the five lowest priced types of 1-3/32 inch staple length cotton offered on the
European market from 1990 through 2008, and in Far East markets from 2009.
Figure 3. U.S. Cotton Exports and International Cotton Price Index
20
130
A-Indexa
115
15
s
1999-2002
le
a
100
B
d
n
und
u
o
p
r po
10
85
pe
s
480-
n
nt
e
C
illio
70
M
5
55
U.S. exports
0
40
1990
1995
2000
2005
2010
Source: USDA, PSD online data base, December 10, 2009.
a. The A-index is an average of the five lowest priced types of 1-3/32 inch staple length cotton offered on the
European market from 1990 through 2008, and in Far East markets from 2009.
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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.
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).
Finding 5
The panel found (and was upheld by the AB in finding) 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.19
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 (2003 to 2007, the
remaining life of the 2002 farm act), the panel stated in its final report that those “prohibited”
subsidies that caused serious prejudice during the 1999-to-2002 period—namely, user marketing
(Step 2) payments to exporters and domestic users; and export credit guarantees in respect of
certain products under the GSM-102, GSM-103, and SCGP programs—must be withdrawn
“without delay” pursuant to Article 4.7 of the SCM Agreement.20 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.”21
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.
19 WT/DS267/R, paragraph 7.1307, p. 307.
20 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.
21 Ibid.
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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).22 As a result, the panel declined to further
examine Brazil’s claims on this particular issue.
Panel and Appellate Body 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).23 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 the following.
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.
• Step 2 program payments to exporters of upland cotton.
Prohibited Import Substitution Subsidy
• Step 2 payments to domestic users of upland cotton.
22 For more information on DS108, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S. Compliance in
Pending Cases, by Jeanne J. Grimmett.
23 Done in accordance with SCM, Article 4.7.
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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 adverse effects to the interests of Brazil
during the marketing years 1999-2002.
It is noteworthy that the actionable subsidies remedy dealt with adverse effects 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—the Step 2 provisions and
export credit guarantees—could so significantly transform the basket of measures in question that
it was not necessary or appropriate to address Brazil’s claims of threat of serious prejudice.24 This
appeared to leave open the possibility that removal of the prohibited subsidies might resolve the
dispute under the actionable subsidies recommendation.
Implementation of Panel/Appellate Body Recommendations25
Following is a discussion of how the implementation phase was to unfold in accordance with
WTO rules and how the actual implementation has unfolded.
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 failed 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 did not want to press ahead full force with imposing sanctions, there would
be considerable opportunity to delay compliance steps.
The time track for compliance with panel and AB recommendations could diverge depending on
whether the United States chose 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.”
24 WTO, WT/DS267/R, para. 7.1503, p. 354.
25 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.
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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),26 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.27 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.28 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.29
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).30 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, 2003.31
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 was subject to a six-
month period starting on the date of adoption of the AB and panel reports (March 21, 2005).32 As
26 Normally a 30-day period is given to respond (DSU, Article 21.3); however, this is halved under SCM, Article 4.12.
27 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.
28 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).
29 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).
30 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).
31 For more information on case DS108, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S.
Compliance in Pending Cases, by Jeanne J. Grimmett.
32 In accordance with SCM, Article 7.9.
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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. Compliance Actions
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.33 However, U.S. officials said
that they preferred to resolve the cotton case through trade negotiations in the WTO Doha Round
rather than a separate settlement.34 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 ruling, but stated that it would work with USTR and USDA to
coordinate a response to the decision.35
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.
On August 1, 2006, the Step 2 cotton program, which was authorized by the 2002 farm act (P.L.
107-171, Section 1207), was eliminated by a provision (Section 1103) in the Deficit Reduction
Act of 2005 (P.L. 109-171).
On June 18, 2008, the date of enactment of the 2008 farm bill (P.L. 110-246), a provision (Sec.
3101(a)) in the Trade title (Title III) eliminated the GSM-103 and SCGP programs, and removed
the 1% cap on fees that can be charged under the GSM-102 program. In addition, the same 2008
farm bill provision explicitly requires the Secretary of Agriculture, in carrying out the GSM-102
program, to “work with the industry to ensure, to the maximum extent practicable, that risk-based
fees associated with the guarantees cover, but do not exceed, the operating costs and losses over
the long-term.”
33 Inside U.S. Trade, “Appellate Body Favors Brazil in Cotton Subsidies Challenge,” Vol. 23, No.9, March 4, 2005.
34 Congressional Daily, “Comply Quickly With WTO Ruling, Brazil Urges U.S.” March 15, 2005.
35 NCC, “NCC Statement on WTP Appellate Ruling,” March 3, 2005; available at http://www.cotton.org/news/
releases/2005/wtostatement.cfm.
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However, the 2008 farm bill defined the “long-term” as a period of 10 or more years. While the
WTO panel did not explicitly define its view of the “long-term,” it clearly is less than 10 years
and more likely is on the order of a period of two years—that is, a net loss in one year must be
offset by a net gain in the following year.
At this point the Administration likely felt that sufficient program changes had been enacted to
fully comply with the both the prohibited and actionable subsidies portions of the WTO ruling.
Phase III: WTO Compliance Panel Review and
Ruling
This section describes Brazil’s charges of noncompliance, the proposed retaliation, the beginning
of WTO arbitration over the size and nature of the proposed retaliation, and a ruling by a WTO
compliance panel reviewing whether the U.S. had fully complied with earlier recommendations.
Arbitration Requested, Then Suspended, Over Brazil’s Proposed
Retaliation Amounts
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. According to WTO rules, trade sanctions are limited to a value not to
exceed the level of lost benefits. The $3 billion value corresponded to (1) Step 2 payments made
in the then-most-recently-concluded marketing year (2004/2005) 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).36 This amount was later
pared back to $1.155 billion in annual retaliation to counter the prohibited subsidies based on
Brazil’s methodology applied to FY2006 data.37 The United States objected to the amount of
Brazil’s proposed sanctions and requested WTO arbitration.38 However, on August 18, 2005, the
United States and Brazil reached a procedural agreement temporarily suspending arbitration
proceedings concerning the prohibited subsidies.39
Then, 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 adverse effects to Brazil’s trade interest. Brazil then
requested authorization from the WTO to impose countermeasures valued at $1.037 billion as
retaliation against the actionable programs. According to WTO rules, trade retaliation should take
place within the sector where the violation occurred. In this case, retaliation would be restricted to
punitive tariffs on U.S. goods entering Brazil. However, Brazil argued that limiting retaliation to
the goods sector alone would have a more deleterious effect on the Brazilian economy (via higher
36 For details, see CRS Report RL32014, WTO Dispute Settlement: Status of U.S. Compliance in Pending Cases, by
Jeanne J. Grimmett.
37 Presented in Brazil’s written submission to the WTO arbitration panel, January 13, 2009.
38 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.
39 WT/DS267/25, August 18, 2005.
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input costs) and Brazilian consumers (via higher inflation) than on U.S. exporters due to the
asymmetries between the two economies.40 Instead, Brazil proposed to suspend tariff concessions
as well as obligations under the WTO Agreement on Trade-Related Intellectual Property Rights
(TRIPS) and the General Agreement on Trade in Services (GATS) in the amount of $1.307 billion
until the United States withdrew the four domestic subsidies (counter-cyclical payments, market
loss assistance payments, market loan program benefits, and Step 2 payments) or removed their
adverse effects. This type of “cross-retaliation” has been permitted twice previously in WTO
dispute settlement cases, so it is not without precedent. However, its impact is potentially very
far-ranging and could include the protection of copyrights, trademarks, industrial designs, patents,
and undisclosed information, as well as withdrawal of concessions in services related to
communication, construction, distribution, finance, tourism, and transport.41
Once again, the United States objected to both the amount and nature of Brazil’s proposed request
and asked for WTO arbitration over the level of the proposed sanctions (October 18, 2005).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
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 WTO 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
negotiations44—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, Brazil argued that U.S. program changes were insufficient and, on August 21, 2006,
requested the establishment of a WTO compliance panel to review whether the United States had
fully complied with panel and AB rulings.
Brazil identified below-market premium rates (i.e., user fees) charged to GSM-102 program
beneficiaries as the primary reason that the revised GSM-102 program operated at a net loss and
was still out of compliance with WTO rules. The WTO Compliance Panel (upheld on appeal)
concurred with Brazil, after an examination of new evidence on GSM-102 operations for the
2006-2008 period showing that it continued to operate at a net loss. See Table 3 for the most
recent estimates of credit subsidies under CCC export credit guarantee programs.
40 “U.S., Brazil Clash on Cotton Sanctions,” International Center for Trade and Sustainable Development (ICTSD),
Bridges, vol. 12, no. 6, January 2009.
41 Ibid.
42 WT/DS267/27, October 18, 2005.
43 WT/DS267/29, December 7, 2005.
44 For more information and an update on the status of Doha negotiations, see CRS Report RL33144, WTO Doha
Round: The Agricultural Negotiations, by Charles E. Hanrahan and Randy Schnepf.
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Table 3. Estimated Credit Subsidies on CCC Export Credit Guarantees
Fiscal Year
Budget Loss ($ millions)
2001 $1,410
2002 —
2003
$ 13
2004
$ 230
2005
$ 205
2006
$ 366
2007
$ 232
2008
$ 225
2009
$ 39
Average
$ 302
Source: President’s FY2011Budget, Analytic Perspectives, “Special Topics,” Table 22-3, “Re-estimates of credit
subsidies on loans disbursed between 1992-2009,” p. 366, available at http://www.whitehouse.gov/omb/budget/
fy2011/assets/topics.pdf.
The GSM-102 premium rates were identified as below-market rates, in part, because they failed
to fully account for the risk of non-payment or default for individual countries. There is no
widely accepted international standard for determining country risk and assigning “market”
premium rates. In its determination, the Compliance Panel used a list of “minimum premium
rates” as reported in the Organization for Economic Cooperation and Development (OECD)
Arrangement on Officially Supported Export Credits.45 A comparison with premium rates
charged under the GSM-102 program found the GSM-102 rates to be significantly below the
OECD measures, suggesting that they were under-valued.
In addition, Brazil charged that U.S. farm programs continued to provide significant (and
injurious) support to U.S. cotton producers (Table 1 and Table 4).
WTO Compliance Panel Rules Against the United States
Following Brazil’s request, the WTO’s Dispute Settlement Body (DSB) agreed to establish a
compliance panel to review U.S. farm program changes 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 had 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. On June 2, 2008, a
WTO Appellate Body (AB) publicly released its final report upholding the compliance panel’s
45 For more information, see OECD, Trade and Agriculture Directorate, “Arrangement on Export Credits,” at
http://www.oecd.org/department/0,3355,en_2649_34171_1_1_1_1_1,00.html.
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ruling that the United States had not fully complied with the March 2005 WTO ruling. The AB
report was adopted by the WTO’s Dispute Settlement Body on June 25, 2008.
Phase IV: WTO Arbitration of Brazil’s Proposed
Countermeasures
Brazil Requests Resumption of Arbitration
On August 25, 2008, Brazil requested a resumption of the arbitration proceedings to review its
proposed retaliatory countermeasures. On October 1, 2008, Brazil and the United States agreed
on the arbitration panelists, who then were to produce a ruling within 60 days. However, the
arbitration review continued past the normally allotted 60 days and into 2009. During that period,
both parties made written submissions to the WTO arbitrator stating their positions with respect
to retaliation in this case. 46
Brazil Alters Its Countermeasure Request
At a March 3, 2009, Dispute Settlement Body meeting, Brazil revised its total retaliation request
to $2.5 billion, down from an earlier $3 billion request. Brazil’s proposed sanctions total
comprised both prohibited and actionable subsidy countermeasure components.
Under the prohibited subsidies arbitration case, Brazil was seeking two countermeasures:
1. a one-time countermeasure in relation to the Step 2 program of $350 million
based on U.S. government payments made under the Step 2 program in
marketing year 2005 (this corresponds roughly to the period that elapsed between
the expiration of the prohibited subsidy compliance period on July 1, 2005, and
the effective repeal of the Step 2 program by the U.S. Congress on August 1,
2006); and
2. annual countermeasures proportionate to the entire annual amount of GSM 102
export credit guarantees issued to all countries for export transactions involving
unscheduled products—rice, pork, and poultry—valued at $1.155 billion during
FY2006 (initially Brazil valued this countermeasure at $1.294 million) and
composed of three parts:
a. an interest rate subsidy component amounting to $234.7 million;
b. the additional export sales obtained by the United States as a result of these
discounts, including sales to creditworthy foreign obligors, referred to as
marginal additionality and valued at $62.3 million; and
c. the additional export sales to noncreditworthy foreign obligors, referred to as
full additionality and valued at $855 million.
Under the actionable subsidies arbitration case, Brazil again asked for:
46 United States—Subsidies on Upland Cotton (WT/DS267), written submissions of the United States, December 9,
2008; and United States—Subsidies on Upland Cotton (WT/DS267), written submission of Brazil, January 13, 2009.
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3. annual countermeasures valued at $1.037 billion until the United States withdrew
the relevant subsidies or removed their adverse effects (based on marketing year
2005 data, Brazil calculated the amount of adverse effects on the rest of the world
at $3.335 billion, although it only requested countermeasures of $1.037 billion).
Under the combined prohibited and actionable subsidy cases, Brazil asked for:
4. the right to engage in cross-retaliation (i.e., countermeasures in sectors outside of
the trade in goods, most notably in the area of U.S. copyrights and patents, as
well as services), stating that retaliation in goods would not be practicable or
effective due to limited trade in goods between Brazil and the United States.
The United States argued that it had removed the prohibited subsidy component of its export
credit program via provision 3101(a) of the 2008 farm bill (P.L. 110-246). Furthermore, the
United States argued that it had operated its remaining GSM-102 export credit program at “no net
cost” to the government since 2005.47 The United States asked the arbitrators to dismiss all claims
related to prohibited subsidies since they currently operated at “no net cost” to the government.
Furthermore, the United States argued that Brazil’s prohibited-subsidy countermeasure request
continued to include a program that no longer exists (i.e., Step 2). Finally, with respect to Brazil’s
actionable-subsidy countermeasure request, the United States pointed out that Brazil included a
calculation for the entire global adverse effect, not just those adverse effects relevant to Brazil.
According to U.S. calculations, the total effects of U.S. counter-cyclical payments and marketing
loan payments on Brazil during the 2005-2007 period averaged $30.4 million per year.48
Arbitration Panel Ruling
On August 31, 2009, the arbitrator ruled on Brazil’s arbitration requests in two separate reports.49
The first report (WT/DS267/ARB/1) ruled on Brazil’s retaliation requests regarding the
prohibited subsidies—the Step 2 cotton program and the GSM 102 program (under certain
conditions)—based on Article 4.11 of the SCM Agreement. The second report
(WT/DS267/ARB/2) ruled on Brazil’s retaliation requests regarding the actionable subsidies—
market loss assistance payments, marketing loan benefits, counter-cyclical payments (CCP), and
Step 2 payments—based on Article 7.9 of the SCM Agreement. The arbitrator’s decisions are
final and are not subject to appeal.
With respect to the four main countermeasure requests, the arbitrator issued four key findings,
discussed below.
47 United States—Subsidies on Upland Cotton (WT/DS267), written submissions of the United States, December 9,
2008.
48 Ibid., paragraph 312, p. 99.
49 United States—Subsidies on Upland Cotton: Recourse to Arbitration by the United States under Article 22.6 of the
DSU and Article 4.11 of the SCM Agreement, WT/DS267/ARB/1, WTO, August 31, 2009; and United States—
Subsidies on Upland Cotton: Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article
7.10 of the SCM Agreement, WT/DS267/ARB/2, WTO, August 31, 2009.
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First Finding
Brazil was not entitled to its request of a one-time $350 million retaliation award to compensate
for previous Step 2 injury. In rejecting Brazil’s request on this point the arbitrator stated that
countermeasures are an exceptional temporary remedy, available only where compliance has not
been achieved, and aimed at inducing such compliance, and that in fact the United States had
fully (albeit belatedly) complied with the panel’s recommendation to eliminate the Step 2
program.
Second Finding
With respect to Brazil’s request for $1.155 billion in countermeasures related to the “prohibited”
subsidies, the arbitrator found that Brazil was only entitled to retaliate for the effects of these
subsidies on Brazilian products and not for their full effect on the rest of the world (ROW). The
arbitrator used Brazil’s share of world exports of those products receiving GSM 102 credit
guarantees (estimated to be 11.7% in 2006) to apportion Brazil’s share of the subsidy effect from
the entire global market effect. With this revision to Brazil’s formula, the arbitrator estimated the
countermeasure at $147.4 million in FY2006—comprising an interest rate effect of $25.27
million, marginal additionality of $41.3 million, and full additionality of $80.8 million.
Furthermore, the arbitrator ruled that the retaliatory amount accorded Brazil would vary each year
(via formula) based on the total of exporter applications received by the U.S. government under
the GSM 102 program for the most recently concluded fiscal year. The formula would consider
an interest rate subsidy component and the trade displacement additionality (both full and
marginal) of the subsidy component of GSM 102.
Third Finding
The arbitrator found that the amount of countermeasures specific to Brazil and commensurate
with the degree and nature of adverse effects resulting from the actionable subsidies was fixed at
an annual amount of $147.3 million. This figure was obtained, first, by a recalculation of the total
adverse effects on the ROW resulting from the actionable subsidies, to an amount of $2.905
billion in the 2005 marketing year. The adverse effect was calculated as a price effect whereby it
was determined that the world price of cotton would have been 9.38 cents per pound higher in the
absence of U.S. marketing loan benefits and CCP payments, and that the lower world price
resulted in both lost income effects in the ROW of $2.384 billion and reduced production effects
of $521.5 billion, for a total of $2.905 billion. However, the WTO arbitrator determined that
Brazil should be entitled to retaliation on only a specific portion of the $2.905 billion. The share
apportioned to Brazil was based on Brazil’s share of cotton production in the ROW in marketing
year 2005, which equaled 5.1% or $147.3 million. Furthermore, the panel fixed Brazil’s
maximum annual retaliation with respect to the “actionable” U.S. subsidies at this same $147.3
million (in other words, this amount will not vary from year to year).
Thus, the overall annual permissible retaliation amount for 2006 was $294.7 billion. Furthermore,
this amount varies annually, since it consists of both a fixed retaliatory amount in response to
“actionable” U.S. subsidies, and a variable retaliatory amount in response to “prohibited” U.S.
subsidies.
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Fourth Finding
Finally, Brazil had requested the right to engage in cross-retaliation, that is, retaliatory
countermeasures in sectors outside of the trade in goods, most notably in the area of intellectual
property (IP) rights such as copyrights and patents. A key determinant in ruling on this request
was Brazil’s contention that there is insufficient trade in consumer goods with the United States to
permit compensatory retaliatory action, and that a substantial portion of those imports were of
critical importance to Brazil’s economy such that punitive sanctions on them would harm Brazil’s
economy. However, the panel felt that a certain percentage of Brazil’s imports of consumer goods
originating from the United States should be eligible for countermeasures without causing harm
to Brazil’s economy because there was available to Brazil a sufficient amount of alternate sources
of imports or of sufficiently close substitutes in consumption so as to avoid economic harm. As a
result, the panel ruled that Brazil would be entitled to cross-retaliation, if (and only if) the overall
retaliation amount (combining both the variable and fixed components) to which it would
otherwise be entitled exceeds a variable annual threshold (described below). If the threshold is
surpassed, then Brazil would be entitled to suspend certain obligations under the TRIPS
Agreement and/or the GATS in the amount in excess of the threshold.
Threshold for Permitting Cross-Retaliation Countermeasures
For purposes of determining eligibility to apply cross-retaliation, the panel established an initial
threshold amount of $409.7 million that could be subject to countermeasures without harming
Brazil’s economy based on the volume and composition of Brazil’s imports of consumer goods in
the year 2007. The amount of $409.7 million represents the sum of the value of those consumer
goods imported by Brazil where the U.S. share is less than 20%, excluding books and automotive
parts which are considered essential to Brazil’s economy.
The threshold amount may vary from year to year according to the following formula:
Tt+1 = Tt * (1 + g t+1)
where T2007 = $409.7 million
where
T t+1 = threshold value in year t+1
Tt = threshold value in year t
g t+1 = percentage change in the value of Brazil’s total imports from the United States between
years t and t+1.
Brazil’s Reaction
Following the arbitration panel’s ruling, Brazil claimed that applying the panel’s countermeasure
determination formulas to preliminary 2009 data would allow for $800 million in total retaliation,
including both the fixed $147.3 million of actionable subsidy countermeasures and $650 million
of prohibited subsidy countermeasures.50 The $650 million figure resulted from expanded use of
50 “WTO Arbitration Panel Decision Falls Short of Brazilian Demands,” Inside U.S. Trades’ World Trade Online,
Daily News, August 31, 2009.
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GSM 102 credit guarantees by the United States during the recent fiscal year—rising from $1.36
billion in FY2006 to $5.5 million in FY2009.51 According to Brazil, using 2009 data to calculate
the threshold for cross-retaliation would produce an amount of $460 million. If confirmed, these
data would suggest that Brazil would be authorized to engage in cross-retaliation equal to $340
million (i.e., the difference between $800 million and $460 million) by suspending commitments
it made under the WTO concerning the protection of intellectual property and services.
U.S. Reaction
USTR spokeswoman Carol Guthrie issued the following statement:52
While we remain disappointed with the outcome of this dispute, we are pleased that the
Arbitrators awarded Brazil far below the amount of countermeasures it asked for. In its first
requests for countermeasures in the Cotton dispute, Brazil asked for more than $4 billion in
annual countermeasures. During the arbitration proceedings, Brazil argued for more than $2
billion annually. Further, we are grateful that the Arbitrators denied Brazil’s request for unlimited
ability to suspend concessions on intellectual property or services. And we are pleased that the
Arbitrators denied Brazil’s request for an additional one-time $350 million in countermeasures in
connection with the repealed Step 2 payment program for cotton.
At this time, we do not know when or if Brazil will move to obtain final authorization to suspend
concessions or when or if Brazil would act on any such authorization.
The Administration will be actively consulting within the U.S. Government and with stakeholders
on how to move forward.
U.S. industry groups, led by the National Cotton Council (NCC), argued that substantial changes
had been made to the GSM 102 programs since the initial WTO dispute settlement panel issued
its ruling in 2005 and that, as a consequence of those changes, the GSM 102 program now
operates in a fully WTO-compliant manner.53 Similarly, the NCC argued that changes under the
2008 farm bill (P.L. 110-246) to the marketing loan and CCP programs had made them more
WTO-compliant. Finally, the NCC complained that the WTO arbitration ruling was based almost
entirely on 2005 data, when U.S. cotton support programs were at their peak and the U.S. share of
the world cotton market was near 40%, compared with about 12% today.54
As a result of these changed circumstances, the NCC and other U.S. farm groups publicly stated
that USTR should seek the establishment of a new WTO compliance panel in order to prove that
U.S. cotton subsidy programs and export credit programs no longer violate WTO rules. However,
in accordance with WTO rules, even if the United States were to initiate such a new compliance
panel, Brazil would be able to proceed with its WTO-authorized retaliation.
51 The actual total is $5.9 billion including the $5.5 billion allowed under the 2008 farm bill plus $465 million in re-
announcement of unutilized programs or cancelled guarantees from earlier in FY2009; available at
http://www.fas.usda.gov/excredits/ecgp.asp.
52 “USTR Statement on Awards in Brazil Cotton Dispute,” U.S.T.R., August 31, 2009; available at
http://www.ustr.gov/about-us/press-office/press-releases/2009/august/ustr-statement-awards-brazil-cotton-dispute.
53 “WTO Arbitration Panel Ruling Fails to Recognize Changes to GSM Program; Punishes USA Despite Compliance
with WTO,” NCC news release, September 2, 2009; at http://www.cotton.org/.
54 “NCC Statement—Arbitration Determination,” NCC news release, August 31, 2009; at http://www.cotton.org/.
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Phase V: Retaliation or Settlement?
Following the WTO arbitrator’s August 31, 2009, ruling, Brazil now had the approval to initiate
sanctions against the United States. The arbitrator’s decisions were final and not subject to
appeal, and Brazil had complete freedom to decide which products would be subject to retaliatory
hikes in import tariffs and which IP and services rights could be targeted by supplementary
countermeasures.55 However, before Brazil could proceed with any retaliation, it first had to
request the WTO Dispute Settlement Body to authorize its retaliation request in an amount, and
with respect to types of trade, consistent with these decisions. Following the circulation of the
arbitrator’s decisions on August 31, 2009, Brazil accordingly submitted requests to the DSB to
authorize the suspension of concessions or other obligations (WT/DS267/41 and
WT/DS267/42).56 Such approval is decided under reverse consensus, such that WTO members
would have to decide by consensus (including Brazil voting against itself) to not allow Brazil to
proceed.
On November 19, 2009, the DSB agreed to grant Brazil authorization to impose countermeasures
consistent with the arbitrator’s decisions.57 WTO dispute settlement rules did not require that
Brazil pursue its retaliation request or, if it did so, that it request authorization to retaliate by a
given date. Other possible options included the negotiation of a settlement of the case before
Brazil were to impose retaliatory measures or, as suggested by some, a request by the United
States for a ruling by a new compliance panel that the objectionable elements of the prohibited
subsidy have been eliminated.
Brazil Targets Goods and Services for Countermeasures
On December 21, 2009, Brazil announced that it was authorized by the WTO to impose trade
retaliation against up to $829.3 million in U.S. goods in 2010 (based on 2008 U.S. trade data). 58
The countermeasure included a fixed annual amount of $147.3 million, reflecting the adverse
effects from U.S. price-contingent subsidies (i.e., marketing loan benefits and counter-cyclical
payments), and the balance of $682 million related to the volume of U.S. export credit guarantees
(found to operate as a prohibited export subsidy), which may vary annually. The WTO also
established a threshold value (related to the value of Brazil’s consumer goods imports from the
United States) for determining the extent of permissible cross-retaliatory countermeasures. The
threshold varies annually based on changes in Brazil’s total imports from the United States, but is
currently estimated at $561 million, yielding a remaining value of $268.3 million ($829.3 million
- $561 million) in eligible cross-retaliatory countermeasures.
On March 10, 2010, Brazil released a final list of goods of U.S. origin valued at $561 million that
would be subject to import tariffs within 30 days unless a last-minute agreement was reached.59
55 BNA, International Trade Reporter, “Brazil Says Entitled to Impose $829 Million in Annual Sanctions on U.S. in
Cotton Case,” December 24, 2009.
56 Notes from the WTO DSB meeting of November 19, 2009, at http://www.wto.org/english/news_e/news09_e/
dsb_19nov09_e.htm.
57 The arbitrators’ decisions are contained in official documents WT/DS267/ARB/1, WT/DS267/ARB/2 and Corr.1.
58 BNA, International Trade Reporter, “Brazil Delays Final List of U.S. Goods to Be Sanctioned in WTO Cotton
Dispute,” December 24, 2009.
59 “Brazil Releases List of U.S. Goods for Retaliation in Cotton Dispute,” Bridges Weekly Trade News Digest, vol. 14,
no. 9, March 10, 2010.
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The following week (March 15), Brazil released a preliminary list of U.S. patents and intellectual
property rights it could restrict, barring a joint settlement.60 The new measures—which were open
to public comment for a period of 20 days and subject to public hearings—included the
temporary suspension of U.S. patents on pharmaceuticals, chemicals, and biotechnology, and the
restriction of copyrights in the music and audiovisual industry.61
Negotiations Seek Mutual Settlement
The United States and Brazil continued to seek a last-minute negotiated settlement to avoid the
retaliatory measures. Brazil said that it would only apply sanctions if the United States refused to
eliminate its cotton subsidies. The United States reiterated its intention to comply with the DSB’s
recommendations and rulings and therefore did not believe that it would be necessary for Brazil
to exercise that authorization. The United States added that suspending concessions or obligations
could present economic and other challenges for both Brazil and the United States.
Brazil indicated that it could accept a U.S. pledge to send a reform bill to Congress to alter the
offending cotton program provisions, if Brazil were compensated for damages until the bill’s
approval. Some Brazilian leaders proposed compensation through U.S. investments into cotton
research, as well as more U.S. imports of Brazilian beef, orange juice, and ethanol.62 In contrast,
some speculated that the United States could take offense at Brazil’s retaliatory action and
suspend the more than $2.5 billion in trade privileges that it offers Brazil under its Generalized
System of Preferences (GSP).
Several U.S. trade associations—including the Brazil-U.S. Business Council, the National
Association of Manufacturers, the U.S. Chamber of Commerce, the Council of the Americas, and
the American Chamber of Commerce in Brazil, and others—voiced strong concerns that the U.S.
government take every measure possible to avoid Brazil’s imposition of trade retaliation.63
Steven Bipes, executive director of the Brazil-U.S. Business Council, argued that settlement of
the dispute would likely have to occur in two stages:64
• the first stage would involve administrative action by the U.S. government on
any number of several pending trade issues with Brazil as a gesture of good faith;
• the second stage would have to occur in the context of the 2012 farm bill, where
Congress could make further substantive changes to U.S. cotton subsidies or to
the GSM 102 export credit guarantee program.
60 “U.S. Cotton Dispute—Public Consultations About Measures for the Suspension of Concessions or Obligations vis-
à-vis the United States in the Area of Intellectual Property Rights,” press release, Press Office of the Brazilian Ministry
of External Relations, Brasilia, March 15, 2010.
61 “Brazil Details Retaliation on U.S. Copyright, Patents,” Reuters, March 15, 2010.
62 Ibid.
63 “Brazil Holds Off on Goods Retaliation List; U.S. Industries Press for Settlement,” Inside U.S. Trade, Feb. 12, 2010.
64 Ibid.
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Brazil and United States Sign Memorandum of Understanding
On April 1, 2010, Deputy U.S. Trade Representative (USTR) Miriam Sapiro and USDA
Undersecretary for Farm and Foreign Agricultural Services Jim Miller met with Ambassador
Antonio Patriota, Secretary General of Brazil’s Ministry of External Relations, to discuss possible
resolution of the dispute.65 On April 5, 2010, the United States floated a proposal to Brazil on a
negotiated settlement.66 After reviewing the proposal, Brazil’s Foreign Trade Council (CAMEX)
approved a resolution that postponed until an initial deadline of April 22 the implementation of
WTO-approved countermeasures by Brazil against U.S. imports. Key features of the U.S.
proposal and the ongoing negotiations included the following:
• The United States will establish a fund in the amount of $147.3 million per year
to provide technical assistance and capacity-building for Brazil’s cotton sector.
Under terms of a memorandum of understanding (MOU) signed by Brazil and
the United States, the fund will continue until the passage of the next U.S. farm
bill or a mutually agreed solution to the dispute, whichever is sooner. Also, the
fund will be subject to transparency and auditing requirements, as well as a list of
allowable uses specified in the MOU.67
• The United States agreed to make some near-term modifications to the operation
of the GSM-102 Export Credit Guarantee Program, and to engage with the
government of Brazil in technical discussions regarding further operation of the
program. On April 6, 2010, USDA announced that it was cancelling unutilized
balances from the GSM-102 program for FY2010, and that these balances would
be re-announced under a new guarantee fee rate schedule announced on April 19,
2010.68
• The United States also agreed to publish a proposed rule by April 16, 2010, to
recognize the state of Santa Catarina as free of foot-and-mouth disease (FMD),
rinderpest, classical swine fever, African swine fever, and swine vesicular
disease, based on World Organization for Animal Health guidelines, and to
complete a risk evaluation that is currently underway and identify appropriate
risk mitigation measures to determine whether fresh beef can be imported from
Brazil while preventing the introduction of FMD into the United States.
USDA would finance the annual “cotton” fund of $147.3 million using Commodity Credit
Corporation (CCC) funds under the auspices of the CCC Charter Act (15 U.S.C. 714).69 The CCC
Charter Act contains language that allows USDA to use CCC funds to “export or cause to be
exported ... agricultural commodities.”70
65 “U.S., Brazil Agree Upon Path Toward Negotiated Solution of Cotton Dispute,” USDA News Release No. 0168.10,
April 6, 2010.
66 “U.S. May Float Proposal in Cotton Dispute Today, CAMEX to Hold Meeting,” World Trade Online, April 5, 2010.
67 “U.S., Brazil Agree on Memorandum of Understanding As Part of Path Forward Toward Resolution of Cotton
Dispute,” USTR Press Release, April 21, 2010.
68 Ibid.
69 For more information, see “About the Commodity Credit Corporation,” Farm Service Agency, USDA, available at
http://www.apfo.usda.gov/FSA/webapp?area=about&subject=landing&topic=sao-cc.
70 “USDA Determined CCC Charter Act Allows Funding of Brazil Cotton Deal,” World Trade Online, Inside U.S.
Trade, April 16, 2010.
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In light of the conclusion of the MOU with Brazil (April 20), publication of the proposed rule on
meat imports from Santa Catarina (April 16), and the above changes to the GSM-102 program,
Brazil extended the ongoing negotiations for resolving the path forward by 60 days, to a second
deadline in June 2010. Brazil said that it was still pursuing the full U.S. compliance with the
WTO dispute settlement ruling, particularly as concerns U.S. cotton-specific farm program
subsidies. However, any changes to farm programs would likely have to be made in the context
of the 2012 farm bill.
Although the proposal succeeded in avoiding, at least temporarily, the imposition of harmful trade
countermeasures including the suspension of copyright and patent protection, the U.S. proposal
was met with both praise and criticism. Proponents of U.S. farm programs (and their incumbent
support payments) were generally in favor of the ongoing negotiations and the U.S. proposal. In
contrast, opponents and critics of U.S. farm programs were generally critical of the U.S.
negotiating offer. In particular, the establishment of the $147.3 million annual fund to support
Brazil’s cotton sector was described as “subsidy payments to Brazil’s cotton farmers needed to
permit the continuation of subsidy payments to U.S. cotton farmers.”71
Brazil and United States Reach Framework Agreement
On June 17, 2010, U.S. and Brazilian trade negotiators concluded the Framework for a Mutually
Agreed Solution to the Cotton Dispute in the WTO (WT/DS267) for moving forward in the dispute
settlement case.72 The framework agreement—which lays out a number of “steps and
discussions”—represents a path forward toward the ultimate goal of reaching a negotiated
solution to the dispute, while avoiding WTO-sanctioned trade retaliation by Brazil against U.S.
goods and services.73 The framework agreement was formally accepted by Brazil’s Foreign Trade
Council of Ministers (CAMEX) on June 17, 2010. As a result, Brazil has suspended trade
retaliation pending U.S. compliance with the framework agreement measures.74
The framework agreement includes quarterly discussions on potential limits to trade-distorting
U.S. cotton subsidies (recognizing that actual changes to cotton-specific subsidies require
legislation by Congress and are not likely to happen outside of the 2012 farm bill debate).75
Specifically, the agreement identifies parameters for a future annual limit on U.S. domestic
support for upland cotton such that “[t]he level of the limit would be significantly lower than the
average annual level of trade-distorting domestic support provided for upland cotton in the period
MY 1999-2005.”76 Based on fiscal year data from Table 1, average annual upland cotton
subsidies for the FY1999-FY2005 period averaged $3.568 billion.
In addition, the framework agreement provides semi-annual operation reviews to evaluate two
sets of guided changes to the GSM-102 agricultural export credit guarantee program. First, the
weighted-average length for a GSM-102 contract will be lowered to 16 months by the end of
71 Michael Grunwald, “Why the U.S. Is Also Giving Brazilians Farm Subsidies,” Time, April 9, 2010.
72 “Joint Communication from Brazil and the United States,” WT/DS267/45, WTO, August 31, 2010.
73 “Kirk Comments on Signing of Framework Regarding WTO Cotton Dispute,” USTR News Release, June 25, 2010.
74 “CAMEX to Decide Today On Accepting Framework Cotton Deal,” World Trade Online, Inside U.S. Trade,
June 17, 2010.
75 “The Latest Brazil Cotton Compromise,” Washington Trade Daily, vol. 19, no. 122, June 21, 2010.
76 Section I (a.), WT/DS267/45, WTO, August 31, 2010.
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2012, down from the current average of about 20.5 months. Second, a set of benchmarks is
established for implementing changes to GSM-102 contract premiums (i.e., the rates charged for
each dollar of credit guarantee) contingent on performance. The current $5.5 billion in annual
GSM-102 export credit guarantee value remains intact; however, the annual value is broken into
two six-month tranches of $2.7 billion. Every six months an operational review (held each
October and April) will determine how GSM-102 usage (i.e., the value of uncancelled guarantee
value) for the preceding six-month period compares with the eligible $2.7 billion:
• if usage is greater than $1.3 billion, premiums increase by at least 11% of the
simple average fee rate;
• if usage is not greater than $1.3 billion, then during the following six-month
period, if usage exceeds $1.5 billion, premiums increase by at least 15% of the
simple average fee rate; and
• if usage is below $0.8 billion, premiums could be decreased by an amount equal
to half of the most recent premium increase.
The GSM-102 semi-annual operational reviews will coincide with the relevant quarterly cotton
program discussions. Both parties to the dispute have said that a final mutually agreed solution
would not be possible until after the 2012 farm bill, when the nature of any changes to U.S.
domestic cotton subsidies has been made clear.
Phase VI: Implementation of the MOU &
Framework Agreement
The United States has taken several steps to comply with the three major points identified under
the April 2010 Memorandum of Understanding (MOU) and the June 2010 Framework
Agreement.
Payments to the Brazilian Cotton Institute
The United States has agreed to pay $147.3 million annually into a Brazilian fund (known as the
Brazilian Cotton Institute) for technical assistance and capacity building for Brazil’s cotton sector.
In June 2010, the United States began making payments to the Brazilian Cotton Institute (BCI)
with an initial tranche of $34.3 million, to be followed by successive monthly payments of
$12.275 million going forward.77 The BCI’s board of directors consists of three private-sector
representatives (including a representative from the Brazilian Association of Cotton Producers
(ABRAPA) and two state-level cotton sector representatives) and three government
representatives (one each from the ministries of foreign affairs, agriculture, and the ministry of
development, industry, and foreign trade). Harold Cunha, a former president of ABRAPA, was
designated as the BCI’s first executive director.
The BCI’s board of directors—who will be responsible for deciding on the uses of funds—are
limited by a negotiated list of “acceptable uses” that includes activities such as pest and disease
77 “U.S. Begins Cotton Payments, Brazilian Institute to Decide on Uses,” Inside U.S. Trade, August 27, 2010.
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control, purchase and use of capital equipment, and generic promotion of cotton uses. The money
is prohibited from being used as a direct subsidy for Brazil cotton production.
Semi-Annual Operational Review of the GSM-102 Program
The United States has agreed to meet with Brazilian officials on a semi-annual basis to review the
operation of the U.S. GSM-102 program (both funding levels and average length of tenor)
relative to a series of benchmarks.
On October 20, 2010, U.S. and Brazilian government officials met in their first “operational
review” of the GMS-102 program, as called for under the framework agreement.78 The principal
purpose of the review was to evaluate U.S. use of GSM-102 credit guarantees during the six-
month period April through September of 2010 against the $1.3 billion threshold (described
above). According to public USDA figures, USDA received $1.39 billion in GSM-102
applications during the six-month period. However, the officials jointly agreed that the actual
usage of GSM-102 had come very close to the $1.3 billion threshold but had not exceeded it.
Apparently cancellations reduced the actual usage level substantially from the initial application
level. As a result, no fee increase under the U.S. operation of the program was triggered. The
next operational review will take place in April 2011 to review GSM-102 usage for the October
2010 through March 2011 period.
The two sides also discussed the average length of loan tenors made under the GSM-102
program.79 Under the framework agreement, the United States is obligated to try to lower the
weighted-average tenor to 16 months by the end of 2012. It was jointly concluded that the
weighted-average tenor exceeded the target of 16 months. In response, the United States
committed to make further changes to the program before the next operational review. U.S.
officials suggested that a possible method to lower the weighted average loan tenor would be to
raise fees for use of credit guarantees with longer tenors as an incentive for use of shorter
tenors.80
Quarterly Discussions of U.S. Farm Programs
The United States has agreed to meet with Brazilian officials on a quarterly basis to exchange
information on U.S. domestic cotton support with a goal of bringing annual spending on trade-
distorting upland cotton programs under a cap equal to the annual average provided during the
1999 through 2005 marketing years.
During the October 20 meetings, it was deemed too early relative to the 2012 farm bill to discuss
any substantive program changes. However, Brazilian officials expressed their interest in
eventually meeting with members of the House and Senate Agricultural Committees to discuss
their concerns.
78 “U.S., Brazil Find GSM 102 Usage Below Fee-Increase Trigger of $1.3 Billion,” Inside U.S. Trade, Oct. 28, 2010.
79 Ibid.
80 Ibid.
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APHIS Rule Changing Animal Disease Status of Brazilian State of
Santa Catarina
Under the April MOU, the United States agreed to expedite publication of a rule governing
modification to the animal disease status of the Brazilian State of Santa Catarina.
On November 16, 2010, USDA’s Animal and Plant Health Inspection Service (APHIS) published
its final rule amending the regulations in the U.S. Code (9 CFR part 94) governing the
importation into the United States of certain animals and animal products by modifying the
disease status for the Brazilian State of Santa Catarina with respect to certain ruminant and swine
diseases—FMD, rinderpest, swine vesicular disease, classical swine fever, and African swine
fever.81 These changes will make it easier for animal products such as pork and live swine from
Santa Catarina to enter the United States.
Phase VII: Potential Policy Implications of WTO
Panel Ruling
The arbitration ruling in favor of Brazil’s requested cross-retaliation countermeasure could raise
the stakes in this particular dispute by potentially expanding retaliation into TRIPS and the
General Agreement on Trade in Services. 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.82
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.83
Bringing GSM-102 into WTO Compliance
Brazil argued that the fees charged to users of GSM failed to cover the U.S. government’s costs
(whether a default on the credit or late or partial payment) associated with running the program.
This charge was confirmed by the original WTO panel (based on U.S. historical data of GSM-102
program operations) and upheld on appeal. Thus, a key to bringing the GSM-102 program into
compliance would be setting premium rates high enough to cover long-run program operating
81 “Changes in Disease Status of the Brazilian State of Santa Catarina With Regard to certain Ruminant and Swine
Diseases,” Federal Register, Vol. 75, No. 220, November 16, 2010, pp. 69851-69857.
82 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO Agriculture Negotiations,
by Charles E. Hanrahan.
83 For more information see, CRS Reports CRS Report RS22522, Potential Challenges to U.S. Farm Subsidies in the
WTO: A Brief Overview, by Randy Schnepf, and CRS Report RS20840, Agriculture in the WTO: Limits on Domestic
Support, by Randy Schnepf.
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costs. By the WTO Compliance Panel’s own measure, this could be achieved by adopting the
minimum premium rates as reported in the OECD Arrangement on Officially Supported Export
Credits. Further, the rates could be subject to a proviso that, should the GSM-102 program
operate at a loss during any given year, then the fees would be adjusted higher by some amount to
offset the loss in the subsequent year.
A review of the estimated credit subsidies on CCC export credit guarantees since 2001 suggests
that an annual average of $302 million could be saved by adjusting fees upward to more fully
cover operating costs. The program net losses have varied annually with changes in the rates of
participation and default.
Bringing Price-Contingent Programs into WTO Compliance
The obvious adjustment needed to bring price-contingent cotton programs into compliance
involves lowering the support prices (i.e., the loan rate and the target price) until they are more in
line with market prices. Depending on the degree to which cotton price triggers are adjusted
downward relative to market prices, the average payment rate will decline. By setting trigger
prices at a moving average of market prices, payments could approach zero.
CCC outlays to cotton producers under the price-contingent market loan provisions (including
loan deficiency payments, marketing loan gains, and certificate exchange gains) and the CCP
program have, on average, accounted for about 42% of all CCC payments under these programs
since 2003 (Table 4). During that period, cotton producers received an annual average of over
$1.8 billion. During the 2007-2009 period, cotton receipts surged to a 66% share of total CCC
outlays as high world commodity prices raised prices for most other major U.S. program crops
above their program price triggers. In 2010, cotton prices have also moved above their program
trigger levels.
Table 4. CCC Cotton Outlays under Marketing Loan Benefits and CCP Programs
($ millions)
Counter-cyclical
Marketing Loan
% Share of Total
Fiscal Year
Payments
Benefitsa
Total
CCC Outlaysb
2003
$ 1,264
$ 891
$ 2,155
59.5%
2004
$ 217
$ 193
$ 409
24.8%
2005
$ 1,421
$ 1,840
$ 3,261
38.5%
2006
$ 1,410
$ 1,189
$ 2,600
25.1%
2007
$ 1,281
$ 1,118
$ 2,399
55.1%
2008
$ 267
$ 1
$ 268
73.2%
2009
$ 728
$ 1,016
$ 1,743
91.4%
7-year average
$ 941
$ 893
$ 1,834
41.6%
Source: USDA, FSA, CCC Budget Essentials, “FY 2002 thru FY 2009 CCC Actual Payments,” March 8, 2010.
a. Sum of loan deficiency payments (LDPs), marketing loan gains, and certificates of exchange.
b. Cotton payments as a share of total USDA, Commodity Credit Corporation outlays for marketing loan
benefits and CCP payments.
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Direct Payments Classification
Concerns have also been expressed regarding the reclassification of PFC and direct payments
away from non-trade-distorting green box support.84 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 FY2008, PFC and DP payments averaged $5.2 billion per year and accounted for 34%
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 initiated a WTO
dispute settlement proceeding 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 4).85
84 “Brazil Wins Key Points in Interim WTO Panel on U.S. Cotton Subsidies,” Inside U.S. Trade, April 30, 2004.
85 See CRS Report RL34351, Brazil’s and Canada’s WTO Cases Against U.S. Agricultural Direct Payments, by Randy
Schnepf. This dispute settlement case has been dormant since 2008.
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Figure 4. U.S. AMS Outlays, as Notified Without Direct Payments versus
With Addition of Direct Payments
25
AMS Limit
20
Direct
Payments
s 15
n
illio
B
$ 10
5
AMS Notifications without Direct Payments
0
1995
2000
2005
Source: 1995-2008 are U.S. WTO notifications.
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.86 If realized, a new round of domestic spending limitations could
potentially represent a “real” ceiling on U.S. commodity spending and could
result in lower program outlays.
• Second, a consortium of four African cotton-producing countries—Benin,
Burkina Faso, Chad, and Mali—has submitted a WTO proposal calling for a
global agreement to end all production-related support for cotton growers of all
WTO-member cotton producing nations.87 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
initial agriculture framework (of July 31, 2004) of the WTO’s ongoing Doha
Round.88 Although no specific cotton program concessions were mentioned in the
86 WTO, Doha Ministerial Declaration, WT/MIN(01)/DEC/1, November 20, 2001.
87 For more information, see CRS Report RS21712, The African Cotton Initiative and WTO Agriculture Negotiations,
by Charles E. Hanrahan.
88 For more information, see CRS Report RS21905, Agriculture in the WTO Doha Round: The Framework Agreement
and Next Steps, by Charles E. Hanrahan.
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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.
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 several of the AB’s recommendation concerning “prohibited subsidies” through
changes in the 2008 farm bill (P.L. 110-246; Sec. 3101(a)) 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). In addition, by the same 2008
farm bill provision Congress requires that the Secretary of Agriculture, in carrying out the GSM-
102 program, “ work with the industry to ensure, to the maximum extent practicable, that risk-
based fees associated with the guarantees cover, but do not exceed, the operating costs and losses
over the long-term.” However, a more explicit definition of “long-term” such as a two-year
period would perhaps provide a stronger signal to the Secretary of Agriculture in regard to
operating the GSM-102 program with no net losses.
Also, some questions remain as to what extent the 2008 farm bill has addressed the adverse
effects 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 perception (if not the reality) of adverse effects 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.89 For example,
the enacted 2008 farm bill:90
89 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.
90 See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by Renée
Johnson.
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• extends the counter-cyclical payments (CCP) program and current marketing
loan provisions (Sections 1104 and 1201 of P.L. 110-246);
• 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 (Section 1107). This retention of the status quo has important WTO
implications for the AMS case being brought against the United States by both Canada and
Brazil. The U.S. aggregate measure of support (AMS) has exceeded, on at least two occasions, its
total WTO limit if direct payments are included in the AMS calculation (Figure 4).91
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 112th
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.
91 See CRS Report RL34351, Brazil’s and Canada’s WTO Cases Against U.S. Agricultural Direct Payments, by Randy
Schnepf.
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Table 5. Timeline: U.S.-Brazil WTO Dispute Settlement Case 267
Date
Event
Sept. 27, 2002
Brazil makes a formal “request for consultations” with the United States (WT/DS267/1).
Oct. 2002 to
Brazil and United States hold three consultations to discuss dispute over U.S. cotton
Jan. 2003
subsidies. The consultations are 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) establishes 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 reverses an earlier procedural decision and states that it will decide both the
peace clause issue and Brazil’s challenge to U.S. cotton subsidies together.
Nov. 17, 2003
The panel chairman informs the DSB that the panel will not be able to complete its work
in six months due to the complexity of the matter. An extension is announced
(WT/DS267/16).
Apr. 26, 2004
The panel’s interim report is released confidential y 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 is released confidentially, news reports suggest at least a partial finding against the
United States on each of the five major claims.92
June 18, 2004
The panel’s final report is released confidential y to the two parties. News reports suggest
that the final ruling varies little from the interim ruling against the United States.93
Sept. 8, 2004
After translation into English, French, and Portuguese, the final report is delivered to the
WTO Dispute Settlement Body (DSB), as wel as to the public (WT/DS267/R).
Oct. 18, 2004
The United States notifies 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 file a third participant’s submission, while others notify 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 agree to an extension to March 3, 2005, for circulation of the Appel ate Body’s
(AB’s) final report (WT/DS267/18).
Mar. 3, 2005
The AB issues 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.
92 “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.
93 “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.
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Date
Event
Mar. 21, 2005
The DSB adopts the AB and panel reports, thus initiating a sequence of compliance
deadlines (WT/DS267/20).
Apr. 20, 2005
The United States announces to the DSB that it intends to implement the
recommendations and rulings of the DSB.
June 30, 2005
USDA announces 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 proposes 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 requests authorization from WTO to impose $3 billion in retaliatory measures
against prohibited U.S. subsidies (WT/DS267/21).
July 5, 2005
USDA proposes statutory changes be made by Congress: remove 1% fee cap on GSM-102
program and terminate GSM-103 program.
July 5, 2005
United States objects to the amount of Brazil’s proposed sanctions on the prohibited
subsidies and requests 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 assigns role of arbitration on the prohibited-subsidy sanctions to the original
panel (WT/DS267/24).
Aug. 17, 2005
Brazil and United States reach 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 expires.
Oct. 6, 2005
Brazil requests authorization from WTO to impose $1 billion in retaliatory measures
against actionable U.S. subsidies to offset their adverse effects (WT/DS267/26).
Oct. 17, 2005
United States objects to the amount of Brazil’s proposed sanctions on the actionable
subsidies and requests WTO arbitration (WT/DS267/27).
Oct. 18, 2005
The DSB assigns role of arbitration on the actionable-subsidy sanctions to the original
panel (WT/DS267/28).
Nov. 21, 2005
Brazil and United States reach 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.94
Aug. 1, 2006
Step 2 cotton program eliminated (Sec. 1103, P.L. 109-171; Deficit Reduction Act of
2005).
Aug. 18, 2006
Brazil requests the establishment of a WTO compliance panel to review whether the
United States has ful y complied with the AB’s ruling of March 3, 2005 (WT/DS267/30).
Sept. 28, 2006
The DSB agrees to establish a panel (WT/DS267/31). The panel members are announced
on Oct. 25, 2006.
Jan. 9, 2007
The DSB announces that, because of particular circumstances, the compliance panel will
not complete its work before July 2007.
July 27, 2007
The WTO compliance panel issues 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.95
94 For more information, see CRS Report RL33144, WTO Doha Round: The Agricultural Negotiations, by Charles E.
Hanrahan and Randy Schnepf.
95 For example, see Financial Times, “Brazil Claims WTO Cotton Victory,” July 27, 2007.
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Date
Event
Oct. 15, 2007
The WTO compliance panel releases its confidential final report to the United States and
Brazilian governments. News reports suggest a ruling that the United States had not fully
complied with the March 2005 ruling.
Dec. 18, 2007
The WTO compliance panel issues its final ruling publicly (WT/DS267/RW), confirming
earlier news reports that the panel has found that the United States is not in full
compliance.
Feb. 12, 2008
The United States notifies its intention to appeal certain issues of law covered in the
report of the WTO compliance panel (WT/DS267/33).
June 2, 2008
The Appel ate Body (AB) issues its report upholding most of the compliance panel’s
rulings (WT/DS267/ABR).
June 18, 2008
2008 farm bill (P.L. 110-246) enacted, including a provision (3101(a)) that alters the U.S.
export credit guarantee program by eliminating the GSM-103 and Supplier Credit
Guarantee Programs, and the 1% cap on GSM-102 user fees.
June 25, 2008
The DSB adopts the compliance panel and AB reports.
Aug. 25, 2008
Brazil official y asks the chair of the DSB panel to resume the arbitration proceedings
concerning proposed countermeasures for both the prohibited subsidies and the
actionable subsidies rulings (WT/DS267/38 and WT/DS267/39).
Oct. 1, 2008
Brazil and the United States agree on the arbitration panelists (WT/DS267/24/Add.1 and
WT/DS267/28/Add.1).
Dec. 9, 2008
U.S. written submission in arbitration proceedings.
Jan. 13, 2009
Brazil written submission in arbitration proceedings.
Aug. 31, 2009
WTO arbitrator releases a decision in two parts: WT/DS267/ARB/1, which rules on
Brazil’s retaliation requests regarding the prohibited subsidies, and WT/DS267/ARB/2,
which rules on Brazil’s retaliation requests regarding the actionable subsidies.
Nov. 19, 2009
DSB grants authorization to Brazil to impose countermeasures against the United States.
Dec. 21, 2009
Brazil announces authorization by WTO to impose trade retaliation in 2010 against
$829.3 million in U.S. goods and services (based on 2008 data), including $268.3 million in
cross-retaliation.
Feb. 10, 2010
Brazil’s Chamber of Foreign Trade (CAMEX) releases a preliminary list identifying U.S.
goods exports that would be subject to retaliatory duties.
March 10, 2010
Brazil announces that it will impose retaliatory tariffs worth $591 million on a list of 102
U.S. products. The new tariffs are set to take effect 30 days after their announcement.
March 15, 2010
Brazil announces a preliminary list of U.S. patents and intel ectual property rights it could
restrict unless both countries reach a settlement. The proposed measures are open to
public comment for a period of 20 days and are still subject to public hearings.
April 1, 2010
U.S. negotiating team meets with Brazilian officials to discuss possible resolution of the
dispute.
April 5, 2010
The United States floats a proposal to Brazil on a negotiated settlement. After reviewing
the proposal, Brazil’s Foreign Trade Council (CAMEX) approves a resolution that would
postpone until April 22 the implementation of WTO-approved countermeasures by Brazil
against U.S. imports.
April 6, 2010
USDA announces cancellation of unutilized GSM-102 balances for FY2010.
April 16, 2010
USDA publishes a proposed rule to recognize the Brazilian state of Santa Catarina as free
of several virulent animal diseases, thus opening up the possibility of importation into the
United States following 60-day comment period.
April 19, 2010
USDA announces new GSM-102 fee rates and re-announces the unutilized GSM-102
balances for FY2010.
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Date
Event
April 20, 2010
Brazil and United States sign memorandum of understanding establishing a $147.3 million
annual fund for technical assistance and capacity-building for Brazil’s cotton sector.
June 17, 2010
Brazil and the United States reach a “framework agreement” as interim solution detailing
way forward to eventual mutual solution. Brazil’s Council of Trade Ministers (CAMEX)
approves the Framework to avoid retaliation.
June 21, 2010
Brazil’s CAMEX publishes notice calling off trade retaliation pending successful
implementation of the framework agreement.
June 25, 2010
Framework agreement released publicly by the U.S. Trade Representative.
June, 2010
United States makes initial payment of $34 million to newly created Brazilian Cotton
Institute as part of $147.3 million annual fund.
July, 2010
United States makes monthly payment of $12.275 million to Brazilian Cotton Institute as
part of $147.3 million annual fund. A similar payment of $12.275 million will be made
each month going forward.
Oct. 20, 2010
First semi-annual operational review of the GSM-201 program, combined with the
quarterly review of U.S. domestic cotton program. U.S. GSM-102 usage was jointly
deemed to be under the $1.3 billion trigger, thus, avoiding imposition of higher fees.
Nov. 16, 2010
APHIS publishes a rule in the Federal Register (75 FR 69851) announcing disease-free
status of the Brazilian state of Santa Catarina with regard to certain ruminant and swine
diseases.
Source: Compiled by CRS from official WTO documents and news sources as cited.
Author Contact Information
Randy Schnepf
Specialist in Agricultural Policy
rschnepf@crs.loc.gov, 7-4277
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