Status of the WTO Brazil-U.S. Cotton Case
Randy Schnepf
Specialist in Agricultural Policy
December 12, 2013
Congressional Research Service
7-5700
www.crs.gov
R43336
Status of the WTO Brazil-U.S. Cotton Case
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 ruled that (1) certain U.S. agricultural support payments for cotton distorted international
agricultural markets and should be either withdrawn or modified to end the market distortions;
and (2) U.S. Step-2 payments and agricultural export credit guarantees for cotton and other
unscheduled commodities were prohibited under WTO rules and should be withdrawn.
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 Brazil’s favor and was
upheld on appeal. 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 could include two components: (1) a fixed annual payment by the U.S. government to
Brazil of $147.3 million, and (2) a variable annual amount based on U.S. GSM-102 program
spending. In addition, Brazil argued for and received authority for cross-retaliation—that is, to
impose countermeasures in sectors outside of the trade in goods, most notably in the area of U.S.
copyrights and patents.
The threat of retaliation led Brazil and the United States to negotiate a temporary mutual
agreement (June 17, 2010) to avoid trade retaliation. Key aspects of the agreement included U.S.
payments of $147.3 million annually to the “Brazilian Cotton Institute” to provide technical
assistance and capacity-building for Brazil’s cotton sector; regular discussions on potential limits
of trade-distorting U.S. cotton subsidies (recognizing that actual changes will not occur prior to
the next farm bill); and 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.
Both Brazil and the United States have hoped that the WTO cotton dispute would be resolved
definitively within the context of the next U.S. farm bill. In this regard, both the Senate-passed (S.
954) and House-passed (H.R. 2642) 2013 farm bills are in agreement over proposed changes to
U.S. cotton support programs—cotton would no longer be included as a major program
commodity, thus losing eligibility for certain price and income support programs proposed in
Title I of the farm bill. Instead, those programs would be replaced by a new cotton program
comprised of a stand-alone, county-based revenue insurance policy called the Stacked Income
Protection Plan (STAX). The House- and Senate-passed farm bills are presently in conference to
resolve differences. While a new farm bill might address issues related to the WTO Brazil-U.S.
cotton case from a U.S. perspective, Brazil still retains substantial authority in making a final
determination regarding the compliance of any policy changes to U.S. cotton support programs.
Furthermore, the heightened attention surrounding the WTO Brazil-U.S. cotton case has served to
single out cotton for special treatment within ongoing WTO trade negotiations and to bring into
international focus the proposed changes to U.S. farm programs for cotton in the next farm bill.
Such heightened international awareness could intensify pressures on both Brazil and the United
States to resolve the cotton dispute in a transparent and widely acceptable manner so as to
minimize further repercussions in future WTO trade negotiations or dispute settlement cases.
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Status of the WTO Brazil-U.S. Cotton Case
Contents
Introduction ...................................................................................................................................... 1
Brief Historical Overview of the WTO Case ................................................................................... 1
Dispute Settlement and Arbitration ........................................................................................... 1
WTO Authorizes Retaliation Authority for Brazil ..................................................................... 2
Temporary Suspension of Retaliation ........................................................................................ 3
Brazil’s Trade Retaliation Authority Explained ............................................................................... 4
Fixed Component ...................................................................................................................... 4
Formula-Based Variable Component ......................................................................................... 4
Estimated Retaliation Authority Based on Recent Data ............................................................ 5
U.S. Policy Changes in Response to Cotton Case ........................................................................... 6
Program Changes to Date .......................................................................................................... 6
Eliminated Step 2 program .................................................................................................. 6
Modified or Eliminated Export Credit Guarantee Programs ............................................... 6
Compliance with Brazil-U.S. Framework Agreement ........................................................ 7
Proposed Policy Changes in Next Farm Bill ............................................................................. 8
Eliminate or Modify Existing Price and Income Supports for Cotton ................................ 8
Insurance-Like Stacked Income Protection Plan (STAX) ................................................... 9
Repercussions from Brazil and U.S. Officials..................................................................... 9
Potential Farm Bill Issues Remaining ..................................................................................... 10
Is a Permanent Resolution in the Offing? ................................................................................ 10
Cotton in WTO Trade Negotiations ............................................................................................... 11
The C4 “Cotton Initiative” ...................................................................................................... 11
Cotton at the Bali Ministerial .................................................................................................. 12
Why Does This Matter? ........................................................................................................... 13
Conclusion ..................................................................................................................................... 13
Contacts
Author Contact Information........................................................................................................... 13
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Status of the WTO Brazil-U.S. Cotton Case
Introduction
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.
The “Brazil-U.S. cotton case” had its WTO origins in 2002 and has since evolved into a
sprawling legal enterprise that is still ongoing as of 2013. For a detailed description of the case’s
origin and progress through the WTO dispute settlement process to the point in April 2011 when
Brazil and the United States reached an agreement (referred to as the U.S.-Brazil framework
agreement), readers may refer to archived CRS Report RL32571, Brazil’s WTO Case Against the
U.S. Cotton Program.
This report focuses on developments in the cotton case since 2011; in particular, the status of
three aspects of the WTO cotton case:
• the nature and calculation of Brazil’s authority to retaliate;
• changes to U.S. agricultural policy (both resultant and pending) that have
occurred as a direct result of the WTO cotton case, and Brazil’s response to them;
and
• the broader implications for U.S. farm policy of the WTO cotton initiative—a
direct offspring of the Brazil-U.S. cotton case—within ongoing WTO trade
negotiations.
Each of these case aspects remains highly germane to U.S. farm policy and programs, as Brazil
still retains the WTO-granted authority to impose millions of dollars of trade retaliation against
U.S. goods and services. In addition, with the world closely watching the resolution of the Brazil-
U.S. cotton case, the final terms and circumstances of such a resolution—were it to occur—could
serve either as catalyst or as precedent for future trade disputes related to the agricultural sector,
and/or as progenitor of new, more restrictive WTO rules for domestic cotton support programs.
Brief Historical Overview of the WTO Case
The so-called “Brazil-U.S. cotton case” is a long-running WTO dispute settlement case (DS267)
initiated by Brazil—a major cotton export competitor—in 2002 against specific provisions of the
U.S. cotton program. Brazil charged that U.S. cotton programs were depressing international
cotton prices and thus artificially and unfairly reducing the quantity and value of Brazil’s cotton
exports, causing economic harm to Brazil’s domestic cotton sector.
Dispute Settlement and Arbitration
In September 2004, after nearly a year-long period of hearings and review, a WTO dispute
settlement panel found that certain U.S. agricultural support payments and guarantees were
inconsistent with WTO commitments and resulted in market distortions that depressed
international cotton prices, as claimed by Brazil. In addition, certain U.S. agricultural export
programs were found to be illegal under WTO rules. As a result, U.S. support programs were
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found to violate two different types of WTO rules and thus required two different types of
responses from the United States to remedy the inconsistencies.
First, actionable subsidies were those subsidies identified as having distorted normal market
conditions and resulted in adverse effects to Brazil. The WTO panel recommended that the
United States take appropriate steps by September 21, 2005, to remove the adverse effects or to
withdraw the subsidy measures singled out as price-contingent—marketing loan provisions,
Step 2 payments,1 and counter-cyclical program (CCP) payments.2
Second, prohibited subsidies were those subsidies deemed illegal under WTO rules. The panel
identified export credit guarantee programs—GSM-102, GSM-103, and the Supplier Credit
Guarantee Program (SCGP)3—that assisted cotton and other “unscheduled” agricultural products
entering international markets, and Step 2 payments to both domestic users and exporters of
upland cotton. The WTO panel recommended that the United States withdraw these programs by
July 1, 2005.
In 2005, the United States made several changes to both its cotton farm support programs and
export credit guarantee programs in an attempt to bring them into compliance with WTO
recommendations. However, Brazil argued that the U.S. response was inadequate and requested
authority to impose $3 billion in retaliation against prohibited U.S. subsidies. Retaliation
generally takes the form of higher tariffs, above WTO bound levels.
The United States objected to Brazil’s requested retaliation amount and called for WTO
arbitration; however, arbitration was mutually suspended in July 2006. Shortly thereafter (August
2006), Brazil requested a WTO compliance panel to review whether the United States had
brought its cotton programs into compliance with the original WTO panel ruling. In December
2007, a WTO compliance panel ruled in favor of Brazil’s noncompliance charge against the
United States, and the ruling was upheld on appeal in June 2008.
WTO Authorizes Retaliation Authority for Brazil
In August 2008, Brazil requested resumption of arbitration over its proposed retaliation value of
$3 billion. In August 2009, the WTO arbitration panel announced that Brazil’s trade
countermeasures against U.S. goods and services could include two components:
1 Step 2 payments were part of special cotton marketing provisions authorized under U.S. farm program legislation to
keep U.S. upland cotton competitive on the world market. Step 2 payments were made to exporters and domestic mill
users to compensate them for their purchase of higher-priced U.S. upland cotton. Under the 2002 farm act, the Step 2
payment rate for the 2002-2005 marketing years was calculated as the difference between the price of U.S. upland
cotton, delivered c.i.f. (cost, insurance, freight) in Northern Europe, and the average of the five lowest prices of upland
cotton delivered c.i.f. in Northern Europe from any source. The Step 2 cotton program was eliminated on August 1,
2006 (§1103, P.L. 109-171).
2 For a description of U.S. farm programs, see CRS Report RL34594, Farm Commodity Programs
in the 2008 Farm Bill.
3 GSM-103 and SCGP were eliminated by the 2008 farm bill (P.L. 110-246; §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.
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• a fixed annual payment by the U.S. government to Brazil of $147.3 million in
response to the actionable subsidies (i.e., market-distorting U.S. cotton program
payments), and
• a variable formula-derived retaliation amount based on annual spending made
under the U.S. GSM-102 program in response to the prohibited subsidies.
According to WTO rules, trade retaliation should take place within the sector where the violation
occurred. In this case, retaliation normally would be restricted to punitive tariffs on U.S. goods
entering Brazil. However, Brazil argued that limiting retaliation to the goods sector alone would
have a more deleterious effect on the Brazilian economy (via higher input costs) and Brazilian
consumers (via higher inflation) than on U.S. exporters due to the asymmetries between the two
economies.4 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 response to Brazil’s concerns regarding applying retaliation entirely in the goods sector based
on trade between the two countries, the arbitrators ruled that Brazil would be entitled to cross-
retaliation if the overall retaliation amount exceeded a formula-based, variable annual threshold—
different from the earlier formula used for calculating the total annual retaliation.5 Cross-
retaliation involves countermeasures in sectors outside of the trade in goods—for example, in the
area of U.S. copyrights, patents, and other intellectual property rights (IPR). 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.
Temporary Suspension of Retaliation
The threat of sanctions led to intense negotiations between Brazil and the United States to find a
mutual agreement and avoid trade retaliation. While U.S. exporters were anxious about losing
trade with the emerging Brazilian domestic market, Brazil’s domestic manufacturing and business
sectors were concerned that trade retaliation in the form of higher tariffs could be counter-
productive if it resulted in restricting access by domestic industry to key inputs.
In April 2010, the two parties agreed on a memorandum of understanding (MOU) that spelled out
certain actions which, if undertaken by the United States, would lead to suspension of Brazil’s
threatened retaliation. Then, 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 laid out a number of “steps and discussions”—represented 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 (and
possibly IPR).
As a result, Brazil suspended trade retaliation pending U.S. compliance with the Framework
Agreement measures. Key aspects of the Framework Agreement include (1) payment by the
4 “U.S., Brazil Clash on Cotton Sanctions,” International Center for Trade and Sustainable Development (ICTSD),
Bridges, vol. 12, no. 6, January 2009.
5 These formulas are described in more detail in a later section, “Brazil’s Trade Retaliation Authority Explained.”
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United States of a $147.3 million annual fund (or $12.275 million per month) 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 next 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.
These U.S. commitments were intended to delay any trade retaliation until after the next farm bill,
when potential changes to U.S. cotton programs would be evaluated.
Brazil’s Trade Retaliation Authority Explained
As stated earlier, a WTO arbitration panel announced that Brazil’s trade countermeasures against
U.S. goods and services could include two components—a fixed amount and a variable amount.
Each of these components is described in more detail here.
Fixed Component
A fixed annual payment of $147.3 million was based on Brazil’s share (5.1%) of the calculated
global market price effect resulting from the international price-depressing nature of U.S. cotton
programs. This calculation was undertaken using U.S. and international market data for the 2005
marketing year. The analysis found that, in the absence of U.S. marketing loan benefits, Step 2
payments, and counter-cyclical payments to U.S. cotton producers, the world price of cotton
would have been 9.38 cents per pound higher, and that the estimated worldwide losses for both
trade and production effects were $2.9 billion. Since Brazil’s share of world cotton production
(excluding the United States) at that time was 5.1%, this same share of the global loss was
assigned to Brazil as the fixed payment.
Formula-Based Variable Component
An annual, variable retaliatory amount was included to account for U.S. agricultural exports made
under the GSM-102 program. Furthermore, the WTO arbitrator ruled that the retaliatory amount
accorded Brazil would vary each year 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 a component to reflect any
measurable trade displacement—referred to as “additionality.” The WTO arbitrator used Brazil’s
share of world trade of those products receiving GSM-102 credit guarantees (estimated at 11.7%
in 2006) to apportion Brazil’s share of the estimated global subsidy effect of GSM-102.
Since the authority for cross-retaliation was based on the value of trade in goods between Brazil
and the United States, annual changes in the value of trade in goods need to be considered in
order to ascertain a fair value for cross-retaliation. 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.
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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.
Estimated Retaliation Authority Based on Recent Data
Both U.S. policy changes and trade flows have altered the formula calculations in the United
States’ favor in recent years. USDA has made several changes in how it implements the GSM-102
program (described below), while the changing nature of U.S.-Brazil trade flows is working to
severely restrict both the amount and the nature of the retaliatory rights to which Brazil is
entitled. Based on 2011 data, it was estimated that Brazil was entitled to roughly $500 million in
total retaliation.6 This compares with retaliation authority estimates of $829 million using 2008
data and $1 billion using data from 2009.
Not only has the total retaliation authority declined in recent years, but so too has the authority for
cross-retaliation. For instance, using 2008 data, about $269 million of the $829 million in total
retaliation could be applied in cross-retaliation. Similarly, Brazil enjoyed cross-retaliation rights
of about $550 million out of $1 billion total retaliation using 2009 data.7 In sharp contrast,
estimates for 2011 indicate that the cross-retaliation threshold would be higher than the total
retaliation value of $500 million, meaning that Brazil would have no ability to engage in cross-
retaliation.
The fact that Brazil is not entitled to any cross-retaliation when 2011 data are used depends
heavily on the value of U.S. exports in goods to Brazil, which have skyrocketed over the last
several years. According to U.S. Census Bureau export data, which are somewhat less precise
than the Brazilian import data used for the retaliation calculations, U.S. exports to Brazil totaled
about $26.1 billion in 2009, but climbed in 2010 to $35.4 billion, and to $42.9 billion in 2011.8
This surge partly reflects the fact that the U.S. dollar had depreciated vis-a-vis Brazil’s currency,
making U.S. exports more attractive to Brazilian consumers.
If recent developments are limiting the amount and nature of Brazil’s retaliatory rights, that could
mean that Brazil has less ability going forward to use retaliation as leverage to convince the U.S.
Congress to pass a farm bill that would fully bring the United States into compliance with its
WTO obligations.
6 Inside U.S. Trade, “GSM-102 Tweaks, Recent Data Limit Brazil’s WTO Cotton Retaliation Rights”, June 21, 2012.
7 Ibid.
8 Ibid.
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U.S. Policy Changes in Response to Cotton Case
Since 2005, the United States has made several changes to both its cotton and GSM-102
programs in an attempt to bring them into compliance with WTO recommendations. In addition,
Congress has passed legislation to permanently eliminate the Step 2 program and GSM-103 and
SCGP export credit guarantee programs. As a result, the United States has argued that the basket
of potentially distorting programs in question has been so transformed as to render moot the issue
of adverse effects or threat of serious prejudice. However, Brazil has consistently argued that the
U.S. policy response has been inadequate. In an attempt to definitively resolve the cotton dispute,
Congress is proposing a complete revamping of the existing cotton price and income support
programs by replacing most of them with an insurance-like program (described below) where
producers must pay into the program in order to participate.
Program Changes to Date
Eliminated Step 2 program
In order to address the issue of actionable subsidies in the Brazil-U.S. cotton case, the U.S.
Congress, on August 1, 2006, eliminated the Step 2 cotton program by a provision (§1103) in the
Deficit Reduction Act of 2005 (P.L. 109-171).
Modified or Eliminated Export Credit Guarantee Programs
In order to address the issue of prohibited export subsidies several steps have been taken by
USDA and Congress.
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. Higher program-participation fees would ensure that the financial
benefits returned by these programs fully cover their long-run operating costs, and eliminate the
subsidy component. USDA adopted the risk-based fee structure since the cap was required by
statute (7 U.S.C. 5641) and could not be removed administratively. In addition, the CCC stopped
accepting applications for payment guarantees under GSM-103.
On June 18, 2008, the date of enactment of the 2008 farm bill (P.L. 110-246), a provision
(§3101(a)) in the Trade title (Title III) eliminated the GSM-103 and SCGP programs, and
removed the 1% cap on fees that could be charged under the GSM-102 program.
In addition, the same 2008 farm bill provision explicitly required 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.” 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
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the “long-term,” it clearly is less than 10 years and more likely is on the order of a period of two
years9—that is, a net loss in one year must be offset by a net gain in the following year.
These alterations to the GSM-102 program have contributed to the recent drop in Brazil’s
retaliatory rights, as mentioned earlier. This is in spite of the fact that total usage of the GSM-102
program has actually increased in recent years. In particular, two additional changes to GSM-102
operation made in 2010 are also helping to drive down Brazil’s retaliation rights. First, USDA
blocked Brazilian banks from being able to enjoy the loan guarantees for the financing of U.S.
agricultural exports. Second, USDA disqualified Brazil as an export destination for third-country
banks seeking such loan guarantees.
The WTO formula for calculating annual retaliatory authority assumes that GSM-102-backed
loans by Brazilian banks to importers in Brazil have a particularly negative impact on Brazilian
agricultural producers. As a result, the existence of such loans prior to 2010 had the effect of
driving up Brazil’s retaliatory rights by a significant amount, as those measures were meant to
counteract the harm done to Brazilian agricultural producers.10 These alterations have had the
effect of driving down Brazil’s retaliation rights since 2010.
Compliance with Brazil-U.S. Framework Agreement
Under the Brazil-U.S. Framework Agreement, the United States was to make payments to the
Brazilian cotton fund of about $12.275 million every month for a total of $147.3 million annually,
which can be used to aid the development of Brazil’s cotton industry. Although the Framework
Agreement and its monthly payments succeeded in avoiding, at least temporarily, the imposition
of harmful trade countermeasures, 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.”11 During 2011, several amendments were introduced in the
House that would have eliminated or banned the payments to Brazil; however, none of these
amendments was enacted.12
In September 2013, USDA—claiming the effects of the federal budget sequestration process were
at play—reduced the payment to Brazil by an amount equal to 5% of the annual total ($7.35
million), leaving a payment of just $4.9 million.13 In October, USDA completely stopped the
payments. Although his remarks were disputed by several trade experts, Agriculture Secretary
Tom Vilsack claimed without elaboration that the U.S. government lost the authority on October
1, 2013, to continue making payments to Brazil under the temporary WTO settlement.14
9 Annex J, paragraph 3(a), of the “2008 Revised Draft Modalities” sets 180 days as the maximum repayment terms for
an export credit guarantee contract.
10 Ibid.
11 Michael Grunwald, “Why the U.S. Is Also Giving Brazilians Farm Subsidies,” Time, April 9, 2010.
12 See CRS Report RL32571, Brazil’s WTO Case Against the U.S. Cotton Program.
13 Inside U.S. Trade, “U.S. Cuts Cotton Payment, Leading Brazil To Gear Up For Retaliation,” October 3, 2013.
14 Inside U.S. Trade, “Experts: Vilsack Claim On Brazil Payment Authority Expiration Is Untrue,” August 15, 2013.
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In light of the U.S. failure to continue with the payments, Brazil’s Foreign Trade Board (known
by its Portuguese acronym CAMEX) is slated to convene December 18, 2013, and consider a
“menu” of options for retaliation against U.S. exports, including monetary value, method, timing,
and sectors to be targeted. Brazilian Foreign Minister Luiz Alberto Figueiredo said that his
country prefers to continue receiving payments from the United States under the interim cotton
settlement as opposed to imposing trade retaliation on U.S. exports.15 However, with Brazil’s
presidential election coming up in October 2014, the issue could grow more politicized with
every passing day, making retaliation avoidance more difficult.
Proposed Policy Changes in Next Farm Bill
Both Brazil and the United States have hoped that the WTO cotton dispute would be resolved
definitively within the context of the next U.S. farm bill. In this regard, both the Senate-passed (S.
954) and House-passed (H.R. 2642) 2013 farm bills are in agreement over proposed changes to
U.S. cotton support programs designed to address the WTO cotton case—cotton would no longer
be included as a major program commodity, thus losing eligibility for certain price and income
support programs proposed in Title I.16 Instead, both versions of the farm bill include a new
cotton program comprised of a stand-alone, county-based revenue insurance policy called the
Stacked Income Protection Plan (STAX).
The House- and Senate-passed farm bills are presently in conference to resolve differences. On
December 10, 2013, top farm bill conferees announced that they were unable to complete a long-
term bill by the end of the year (2013) because of a lack of agreement and a lack of Congressional
Budget Office (CBO) scores. As a result, any conclusion to the farm bill is pushed into 2014.
The major cotton-related provisions in the House- and Senate-passed farm bills relevant to the
Brazil-U.S. cotton case are briefly described here.
Eliminate or Modify Existing Price and Income Supports for Cotton
Under both the Senate- and House-passed farm bills, farm support for traditional program crops is
restructured by eliminating direct payments, the counter-cyclical price (CCP) program, and the
Average Crop Revenue Election (ACRE) program. Both bills would retain a form of counter-
cyclical price program—either price- or revenue-based—that makes a farm payment when prices
for covered crops decline below certain levels and would add a Supplemental Coverage Option
(SCO) to crop insurance policies to address the issue of “shallow losses,” or losses incurred by
producers but not covered currently by crop insurance. However, cotton is not included as a
program commodity eligible for either the counter-cyclical programs or the SCO.
Authority is continued for marketing assistance loans, which provide additional low-price
protection at “loan rates” specified in current law (with an adjustment made to the upland cotton
marketing loan, which would be reduced from $0.52/lb. to an effective floor of $0.47/lb. in the
Senate bill and $0.45/lb. in the House bill).
15 Inside U.S. Trade, “Minister Says Brazil Prefers Continuation Of Cotton Payments Over Retaliation,” December 3,
2013.
16 See CRS Report R42759, Farm Safety Net Provisions in a 2013 Farm Bill: S. 954 and H.R. 2642.
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Insurance-Like Stacked Income Protection Plan (STAX)
Both the House and Senate farm bills would handle cotton separately from the other major
program crops. In lieu of the farm revenue programs proposed in Title I, both versions of the farm
bill include a new cotton program comprised of a stand-alone, county-based revenue insurance
policy called the Stacked Income Protection Plan (STAX).17 Producers could purchase this policy
in addition to their individual crop insurance policy or as a stand-alone policy.
Key Features of STAX include the following:
• STAX sets a revenue guarantee based on expected county revenue. In other
words, it is an “Area-Wide” program which minimizes producer moral hazard.
• A revenue loss of at least 10% at the county level must occur before an indemnity
from STAX is triggered.
• STAX would indemnify losses in county revenue of greater than 10% of
expected revenue but not more than the crop insurance policy deductible level
(e.g., 15%, 20%, or 25%) or not more than 30% if used as stand-alone policy
without crop insurance.
• A payment rate multiplier of 120% is available if producers want to increase the
amount of protection per acre.
• Unlike traditional farm price and income support programs, participation in
STAX is not free. The farmer must pay 20% of the policy premium for STAX
while a federal subsidy covers the remaining 80%.
• STAX participants are not eligible for benefits available under other field-crop
programs including yield updating and revenue- and price-based counter-cyclical
payments.
Repercussions from Brazil and U.S. Officials
Despite this program formulation, Brazil has yet to formally sign off on STAX as a solution to the
WTO cotton case, but instead has indicated that STAX does not go far enough in resolving the
dispute. In 2012, then-Brazilian Ambassador to the WTO Roberto Azevedo (now Director
General of the WTO) wrote letters to Senate Agriculture Chairwoman Debbie Stabenow (January
2012) and U.S. Trade Representative Islam Siddiqui (July 9, 2012), and released a white paper
conveying Brazil’s dismay over the farm bill proposals, which Brazil has said would generally
increase, rather than decrease, U.S. trade-distorting subsidies. In his letter, Azevedo identified
several alleged shortcomings of the proposed STAX program.18
Azevedo criticized not only the STAX program, but other farm bill safety net proposals as going
in the wrong direction by increasing trade-distorting subsidies. He also pointed out that none of
the proposals seeks to change or end the GSM-102 program, which was faulted as a prohibited
export subsidy in Brazil’s challenge.19 Whether this signifies real intent or is simply a negotiating
17 Ibid.
18Inside U.S. Trade, “Brazil Blasts NCC Farm Bill Proposal, Says it Could Violate WTO Rules,” February 6, 2012.
19 Inside U.S. Trade, “Brazil Criticism Leads Senate Ag Chiefs To Seek Cotton Proposal Changes,” April 18, 2012.
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strategy remains to be seen. It is noteworthy that, since former Ambassador Azevedo announced
his candidacy for WTO Director General in early 2013 (a position he assumed on September 1,
2013), he has refrained from further comment on the Brazil-U.S. cotton case.
In response to Brazil’s 2012 letter addressed to her, Chairwoman Stabenow argued that
compliance with WTO rules is one factor that Congress must bear in mind. Moreover, she
expressed confidence that the next farm bill will live up to U.S. WTO obligations. In contrast,
House Agriculture Committee Chairman Frank Lucas expressed his fear that the new farm bill
would increase trade-distorting subsidies by replacing direct payments, which are considered
minimally trade-distorting, with other types of support schemes, although he made clear that this
would not be an optimal outcome. According to Chairman Lucas, most agriculture groups he has
dealt with thus far “don't seem to care that much about trade implications” of the next farm bill.
“That’s unfortunate, because we have to live for the next five years in the trade environment, in
the WTO court, so to speak, with the decisions we make in this coming farm bill,” he said.20
Potential Farm Bill Issues Remaining
A handful of issues related to the WTO cotton case, GSM-102, and STAX remain unresolved by
either House or Senate farm bills. These include the following.
• GSM-102 still lacks a permanent “fix” and neither farm bill proposal addresses
this issue.
• Because it is designed as an insurance product, STAX is not subject to any cap on
individual payments (i.e., no payment limitation).21 However, the Senate-passed
farm bill contains a limit on crop insurance subsidies based on adjusted gross
income (AGI)—subsidies are reduced by 15 percentage points if average AGI
exceeds $750,000. This AGI limitation would likely apply to STAX if it is
included in the final farm bill reported out of conference.
• The STAX payment rate multiplier of 120% available to producers seeking
higher per-acre protection is poorly understood by casual observers. Brazil views
this as a distortion.
• The government subsidy rate of 80% for STAX is more generous than for other
insurance products, but is viewed by U.S. interests as a partial offset for the other
program benefits sacrificed to obtain STAX.
U.S.-Brazil negotiations in this case remain ongoing and will likely hinge on the eventual farm
bill treatment of cotton.
Is a Permanent Resolution in the Offing?
As stated earlier, the House- and Senate-passed farm bills are in conference. The proposed cotton
policy changes were almost identical going into conference and were not likely to be part of the
20 Ibid.
21 The National Cotton Council (NCC) has suggested the possibility of limiting STAX payouts when futures prices are
high relative to some established threshold but this is not part of either the House- or Senate-passed farm bills.
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Status of the WTO Brazil-U.S. Cotton Case
give and take of conference policy negotiations. As a result, most of the cotton provisions
discussed above are likely to appear as is in the final bill reported out of conference.
If this is the case, then the ball is clearly in Brazil’s court. Under the WTO case ruling, Brazil has
the authority to determine whether any U.S. policy changes are deemed sufficient to meet the
conditions and/or terms of the said ruling. If the United States were to disagree with Brazil’s
interpretation of whether U.S. policy changes were sufficient, the United States likely would have
to introduce a new dispute settlement case to the WTO or, alternately, reach some kind of new
understanding with Brazil.
Cotton in WTO Trade Negotiations
An important consequence of the publicity associated with the Brazil dispute settlement case
against U.S. cotton support programs was the response within the ongoing round of WTO
multilateral trade negotiations, where cotton has been singled out for special consideration and
treatment. As a result, these negotiations (both within the larger Doha Round negotiations, as well
as the smaller Bali Ministerial texts) include provisions proposing that cotton receive special
treatment under each of the three WTO negotiating pillars—domestic support, export
competition, and market access.
Although the WTO’s more comprehensive Doha Round so far has failed to finalize a new
comprehensive trade negotiating agreement (with the exception of the Bali Ministerial agreement
noted below),22 if such an agreement were to be reached it would likely include specific
provisions related to cotton which, in turn, could potentially impact U.S. cotton support programs
and trade.
The C4 “Cotton Initiative”
In June 2003, four African countries—Benin, Burkina Faso, Chad, and Mali, referred to as the
C4—presented a “Sectoral Initiative in Favour of Cotton” to the WTO Trade Negotiations
Committee. Now referred to as the Cotton Initiative, the proposal highlighted the strong linkage
that cotton has with least-developed countries (LDCs), as well as the damage that the C4 believe
has been caused to them by cotton subsidies in wealthier countries. Their cotton initiative called
for all cotton subsidies in developed countries to be eliminated and for compensation to be paid to
the C4 while the subsidies remain in place to cover the related economic losses.
In response to the C4 proposal, a subcommittee was set up on November 19, 2004, to focus on
cotton within the WTO’s Committee on Agriculture (CoA).23 About a year later, on December 22,
2005, the WTO’s Hong Kong Ministerial Declaration included a commitment to address cotton
“ambitiously, expeditiously and specifically” within the agriculture negotiations as follows:24
22 See CRS Report RS22927, WTO Doha Round: Implications for U.S. Agriculture.
23 As required in the August 1, 2004 decision—referred to as the “July Package”—covering all the WTO negotiations,
WT/L/570, August 2, 2004. More information on the CoA’s Cotton Sub-Committee, including all related WTO
documents, is available at http://www.wto.org/english/tratop_e/agric_e/cotton_subcommittee_e.htm.
24 Paragraph 11 of the Hong Kong Ministerial Declaration; 5th WTO Ministerial, WT/MIN(05)/DEC, Doha Work
Program, adopted on December 18, 2005.
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• all forms of export subsidies for cotton by developed countries would be
eliminated immediately upon implementation of a new trade agreement;
• developed countries would give duty-free, quota-free (DFQF) access for cotton
exports from least-developed countries (LDCs) immediately upon
implementation of a new trade agreement; and
• trade-distorting domestic subsidies for cotton production would be reduced more
ambitiously than under whatever general formula is agreed to for other
commodities, and it should be implemented over a shorter period of time than
generally applicable.
However, the Doha Round negotiations floundered and, in December 2011, at the WTO’s 8th
Ministerial meeting in Geneva, were declared at an impasse and members were directed to
explore new negotiating approaches.25
Cotton at the Bali Ministerial
The next opportunity to address the “Cotton Initiative” was the Bali Ministerial of December 3-6,
2013. The C4 had presented a new rewrite of their earlier proposal to the Trade Negotiations
Committee on October 25, 2013, just in advance of the Bali Ministerial. In their new proposal, the
C4 proposed reforming cotton trade in two stages:26
• At the Bali Ministerial, ministers would agree to (1) grant duty-free, quota-free
(DFQF) access to developed-country markets from January 1, 2015, and (2)
immediately eliminate any remaining export subsidies on cotton.
• After the Bali Ministerial (but with agreement in Bali to do this), domestic
support for cotton would be negotiated intensively in 2014 in order to reach
agreement by the end of the year on substantial reductions.
WTO negotiating committees decided that the new C4 proposal was presented too close to the
Bali Ministerial to allow for proper vetting. Instead, the cotton text that was included in the final
Ministerial Decision represented a compromise. Specifically, the final Bali cotton text agreed to
as part of the Ministerial agreement:27
• reiterated WTO members’ commitment to make progress in the negotiations on
cotton according to the 2005 Hong Kong Ministerial objectives;
• officially expressed regret that no progress had been made to date;
• committed to meet twice each year to study the latest information and discuss
developments regarding the cotton initiative; and
• re-affirmed the importance of cotton to lesser-developed countries (LDCs) and
the need to strengthen development assistance for the cotton sector in LDCs.
25 Bridges Negotiation Briefing, Special Bali Issue, December 2013; available at http://ictsd.org/downloads/
bridgesweekly/bridgesweekly17-40.pdf
26 WTO: 2013 News Items, “Texts: Cotton producers release proposal for Bali and chair updates members on farm
talks,” October 30, 2013; at http://www.wto.org/english/news_e/news13_e/news13_e.htm.
27 WTO, Ninth WTO Ministerial Conference; available at https://mc9.wto.org/.
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Why Does This Matter?
The special treatment of cotton within the WTO’s current round of trade negotiations has served
to highlight, and bring into international focus, the Brazil-U.S. cotton policy case and proposed
changes to U.S. farm programs for cotton. Such heightened international awareness could
intensify pressures on both Brazil and the United States to resolve the cotton dispute in a
transparent and widely acceptable manner so as to minimize further repercussions.
Conclusion
While a new farm bill might address issues related to the WTO Brazil-U.S. cotton case from a
U.S. perspective, Brazil still retains substantial authority in making a final determination
regarding the compliance of any policy changes to U.S. cotton support programs. Furthermore,
the heightened attention surrounding the WTO Brazil-U.S. cotton case has served to single out
cotton for special treatment within ongoing WTO trade negotiations. A final resolution to the
cotton case could have an important bearing on how cotton support programs are treated in future
WTO trade negotiations or in future dispute settlement cases.
Author Contact Information
Randy Schnepf
Specialist in Agricultural Policy
rschnepf@crs.loc.gov, 7-4277
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