The WTO Brazil-U.S. Cotton Case

The WTO Brazil-U.S. Cotton Case

October 28, 2014
The WTO Brazil-U.S. Cotton Case
Figure 2. Value of Annual U.S. Cotton Production
World Trade Organization (WTO) rules covering
agricultural trade and domestic support programs for
agriculture have played a large role in shaping current
U.S. cotton policy. This paper summarizes cotton policy
changes and how they came about in the so-called “WTO
cotton case” brought by Brazil against U.S. cotton support
programs.
U.S. Cotton Relies on Government
Support and International Markets
The United States has historically been the world’s leading
exporter of cotton, at times shipping nearly 80% of U.S.
domestic production and supplying over 40% of the world’s
cotton exports (Figure 1).
Figure 1. U.S. Cotton Exports as Share of
U.S. Cotton Production and World Cotton Trade

Source: USDA, crop year production values and fiscal year

government-support data.
Brazil Challenges U.S. Cotton Programs
In 2002, Brazil—a major cotton export competitor—
initiated a long-running WTO dispute settlement case
(DS267) against U.S. cotton support programs. Brazil
charged that U.S. cotton programs were depressing
international cotton prices (Figure 3) and thus artificially
and unfairly reducing the quantity and value of Brazil’s
cotton exports, causing economic harm to its cotton sector.
Figure 3. U.S. Cotton Support versus
International Cotton Prices

Source: USDA.
During periods of low market prices, U.S. cotton support
programs have accounted for a large share of U.S. cotton
receipts (Figure 2) In some years—especially between
1999 and 2010—federal program outlays nearly reached or
exceeded the market value of the U.S. cotton crop.
U.S. Commitments in the WTO
As a signatory member of the WTO, the United States has
committed to abide by WTO rules and disciplines—
including those that govern domestic farm policy and its
effects on international markets. In particular, according to
the WTO’s Agreement on Subsidies and Countervailing
Measures (SCM), a market-distorting program may be

Source: USDA.
challenged when the program’s effect spills over into

Note: The A-Index is a composite index of world cotton prices.
international markets—that is, if it can be established that a
subsidy causes adverse market effects. For an SCM
WTO Panel Rules in Brazil’s Favor
violation to be meaningful, another WTO member country
In September 2004, after a period of hearings and review, a
must successfully challenge the violation under the WTO
WTO dispute settlement panel ruled in Brazil’s favor.
dispute settlement process.
www.crs.gov | 7-5700

The WTO Brazil-U.S. Cotton Case
lead to a temporary suspension of the retaliation. These
actions included, among others, monitoring U.S. use of
WTO Rulings in the Cotton Case
export credit guarantees, pursuing joint discussions toward
In 2004, a WTO panel found that U.S. agricultural programs
a final solution, and making an annual payment of $147.3
were involved in two types of WTO violations.
million to a Brazil fund for certain authorized cotton-sector
Actionable Subsidies—cotton price and income support
activities. The MOU was intended to be a bridge to the next
programs resulted in market distortions that depressed
U.S. farm bill, when permanent changes could be made.
international cotton prices, as asserted by Brazil.
The 2014 Farm Bill (P.L. 113-79)
Prohibited Subsidies—certain U.S. agricultural export
programs (including the GSM-102 program, which provides
The 2014 farm bill, signed into law in February 2014,
short-term export credit guarantees for certain U.S.
authorizes current U.S. farm policy through 2018. Among
agricultural products) were found to operate with implicit
traditional program crops, cotton was singled out for special
and illegal export subsidies under WTO rules.
treatment. Most previous farm safety net programs were
repealed, with the exception of the marketing loan program
The WTO panel ruled that if the violating policies were not
and crop insurance. Unlike other crops, upland cotton was
withdrawn or altered according to specific timetables, then
given a reduced marketing loan rate and was made
Brazil could take appropriate countermeasures (i.e., trade
ineligible for the new safety net programs available to
retaliation).
traditional program crops. Instead, upland cotton producers
In December 2007, a WTO compliance panel ruled that U.S.
are eligible for a stand-alone, county-based revenue
policy changes to that point were inadequate, and the ruling
insurance policy called the Stacked Income Protection Plan
was upheld on appeal in June 2008.
(STAX). Other WTO-related concessions included a
reduced maximum term of 36 months for the GSM 102
In 2009, a WTO arbitration panel ruled that Brazil’s allowable
program, and an allowance for certain additional uses of the
retaliation could have two components:
U.S. funds paid to the Brazil cotton fund. In addition,
• a fixed annual amount of $147.3 mil ion in response to
USDA was given additional flexibility to negotiate with
the actionable subsidies, and
Brazil regarding the GSM 102 program.
• a variable formula-derived amount based on annual U.S.
GSM 102 program spending in response to the
A Final Resolution?
prohibited subsidies.
In early 2014 Brazil said it was still dissatisfied with U.S.
policy changes, and appeared ready to request a new WTO
U.S. Modifies Farm and Trade Policy
compliance panel. Then, on October 2, 2014, Brazil and
As a result of the rulings and the potential for WTO-
the United States appeared to reach an agreement resolving
sanctioned retaliation, the United States made several
the long-running WTO dispute settlement case. The
successive policy changes in an attempt to bring the related
agreement included a final one-time U.S. payment of $300
programs into WTO compliance.
million to the Brazil cotton fund, and both a shortened term
of 24 months and an additional fee component for the GSM
Because most farm programs are written in statute, they
102 program. In return, Brazil agreed to drop the WTO
require congressional action to be changed. Such changes
cotton dispute and to abide by a temporary Peace Clause
usually occur in the context of a new farm bill. However,
with respect to any new WTO actions against U.S. cotton
the Administration also has some wiggle room in how it
support programs while the 2014 farm bill is in force, or
implements the farm programs. The successive policy
against any agricultural export credit guarantees under the
changes evolved over several years and relied on both
GSM 102 program as long as the program is operated in a
legislative action and administrative adjustments.
manner consistent with the agreed terms.
Changes Made Prior to the 2014 Farm Bill
The resolution to the cotton case could have an important
bearing on how domestic support programs are treated in
In 2005 USDA added a risk-based fee to its export credit
future WTO trade negotiations or in future dispute
guarantee programs to eliminate the implicit export subsidy.
settlement cases. In addition to the implications for
In 2006, Congress eliminated the Step 2 cotton program—
domestic support policy, the heightened attention
which made payment to exporters of U.S. upland cotton and
surrounding the WTO Brazil-U.S. cotton case has set a
which was found to operate as an illegal export subsidy—
precedent by singling out cotton for special treatment
by a provision (§1103) in the Deficit Reduction Act of 2005
within ongoing WTO trade negotiations.
(P.L. 109-171). The 2008 farm bill (P.L. 110-246), made
additional changes to the export credit programs, including
More Information
the repeal of a fee cap on GSM 102 guarantees and the
elimination of the GSM 103 (long-term 3- to 10-year credit
For more analysis, see CRS Report R43336, Status of the
guarantees) and Supplier Credit Guarantee programs.
WTO Brazil-U.S. Cotton Case; CRS Report RS20840,
Agriculture in the WTO: Rules and Limits on Domestic
Retaliation Avoided by Temporary MOU
Spending; and CRS Report R43494, Crop Insurance
In April 2010, just prior to the start of Brazil’s threatened
Provisions in the 2014 Farm Bill (P.L. 113-79).
trade retaliation, the United States and Brazil agreed to a
Randy Schnepf, rschnepf@crs.loc.gov, 7-4277.
memorandum of understanding (MOU) that spelled out
certain actions which, if taken by the United States, would
IF00057
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Document Outline

U.S. Cotton Relies on Government Support and International Markets

U.S. Commitments in the WTO

Brazil Challenges U.S. Cotton Programs

WTO Panel Rules in Brazil’s Favor

U.S. Modifies Farm and Trade Policy

Changes Made Prior to the 2014 Farm Bill

In 2005 USDA added a risk-based fee to its export credit guarantee programs to eliminate the implicit export subsidy. In 2006, Congress eliminated the Step 2 cotton program—which made payment to exporters of U.S. upland cotton and which was found to ...

Retaliation Avoided by Temporary MOU

In April 2010, just prior to the start of Brazil’s threatened trade retaliation, the United States and Brazil agreed to a memorandum of understanding (MOU) that spelled out certain actions which, if taken by the United States, would lead to a temporar...

The 2014 Farm Bill (P.L. 113-79)

The 2014 farm bill, signed into law in February 2014, authorizes current U.S. farm policy through 2018. Among traditional program crops, cotton was singled out for special treatment. Most previous farm safety net programs were repealed, with the exc...

A Final Resolution?

In early 2014 Brazil said it was still dissatisfied with U.S. policy changes, and appeared ready to request a new WTO compliance panel. Then, on October 2, 2014, Brazil and the United States appeared to reach an agreement resolving the long-running W...

The resolution to the cotton case could have an important bearing on how domestic support programs are treated in future WTO trade negotiations or in future dispute settlement cases. In addition to the implications for domestic support policy, the he...

More Information

In December 2007, a WTO compliance panel ruled that U.S. policy changes to that point were inadequate, and the ruling was upheld on appeal in June 2008.