October 28, 2014
The WTO Brazil-U.S. Cotton Case
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
Figure 2. Value of Annual U.S. Cotton Production
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
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
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
challenged when the program’s effect spills over into
international markets—that is, if it can be established that a
subsidy causes adverse market effects. For an SCM
violation to be meaningful, another WTO member country
must successfully challenge the violation under the WTO
dispute settlement process.
Note: The A-Index is a composite index of world cotton prices.
WTO Panel Rules in Brazil’s Favor
In September 2004, after a period of hearings and review, a
WTO dispute settlement panel ruled in Brazil’s favor.
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The WTO Brazil-U.S. Cotton Case
WTO Rulings in the Cotton Case
In 2004, a WTO panel found that U.S. agricultural programs
were involved in two types of WTO violations.
Actionable Subsidies—cotton price and income support
programs resulted in market distortions that depressed
international cotton prices, as asserted by Brazil.
Prohibited Subsidies—certain U.S. agricultural export
programs (including the GSM-102 program, which provides
short-term export credit guarantees for certain U.S.
agricultural products) were found to operate with implicit
and illegal export subsidies under WTO rules.
The WTO panel ruled that if the violating policies were not
withdrawn or altered according to specific timetables, then
Brazil could take appropriate countermeasures (i.e., trade
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.
In 2009, a WTO arbitration panel ruled that Brazil’s allowable
retaliation could have two components:
a fixed annual amount of $147.3 million in response to
the actionable subsidies, and
a variable formula-derived amount based on annual U.S.
GSM 102 program spending in response to the
U.S. Modifies Farm and Trade Policy
As a result of the rulings and the potential for WTOsanctioned retaliation, the United States made several
successive policy changes in an attempt to bring the related
programs into WTO compliance.
Because most farm programs are written in statute, they
require congressional action to be changed. Such changes
usually occur in the context of a new farm bill. However,
the Administration also has some wiggle room in how it
implements the farm programs. The successive policy
changes evolved over several years and relied on both
legislative action and administrative adjustments.
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 operate as an illegal export subsidy—
by a provision (§1103) in the Deficit Reduction Act of 2005
(P.L. 109-171). The 2008 farm bill (P.L. 110-246), made
additional changes to the export credit programs, including
the repeal of a fee cap on GSM 102 guarantees and the
elimination of the GSM 103 (long-term 3- to 10-year credit
guarantees) and Supplier Credit Guarantee programs.
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 temporary suspension of the retaliation. These
actions included, among others, monitoring U.S. use of
export credit guarantees, pursuing joint discussions toward
a final solution, and making an annual payment of $147.3
million to a Brazil fund for certain authorized cotton-sector
activities. The MOU was intended to be a bridge to the next
U.S. farm bill, when permanent changes could be made.
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 exception of the marketing loan program
and crop insurance. Unlike other crops, upland cotton was
given a reduced marketing loan rate and was made
ineligible for the new safety net programs available to
traditional program crops. Instead, upland cotton producers
are eligible for a stand-alone, county-based revenue
insurance policy called the Stacked Income Protection Plan
(STAX). Other WTO-related concessions included a
reduced maximum term of 36 months for the GSM 102
program, and an allowance for certain additional uses of the
U.S. funds paid to the Brazil cotton fund. In addition,
USDA was given additional flexibility to negotiate with
Brazil regarding the GSM 102 program.
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 WTO dispute settlement case. The
agreement included a final one-time U.S. payment of $300
million to the Brazil cotton fund, and both a shortened term
of 24 months and an additional fee component for the GSM
102 program. In return, Brazil agreed to drop the WTO
cotton dispute and to abide by a temporary Peace Clause
with respect to any new WTO actions against U.S. cotton
support programs while the 2014 farm bill is in force, or
against any agricultural export credit guarantees under the
GSM 102 program as long as the program is operated in a
manner consistent with the agreed terms.
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 heightened attention
surrounding the WTO Brazil-U.S. cotton case has set a
precedent by singling out cotton for special treatment
within ongoing WTO trade negotiations.
For more analysis, see CRS Report R43336, Status of the
WTO Brazil-U.S. Cotton Case; CRS Report RS20840,
Agriculture in the WTO: Rules and Limits on Domestic
Spending; and CRS Report R43494, Crop Insurance
Provisions in the 2014 Farm Bill (P.L. 113-79).
Randy Schnepf, email@example.com, 7-4277.
www.crs.gov | 7-5700