The WTO Brazil-U.S. Cotton Case

The WTO Brazil-U.S. Cotton Case

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October 28, 2014
The WTO Brazil-U.S. Cotton Case
World Trade Organization (WTO) rules covering
Figure 2. Value of Annual U.S. Cotton Production
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

challenged when the program’s effect spills over into
Source: USDA.
international markets—that is, if it can be established that a
Notes: The A-Index is a composite index of world cotton prices.
subsidy causes adverse market effects. For an SCM
violation to be meaningful, another WTO member country
WTO Panel Rules in Brazil’s Favor
must successfully challenge the violation under the WTO
In September 2004, after a period of hearings and review, a
dispute settlement process.
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
a final solution, and making an annual payment of $147.3
In 2004, a WTO panel found that U.S. agricultural programs
million to a Brazil fund for certain authorized cotton-sector
were involved in two types of WTO violations.
activities. The MOU was intended to be a bridge to the next
U.S. farm bill, when permanent changes could be made.
Actionable Subsidies—cotton price and income support
programs resulted in market distortions that depressed
The 2014 Farm Bill (P.L. 113-79)
international cotton prices, as asserted by Brazil.
The 2014 farm bill, signed into law in February 2014,
Prohibited Subsidies—certain U.S. agricultural export
authorizes current U.S. farm policy through 2018. Among
programs (including the GSM-102 program, which provides
traditional program crops, cotton was singled out for special
short-term export credit guarantees for certain U.S.
treatment. Most previous farm safety net programs were
agricultural products) were found to operate with implicit and
repealed, with the exception of the marketing loan program
illegal export subsidies under WTO rules.
and crop insurance. Unlike other crops, upland cotton was
The WTO panel ruled that if the violating policies were not
given a reduced marketing loan rate and was made
withdrawn or altered according to specific timetables, then
ineligible for the new safety net programs available to
Brazil could take appropriate countermeasures (i.e., trade
traditional program crops. Instead, upland cotton producers
retaliation).
are eligible for a stand-alone, county-based revenue
In December 2007, a WTO compliance panel ruled that U.S.
insurance policy called the Stacked Income Protection Plan
policy changes to that point were inadequate, and the ruling
(STAX). Other WTO-related concessions included a
was upheld on appeal in June 2008.
reduced maximum term of 36 months for the GSM 102
program, and an allowance for certain additional uses of the
In 2009, a WTO arbitration panel ruled that Brazil’s allowable
U.S. funds paid to the Brazil cotton fund. In addition,
retaliation could have two components:
USDA was given additional flexibility to negotiate with

a fixed annual amount of $147.3 million in response to
Brazil regarding the GSM 102 program.
the actionable subsidies, and

a variable formula-derived amount based on annual U.S.
A Final Resolution?
GSM 102 program spending in response to the
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 the
United States appeared to reach an agreement resolving the
As a result of the rulings and the potential for WTO-
long-running WTO dispute settlement case. The agreement
sanctioned retaliation, the United States made several
included a final one-time U.S. payment of $300 million to
successive policy changes in an attempt to bring the related
the Brazil cotton fund, and both a shortened term of 24
programs into WTO compliance.
months and an additional fee component for the GSM 102
program. In return, Brazil agreed to drop the WTO cotton
Because most farm programs are written in statute, they
dispute and to abide by a temporary Peace Clause with
require congressional action to be changed. Such changes
respect to any new WTO actions against U.S. cotton
usually occur in the context of a new farm bill. However,
support programs while the 2014 farm bill is in force, or
the Administration also has some wiggle room in how it
against any agricultural export credit guarantees under the
implements the farm programs. The successive policy
GSM 102 program as long as the program is operated in a
changes evolved over several years and relied on both
manner consistent with the agreed terms.
legislative action and administrative adjustments.
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, The WTO
guarantees) and Supplier Credit Guarantee programs.
Brazil-U.S. Cotton Case; CRS Report RS20840,
Agriculture in the WTO: Rules and Limits on Domestic
Retaliation Avoided by Temporary MOU
Support; 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
memorandum of understanding (MOU) that spelled out
Randy Schnepf,
certain actions which, if taken by the United States, would
IF10193
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
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The WTO Brazil-U.S. Cotton Case

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