TWN Info Service on WTO and Trade Issues (June08/18)
28 June 2008
Third World Network

Trade: DSB adopts rulings in US-Brazil cotton dispute
Published in SUNS #6501 Monday 23 June 2008

Geneva, 20 Jun (Kanaga Raja) -- The WTO Dispute Settlement Body on Friday adopted the report of the Appellate Body and the report of the compliance panel in relation to a dispute brought by Brazil against the United States on its subsidies on upland cotton.

On 2 June, the Appellate Body upheld an earlier compliance panel ruling that found subsidies provided by the US to its cotton farmers to be illegal, with respect to its obligations under the Agreement on Agriculture and Subsidies and Countervailing Measures (SCM).

The Appellate Body recommended that the Dispute Settlement Body request the US to bring its measures - found to be inconsistent with the Agreement on Agriculture and the SCM Agreement - into conformity with its obligations under those Agreements. (See SUNS #6487 dated 3 June 2008).

Apart from statements at the DSB relating to the adoption of the Panel and Appellate Body reports, Brazil, Australia and Canada also voiced their concerns over the US 2008 Farm Bill re-enacted by Congress Wednesday, with continuation of the illegal cotton subsidy programs, and more generally, continuing US trade-distorting agricultural subsidy and support policies.

Welcoming the adoption of the reports, Brazil said at the DSB that some of the conclusions of the Appellate Body are very important in that they clarify the nature of the implementation obligations of Members with respect to subsidies that are found to cause adverse effects.

First, said Brazil, according to the Appellate Body, the terms of Article 7.8 of the SCM Agreement involve "affirmative action" that is directed at effecting the withdrawal of the subsidy or removal of its adverse effects.

Second, the obligation in Article 7.8 is not limited to subsidies granted in the past. In the words of the Appellate Body, this means that "in the case of recurring annual payments, the obligation in Article 7.8 would extend to payments 'maintained' by the respondent Member beyond the period examined by the panel".

Moreover, said Brazil, according to the Appellate Body, the option in Article 7.8 of removing the adverse effects instead of withdrawing the subsidy "cannot be read as allowing a Member to continue to cause adverse effects by maintaining the subsidies that were found to have resulted in adverse effects."

Third, the Appellate Body recognized that the distinction between "as such" and "as applied" claims may not lend itself to a proper analysis of adverse effects cases. Brazil said that this was in the context of an artificial distinction between "payments" and "programs" that was at the core of the dispute in these compliance proceedings.

The Appellate Body correctly noted that it was difficult to divorce payments from programs, and that "it would be difficult to conceive how an analysis of whether a programme 'as such' resulted in adverse effects would differ from an analysis of whether payments under a programme have resulted in such effects."

Brazil said that all these findings go in the direction of safeguarding the effectiveness of the rules agreed by Members to discipline the use of subsidies. Brazil said that it agrees with the Appellate Body that a different conclusion would have "serious implications for a complaining Member's ability to obtain relief against adverse effects of actionable subsidies."

Brazil recalled that at the DSB meeting where the reports of the Appellate Body and the original panel were adopted in 2005, it had stated that "this protracted and sometimes painful process has finally come to an end."

"We, of course, expected that the United States would comply with the clear and unmistakable rulings that were then made by the DSB. Now, 3 years after that meeting and after another period of prolonged litigation, we can at least say that this was the last stage where Brazil's arguments could be examined on their merits," said Brazil.

In light of the findings of continued inconsistency of the US measures with the multilateral rules, Brazil said that it once again expresses hope and expectation that the United States will fully and immediately comply with the rulings and recommendations of the DSB in this matter.

The signals being received by Brazil, however, are not encouraging, it said. The compliance panel proceedings were about measures that were enacted as part of the 2002 farm bill, pursuant to which $8.8 billion were paid to cotton producers from marketing years 2002 to 2005 alone under the three programs that were found to cause adverse effects - an average of $2.2 billion per year. The original panel proceedings, started in 2003, referred to $12.9 billion in subsidies paid in years 1999-2002, corresponding, on average, to a subsidization rate of 89.5%.

Brazil noted that a new Farm Bill was recently approved by the US Congress. According to a report by the International Cotton Advisory Committee (ICAC), "the 2008 farm bill introduces few modifications to the US cotton program. The structure of subsidies (...) will remain the same. (...) [L]oan rates will be unchanged (...) and the upland target price, currently 72.40 cents per pound, will be reduced to 71.25 cents per pound. (...) In conclusion, the cotton program introduced in the 2008 farm bill is little different from the cotton program established by the 2002 farm bill. US farmers will face a similar set of policies between 2008/9 and 2012/13 as they faced between 2002/3 and 2007/8."

[On Thursday, the US Congress (both Senate and House) overrode for the second time a Presidential veto, and re-approved a $290 billion Farm Bill that becomes law. The votes to override, in both Houses of Congress were overwhelming: the Senate by 80 to 14, and the House by 317 to 109.]

Brazil said that this is a cause of great concern, not only for Brazilian cotton growers, but certainly also for other producers around the world, who may have to continue to suffer the adverse effects of subsidized US cotton production while US producers, as recognized by the Appellate Body, are kept isolated from market signals.

Such actions raise questions about the willingness of the United States to comply with its obligations in the present case, said Brazil, expressing hope that the adoption of the compliance panel and Appellate Body reports provides sufficient incentive for the United States to amend its legislation and ensure compliance with the rulings of the DSB.

"Absent full compliance with these rulings, Brazil will pursue the established procedures in order to obtain from the DSB authorization to take counter-measures vis-a-vis the United States."

The US expressed disappointment with the compliance panel and Appellate Body reports. It believed that it had brought the challenged payments and export credit guarantees into full compliance with the DSB's recommendations and rulings.

To find otherwise, the compliance panel and Appellate Body had to make findings on jurisdiction that re-cast or ignored those recommendations and rulings and other findings that assume conclusions and fail to demand of the complaining party that it fully prove its case, said the US.

In a detailed statement, the US highlighted three aspects of the compliance panel and Appellate Body reports; First, the findings on jurisdiction under Article 21.5 of the DSU; second, the findings on export credit programs; and third, the findings on serious prejudice.

On the issue of findings on jurisdiction under Article 21.5 of the DSU, the US maintained that the Appellate Body upheld the compliance panel's two preliminary rulings on scope of compliance proceedings by misapplying Article 21.5 and neglecting the fundamental role of the DSB's recommendations and rulings. The US pointed to the preliminary rulings in relation to US export credit guarantees, and certain payments commencing in September 2005.

With respect to the substantive findings of the dispute, the US expressed disappointment that the Appellate Body relied on what amounted to little more than speculation concerning the design of the GSM 102 program to uphold the compliance panel's ultimate finding on export credit guarantees.

Official US budget re-estimates data showed that the US export credit guarantee programs were projected to be strongly profitable, even before the measures taken to comply were adapted. And, in fact, for the years in which the books had closed (Fiscal Year 1994 and 1995), the data showed an actual profit.

On findings on serious prejudice, the US was also disappointed that the Appellate Body upheld the compliance panel's findings that the US marketing loan and counter-cyclical payments continued to cause significant price suppression, thereby constituting present serious prejudice to Brazil's interests, even though the Appellate Body at times recognized serious weaknesses in the compliance panel's analysis.

The US also said that it was compelled to note that the findings on serious prejudice being considered today are outdated. The compliance panel and Appellate Body reports deal with market conditions from two to three years ago. Since then, US cotton acreage has fallen precipitously, and continues to decline. US cotton planted acreage fell by 29.5% in 2007 from the year before and fell a further 12.8% in 2008. That is, said the US, despite the allegedly market-insulating effects of US payments, US cotton acreage has declined by more than 38.5% in the last two years.

And despite the alleged price-suppressing effects of US payments, cotton prices have risen sharply, and futures prices indicate the market expects prices to remain high for the foreseeable future, said the US, adding that as a result, it has not made any marketing loan payments since September 2007, before circulation of the compliance panel report. Further, the US is making only minimal counter-cyclical payments.

In an intervention, Canada welcomed the panel and Appellate Body findings that the US continues to violate the SCM Agreement through its marketing loan and counter-cyclical payments and its GSM 102 export credit guarantee program.

With respect to the marketing loan and counter-cyclical payments in particular, said Canada, the reports confirm that the US has failed to implement the rulings and recommendations of the DSB by failing to "take appropriate steps to remove adverse effects or withdraw the subsidy."

The US had argued that its obligation under Article 7.8 of the SCM Agreement was limited to removing adverse effects caused by subsidies granted in a particular period of time and did not cover either future payments under the same programs, or the subsidy programs themselves.

Canada said that as a third party in the proceedings, it had argued before the Appellate Body that the loophole that the US sought to establish was a direct challenge to the effectiveness of compliance proceedings in serious prejudice cases.

In rejecting the US position, the Appellate Body's report provides helpful clarification on the obligation in Article 7.8 of the SCM Agreement to "take appropriate steps to remove the adverse effects" and the relationship between Article 7.8 and Article 21.5 of the DSU. Canada welcomed the Appellate Body findings as an important contribution to the prompt and effective settlement of disputes.

Canada was also pleased with the Appellate Body findings on the scope of a "measure taken to comply" for purposes of an Article 21.5 proceeding. The Appellate Body's findings that a panel must consider a measure in its totality in a 21.5 proceeding, while confirming that the scope of claims that may be raised in an Article 21.5 proceeding is not unbounded, are consistent with previous Appellate Body reports.

Canada also welcomed the Appellate Body's findings on the allegations of the US in respect of Article 11 of the DSU. Canada said that it is pleased that the Appellate Body has maintained its consistent position that while a panel must carefully consider and analyze competing evidence submitted by parties, it will not interfere lightly with a panel's exercise of its authority as the trier of fact.

Canada expressed concern that the Farm Bill recently passed by the US Congress fails to reform major US programs including programs at issue in the case, such as the direct payments and the counter-cyclical payments programs. Not only does the new Farm Bill lack meaningful reforms, it also raises the possibility of increased subsidies.

"As a result, the US has missed an opportunity to make its farm programs more market-oriented and to decrease the vulnerability of US farm programs to future challenges," said Canada.

In its intervention, Australia also welcomed the report of the Appellate Body, saying that the Appellate Body has clarified the scope of proceedings under Article 21.5 of the DSU, where these proceedings concern recommendations and rulings on actionable subsidies.

Noting that the findings and conclusions of the Appellate Body give real effect to the meaning of Article 7.8 of the SCM Agreement, Australia said that the Appellate Body has ensured that a Member whose interests have been adversely affected by another Member's subsidy is not left without a remedy, should the subsidizing Member fail to take action envisaged by Article 7.8.

The Appellate Body has recognized that compliance with Article 7.8 will usually involve an affirmative action to withdraw the subsidy or remove its adverse effects, said Australia, adding that it expects the US to take such positive action without delay, in fulfillment of the DSB's recommendations and rulings in this dispute.

Australia also expressed concern that the Farm Bill recently passed by the US Congress continues the cotton support programs at issue in the dispute and reinstates certain elements of support programs benefiting cotton production previously found to be WTO-inconsistent.

More generally, said Australia, the 2008 Farm Bill institutionalizes trade-distorting support programs with the potential to provide even greater subsidies to major crops. The continuance of these same support programs with more generous terms could severely test the ability of the US to comply with its WTO domestic support commitments in future years, particularly should prices for key commodities return to historic levels.

The EC said that the reports clarify WTO rules on export financing, actionable subsidies and the scope of compliance procedures. For example, they confirmed that if payments under a subsidies program has been found to be inconsistent with the SCM Agreement and if the defending Member continues to make payments under such program under the same conditions, those further payments clearly fall within the jurisdiction of a compliance panel. +