US announces deal with Brazil to end decade-long cotton dispute

The US and Brazil have agreed to bring to a close a longstanding trade dispute centred on US cotton subsidies.

by Kanaga Raja

GENEVA: The United States announced on 1 October that it had reached an agreement with Brazil that would settle a decade-long dispute at the World Trade Organization (WTO) over subsidies to US cotton farmers.

According to a press release issued by the Office of the US Trade Representative (USTR), under the terms of the deal, in exchange for a one-time final contribution by the US of $300 million to the Brazil Cotton Institute (IBA), Brazil will formally terminate its dispute with the US over this issue at the WTO’s Dispute Settlement Body (DSB) within 21 days.

Brazil will also give up its rights to take countermeasures against US trade or take any further proceedings in the dispute, the press release added.

[In December 2009, Brazil had advised the DSB (see below) that on the basis of the arbitrator’s awards and complete data, the authorization to retaliate would be for the amount of $829.3 million.]

The USTR press release said that Brazil has also agreed not to bring new WTO actions against US cotton support programmes while the current US Farm Bill is in force or against agricultural export credit guarantees under the GSM-102 programme as long as the programme is operated consistent with the agreed terms.

“I am pleased that the United States and Brazil have found a permanent resolution to the Cotton dispute,” said USTR Michael Froman in the press release.

“Today’s agreement brings to a close a matter which put hundreds of millions of dollars in US exports at risk. The United States and Brazil look forward to building on this significant progress in our bilateral economic relationship,” he added.

“Through this negotiated solution, the United States and Brazil can finally put this dispute behind us,” said US Secretary of Agriculture Tom Vilsack.

“Without this agreement, American businesses, including agricultural businesses and producers, could have faced countermeasures in the way of increased tariffs totalling hundreds of millions of dollars every year. This removes that threat and ensures American cotton farmers will have effective risk management tools,” he further said.

A Bloomberg news report has quoted the Brazilian Foreign Ministry as saying in an emailed statement to the agency: “The deal would allow better competitiveness for Brazilian products in foreign trade, and the payment of $300 million contributes to mitigate the losses for Brazilian cotton growers.”

“The deal is restricted to cotton and allows Brazil to question aspects of US Farm Bill at WTO for other products, if necessary,” the Ministry said in its statement.

History of the dispute

Brazil had raised a dispute against the US back in 2002 concerning prohibited and actionable subsidies provided by the US to its upland cotton industry. The dispute ran through the gamut of panel, Appellate Body, compliance panel as well as its appellate proceedings, and finally to arbitration.

In August 2009, the WTO issued two separate reports concerning arbitration proceedings in the dispute.

In the first report, the arbitrator determined that the annual level of appropriate countermeasures in relation to the GSM-102 payments for fiscal year 2006 amounted to $147.4 million.

In the second report, the arbitrator determined that the annual level of countermeasures commensurate with the degree and nature of adverse effects determined to exist in relation to the marketing loan and counter-cyclical payments amounted to $147.3 million.

In November 2009, the DSB granted Brazil’s request for authorization to suspend the application to the US of concessions and other obligations in the dispute. Subsequently, Brazil informed the DSB in December 2009 that on the basis of complete data related to fiscal year 2008 and calendar year 2008, obtained from the US and other sources indicated by the arbitrator, the total amount of countermeasures authorized to Brazil would be $829.3 million.

Providing some background to the dispute and some subsequent events, the USTR press release said that in June 2010, both the US and Brazil had signed a Framework Agreement, which expired in February 2014 when the 2014 Farm Bill was enacted.

According to the press release, under a related Memorandum of Understanding, the US had also made monthly payments to IBA for technical assistance and capacity-building activities in the cotton sector.

The new agreement also includes a related Memorandum of Understanding which, according to the USTR press release, sets out, amongst others, new rules governing fees and tenor for guarantees under the GSM-102 programme, a final transfer of funds to IBA, and additional support for technical assistance and capacity-building activities initiated under the 2010 Memorandum.

According to the latest Memorandum, the technical assistance and capacity-building activities related to the cotton sector include:

l     pest and disease control, mitigation and eradication;

l     application of post-harvest technology;

l     purchase and use of capital equipment (e.g., storage and ginning equipment);

l     promotion of use of cotton;

l     adoption of plant varieties;

l     observance of labour laws;

l     training and education of workers and employers;

l     market information services;

l     natural resources management and conservation;

l     application of technologies to improve the quality of cotton;

l     application of methods to improve grading and classing services;

l     design, planning and implementation of infrastructure projects required and solely used for storage, conservation and transportation of cotton, cotton seeds, and cotton inputs such as fertilizer; and

l     research by Brazilian public and private institutions in collaboration with US research agencies.

For its part, under Section IV of the Memorandum, the US will not offer guarantees under the GSM-102 programme for loans of longer than 18 months, and shall not extend or renew the tenor of a guarantee after it is issued.

However, debt arising from default under a guaranteed obligation may be rescheduled, and guarantees under the GSM-102 programme shall not be used for debt rescheduling purposes.

The US is to also ensure that the fees for the GSM-102 programme guarantees will meet certain conditions, set out in Section IV of the Memorandum. The Memorandum itself is to terminate on 30 September 2018, unless the parties agree otherwise.

As to the “peace clause” set out under Section VI of the Memorandum, Brazil shall not request consultations under Articles XXII or XXIII of the GATT 1994 with respect to any of the following:

(a) the Commodity Credit Corporation GSM-102 export credit guarantee programme, or any export credit guarantees provided under the programme, while the programme operates in a manner consistent with the requirements described in Section IV (of the Memorandum on the operation of the GSM-102 programme); and

(b) any current domestic support programme or policy specific to upland cotton such as the Stacked Income Protection Programme described in Section 11017 of the US Agricultural Act of 2014, payments under any such programme or policy, or support to upland cotton producers under any other domestic support programme under current agricultural domestic support policies such as marketing loans described in Subtitle B of Title I of the US Agricultural Act of 2014, until 30 September 2018. (SUNS7887)                                     

Third World Economics, Issue No. 578, 1-15 Oct 2014, pp8-9