Brazil Wins Eight-Year Battle Against U.S. Cotton Subsidies After Threatening Sanctions

The United States and Brazil yesterday (Tuesday) announced a trade agreement to end their long-standing dispute about U.S. cotton subsidies. The countries reached the deal one day before Brazil was to impose up to $830 million in sanctions authorized by the World Trade Organization (WTO).

The United States will give $147.3 million in assistance to Brazil's cotton producers and suspend its export loan program that guarantees loans foreign buyers use to purchase U.S. cotton. The program – known as GSM-102 – will eventually restart with higher fees. The WTO declared $147.3 million as the retaliation amount based on how much the U.S. government gave its cotton producers.

The deal's provisions will remain in place until the next farm bill faces Congress in 2012, or until the countries reach another resolution.

The deal's provisions will remain in place until the next farm bill faces Congress in 2012, or until the countries reach another resolution.

"Whatever understanding that is reached outside of what the WTO mandated will be by definition temporary," Brazil Foreign Minister Celso Amorim emailed in a statement to Bloomberg. "Still, any procedural changes that offer adequate guarantees, although temporary, are welcomed."

The WTO ruled in August 2009 that U.S. subsidies to cotton growers had violated global trade rules and the United States had not taken adequate steps to modify its policies. The ruling allowed Brazil to enforce $591 million in higher tariffs against U.S. goods and withhold payment or break patents on $239 million worth of American products.

Although the WTO has in previous rulings allowed countries to suspend obligations to intellectual property rights – like patents – Brazil would have been the first country to actually do so. This happens when the monetary amount of retaliation is so high that taxing goods alone may not meet it.

"Traditionally, retaliation in trade has been the preserve of the largest developed countries, which have market power," Robert Z. Lawrence, a professor of international trade and finance at the Harvard Kennedy School, told The New York Times. "But this mechanism – suspending intellectual property protection – gives smaller, developing countries a way to enforce their rights under trade rules."

The Brazil-U.S. cotton battle has been raging since Brazilian cotton growers pressured their government to file a case against U.S. trade practices in 2002. The WTO ruled that the United States violated trade agreements in both 2005 and 2008.

Oxfam America, an international relief and development organization that seeks to end injustice, has called the American cotton subsidies "unfair, destructive and illegal."

"The global trading system depends on countries obeying rules and submitting to orderly dispute resolution," Gawain Kripke, policy director for Oxfam America, wrote in a message on the program's Web site in reaction to the WTO's August ruling. "Thus far, the U.S. has ignored the ruling of the WTO adjudication and continues large subsidies for cotton production. If the U.S. continues this way, the integrity of the multilateral trade system is at stake."

An Oxfam study showed that complete removal of American cotton subsidies would raise global cotton prices by 6-14%, resulting in enough money to feed and educate millions of extremely poor children in cotton-growing households.

"The U.S. may be buying time with this agreement, but only a full reform of U.S. cotton subsidies will benefit vulnerable cotton farmers around the world," Oxfam spokeswoman Laura Rusu said in an email to Bloomberg.

The U.S. government also agreed to move toward lifting barriers on importing Brazilian pork and beef, which was prohibited because of the possibility it carried foot-and-mouth disease.

News and Related Story Links:

• Bloomberg:
  Brazil, U.S. Agree to Avoid Tariffs in Cotton Dispute
• The New York Times:
  U.S. and Brazil Reach Agreement on Cotton Dispute
• OxfamAmerica.org:
  Oxfam reaction to WTO judgment on U.S. cotton subsidies
• Money Morning:
  Two Ways to Profit From Wall Street's "Soft Commodity" – Cotton
• Money Morning:
  Six Ways to Profit as Brazil's Economy Takes Off