us brazil cotton dispute

8/8/2019 US Brazil Cotton Dispute

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Us-Brazil CottonDispute

By

Mukul Diwaker 09020241009

Mansi Goenka 09020241011

Abhishek Hansda 09020241081

Rohan Munot - 09020241131


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Background of the case

} The United States is the worlds largest cotton exporter.During the 2001-2003 period, U.S. cotton exportsaccounted for 40% of world trade, while U.S. cottonsubsidies averaged $3 billion per year.

} In late 2002, Brazil expressed its growing concernsabout U.S. cotton subsidies by initiating a WTO disputesettlement case (DS267) against specific provisions ofthe U.S. cotton program.

} On September 8, 2004, a WTO dispute settlementpanel ruled against the United States on several keyissues

} This ruling was appealed by the United States, and onMarch 3, 2005, and WTO Appellate Body (AB) upheldthe panels ruling.


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} U.S. cotton programs with recommendations that theoffending programs either be removed or be altered so as toremove their adverse effects

} After losing its appeal, the United States responded to the ABruling by removing its Step 2 cotton program and by adjustingits export credit programs.

} Brazil argued that these changes were insufficient and onAugust 21, 2006, requested a WTO compliance panel toreview the matter.

} Brazil sought the retaliatory measures of worth $ 147 mn peryear and was granted for the same.

} On 30 April 2010, Brazil informed the DSB that it had decidedto postpone the imposition of the countermeasures notified,and that Brazil and the US will mutually reach satisfactorysolution. Accordingly, no countermeasures will enter intoforce before 21 June 2010.


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World Cotton Market (Production)

4,400

8,350

12,500

17,559

25,500

0 5,000 10,000 15,000 20,000 25,000 30,000

Brazil

Pakistan

India

United States

China

1,000 480 lb Bales

25,500 808

0

Legend:

Worlds Top Cotton Producers (2003/2004)

Source: NationMaster.com

Source: Statistical

LexisNexus


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So the theorygoes...

USG subsidizes US cottonindustry

Underpriced US

cotton lowersworld cottonprices and

increases US shareof world cotton

markets

Lower cotton prices anda decreased share ofworld cotton markets

cost the Brazilian cottonindustry millions of

dollars


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World Cotton Market (Exports)

US and Brazil Cotton Exports (1992-2003)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1992

1994

1996

1998

2000

2002

Year

1,000480lb

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.0080.00

90.00

100.00

Cents/

US Cotton Exports

Brazil Cotton Exports

World Price of Cotton

(A Index 1/, Cents/lb)

Worlds Top Cotton Exporters (2003/2004) Source: NationMaster.com

Legend:

12,000 231

0

Source: Statistical LexisNexus


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Contested U.S. agricultural support

measures Production Flexibility Contract Payments

Direct Payments

Counter-Cyclical Payments

Marketing Assistance Loans Loan Deficiency Payments

Crop Insurance Payments

Market Loss Assistance Payments

Step-2 Payments FSC/ETITax Breaks

Export Credit Guarantees


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Subsidies by US} Step 2 payments

} Part of special cotton marketing provisionsauthorized under U.S. farm programlegislation

} To keep U.S. upland cotton competitive onthe world market

} Made to both exporters and domestic millusers

} To compensate them for their purchase ofU.S. upland cotton, which tends to bepriced higher than the world market price


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} Export credit guarantee program(GSM-102, GSM-103, and SCGP)

} Underwrites credit extended by private U.S. banks toapproved foreign banks for purchases of U.S. food

and agricultural products by foreign buyers.} Different scheme, different duration

}GSM-102- 3 years

}GSM-103- 10 years

} SCGP- Short term

} Applies not just to cotton but to all recipientcommodities that benefit from U.S. commoditysupport programs


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Arguments

Brazil Argument US CounterArgument Panel Finding

Brazil claimed that USbreached provisionsunder peace clause(Article 13) of theWTOs Agreement on

Agriculture (AA)because U.S.domestic and exportsubsidies to its cottonsector are in excess ofits WTO commitments

U.S. argued that WTOmembers agreed tothe peace clauserecognizing thatagricultural subsidies

could not beeliminatedimmediately andneeded, undercertain conditions, tobe exempted fromthe Subsidies andCountervailingMeasures (SCM)Agreement and GATT1994 subsidiesdisciplines.

The panel found that U.S.domestic cotton supportmeasures during 1999-2002, averaged $3.28billion, were in excess of

WTO commitments (of$2.0 billion). U.S. domesticcotton support measureshence lose the protectionafforded by the PeaceClause


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Brazil Argument US CounterArgument

Panel Finding

U.S. Direct Payments Do

Not Qualify forExemption fromReductionCommitments asDecoupled IncomeSupport.

United States notifies

that Direct payments asgreen box where theyare not subject to anylimits.

Panel found that U.S. payments

under Direct Paymentsprograms, because of theprohibition on planting fruits,vegetables, and wild rice oncovered program acreage, donot qualify for the WTOs greenbox category of domesticspending.

The Step-2 ProgramFunctions as an ExportSubsidy in consistentwith U.S. WTOobligations for export

subsidies as specifiedunder the SCMAgreement.

US argued that Step-2payments are part of itsdomestic supportprogram & are notified tothe WTO as amber box(trade-distorting)

domestic supportpayments and not asexport subsidies thus notsubject to any limitationsplaced on exportsubsidies.

Payments to exporters werefound to be contingent uponexport performance and thusqualified as prohibited exportsubsidies in violation of WTOcommitments.

Payments to domestic userswere found to be contingenton the use of domestic overimported goods and thereforequalified as prohibited importsubstitution subsidies.


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BrazilArgument

US Counter Argument Panel Finding

U.S. Export

CreditGuaranteesFunction asExport Subsidies

U.S. trade officials argued

that the U.S. export creditguarantee programs areconsistent with WTOobligations

Panel found that export credit

guarantees functioned as exportsubsidies as the financial benefitsreturned by these programs failedto cover their long-run operatingcost.

Subsidies Have

Caused SeriousPrejudice.

U.S. argued that the

subsidies provided to U.S.cotton growers have beenwithin the allowable WTOlimits and are consistentwith U.S. WTO obligations.

U.S. domestic support measures

that are directly contingent onmarket price levels caused seriousprejudice in terms of market pricesuppression. But no other Seriousprejudice was found.

FSC-ETI Act of2000 Acts as anExport Subsidyto UplandCotton.

The United States asserted thatBrazil failed to make anyspecific case with respect tothe ETI Act of 2000 and U.S.upland cotton exports.

Brazil failed to present any newarguments or evidenceconcerning effects upon uplandcotton, declined to furtherexamine Brazils claims on this


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Applicable WTOAgreements/Provisions

} Agreement on Agriculture} Article 13: Peace Clause

} Annex 2

} Agreement on Subsidies and Countervailing Measures (SCM)

} Article 3: Prohibition} Article 6: Serious Prejudice

} Peace Clause - Article 13 (due restraint) of theAgriculture Agreement protects countries using subsidies

which comply with the agreement from being challengedunder other WTO agreements. Without this peace clause,countries would have greater freedom to take actionagainst each others subsidies, under the Subsidies andCountervailing Measures Agreement and relatedprovisions.


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The WTO Dispute SettlementPanels Findings

} Prohibited Subsidies

}

Section 2 Payments} Export Credit Guarantee

}Actionable Subsidies

} Serious prejudice

}Marketing Loan Provision

}Market Loss Payments

} US subsidies violated Peace Clause limits


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Reasoning - Prohibited Subsidies} Step 2 payments

} U.S. cotton

} Discrimination

} Unscheduled


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Export Credit Guarantee} The WTO panel found that all three export credit

programs effectively functioned as export subsidiesbecause

} long-run operating cost.

} Application to all commodities

} Thus so long as the credit guarantees act as an implicitexport subsidy, only U.S. program crops that havescheduled export subsidies are eligible for U.S. export creditguarantees.


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Reasoning - ActionableSubsidies

} Any subsidy may be challenged in the WTO ifit fulfills the WTO definition of a subsidy and is

alleged to cause adverse effects to theinterests of other WTO members

} In particular, price-contingent payments wereidentified as contributing to serious prejudice

to the interests of Brazil

} It is done by depressing prices for cotton onthe world market during the marketing years1999-2002.


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WHYW

AS TH

ER

E A CR

OSS-RETALIATION?

} Brazil argued that cotton subsidies causedworld cotton prices to decline and reduced

their export revenues.} Global cotton output - $25 to $30 billion

} United States - Subsidized $2 to $4 billionannually.

} EU - around $1 billion annually

} Issues of trade fairness and concernsregarding negative impact on developmenterupted.


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AFRICA and LDC View} In Africa more than ten million people directly depend on

cotton exports for their livelihood

} Until WTO rules are reconfigured to address the disputesettlement systems shortcomings, the smallest and poorestdeveloping countries should align their interests and form

coalitions with the more powerful developing nations.Example

} Benin, Burkina Faso, Chad, and Mali, the so-called C-4

} The C-4 brought the case of cotton subsidies to the WTO aswell .

} They entered unchartered territory - demanded directcompensation.

} Launched the Sectorial Initiative in Favour of Cotton,

} Rationale behind the C-4s decision - Even a favorable WTOruling would not have been of much help because of theirlimited trade with the United States.


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WHAT T

HEY

SH

OULDH

AVEDONE?} For the United States, not having subsidies at all or, as

a second best, phasing them out as the U.S. General

Accountability Office recommended fifteen yearsago.

} For the C-4 (and other cotton producing developing)countries, joining forces with Brazil in its disputesettlement case may have been most beneficial.

} Such opportunities may not be available,underscoring the need for a reform of the disputesettlement system that includes monetarycompensation as a remedy.


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Judgment} The Appellate Body upheld the Panel's

finding that export credit guaranteesprovided under the revised GSM 102

programme were "export subsidies}Despite having found that the Panel's

analysis of certain quantitative evidenceconcerning the financial performance of

the revised GSM 102 programme did notmeet the requirements of DSU Art. 11


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} United States acted inconsistently with AAArts. 10.1 and 8, and ASCM Art. 3.1(a) and3.2,

} Serious prejudice to the interests of Brazilwithin the meaning of ASCM Art. 5(c).

}Authorization to retaliate granted on19 November 2009


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Current Status

} Brazil suspended retaliatory measures against U.S.goods over a cotton subsidy dispute, freezing until2012

} The deal agreed between the two countries to

head off up to $829 million in World TradeOrganization-sanctioned retaliation against U.S.goods would stay in place until a new U.S. farmbill is passed.

} Brazil could retaliate at any time if the United

States did not uphold the agreement, Brazilhad no interest in retaliating.

} Brazil had been considering retaliation by liftingpatent protections, which would have hurt U.S.makers of pharmaceuticals and chemicals.


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Reference}www.wto.org

} Brazils WTO Case Against the U.S. CottonProgram Randy Schnepf Specialist inAgricultural Policy

}www.google .finance.com

} US Escapes WTO-Okayed Retaliation by

Brazil forIllegal Cotton Subsidies,Washington Post, 19 June 2010

}www.carnegeendowmwnt.org/wtocases


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ThankYou

us brazil cotton dispute

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