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Upland Cotton Dispute DS 267 Brazil’s case against US Cotton at the WTO

Abigail Hunter Professor Hancock January 26, 2011 MITR 624: Economic Diplomacy


Fundamental Question: How have tactics of economic diplomacy been harnessed in reaching an accord between the US and Brazil on Upland Cotton so as to avoid retaliatory trade practices and ultimately trade war?  


Upland Cotton Dispute -Brazil initiated DS267 in 2002 against specific features of the US cotton programme -Initial DSB Panel ruled in 2004 ✔  Claim 1: Violation of the AoA “Peace Clause” ✔  Claim 2: US direct payments do not qualify for exemption from reduction commitments as decoupled income support. ✔  Claim 3: The Step 2 program functions as an export subsidy. ✔  Claim 4: US export credit guarantees function as export subsidies (GSM-102).

“Domestic support measures… shall be non-actionable…for purposes of countervailing duties…[and] exempt from actions based on non-violation nullification…Export subsidies… shall be subject to countervailing duties only upon a determination of injury…[and] exempt from actions…of the Subsidies Agreement.” –AoA Article 13 “No, or at least minimal, tradedistorting effects or effects on production.” –AoA, Annex 2 “…Insurance or guarantee programs against increase in the cost of exported products or of exchange risk programs, at premium rates which are inadequate to cover the long term operating costs and losses of the programs.”-SCM Annex I


Upland Cotton Dispute -Brazil initiated DS267 in 2002 against specific features of the US cotton programme -Initial DSB Panel ruled in 2004 ✔  Claim 1: Violation of the AoA “Peace Clause” ✔  Claim 2: US direct payments do not qualify for exemption from reduction commitments as decoupled income support. ✔  Claim 3: The Step 2 program functions as an export subsidy. ✔  Claim 4: US export credit guarantees function as export subsidies (GSM-102). Claim 5: US subsidies have caused “serious prejudice”


Upland Cotton Dispute -Brazil initiated DS267 in 2002 against specific features of the US cotton programme -Initial DSB Panel ruled in 2004 ✔  Claim 1: Violation of the AoA “Peace Clause” ✔  Claim 2: US direct payments do not qualify for exemption from reduction commitments as decoupled income support. ✔  Claim 3: The Step 2 program functions as an export subsidy. ✔  Claim 4: US export credit guarantees function as export subsidies (GSM-102). ✔−  Claim 5: US subsidies have caused “serious prejudice” ✗   Claim 6: FSC-ETI Act of 2000 acts as an export subsidy to upland cotton.


Upland Cotton Dispute -Initial DSB Panel’s Ruling was released in September 2004 -October 2004, US filed an appeal to the WTO Appellate Body (AB) -AB issued a final report in March 2005 -Upheld all of the Panel’s rulings. Recommendations: Prohibited Subsidies US should withdraw the support programs identified as inconsistent with obligations under WTO agreements by March 2005.

Eliminate prohibited export subsidies-GSM 102/103 and SCGP Eliminate prohibited import substitution subsidies- Step 2 Actionable Subsidies US should take appropriate steps by September 2005 to remove subsidy measures that are price-contingent.

Eliminate/Amend marketing loan provisions. Eliminate/Amend Step 2 Eliminate/Amend Counter-Cyclical Payments


Upland Cotton Dispute US Compliance? Passed a provision to Farm Act of 2002 that eliminated Step 2. (2006) Farm Bill of 2008 eliminated GSM 102, GSM 103, and Supplier Credit Guaranteed Program. (2008) Brazil Charges Non-Compliance Since 2005 looking for authorization from WTO to impose $3 billion in countermeasures. -Limiting restrictions to cotton goods sector alone would be worst for the Brazilian economy and consumers than on US exporters because of size of economies. -Want to suspend tariff concessions on TRIPS and GATS. US and Brazil reached procedural agreements in order to temporarily suspend retaliation proceedings. Based on the idea that with new Farm Bill legislation to be passed in 2008, the US would be able to repeal all of the domestic laws that were inconsistent with WTO obligations.


Fundamental Question: How have tactics of economic diplomacy been harnessed in reaching an accord between the US and Brazil on Upland Cotton so as to avoid retaliatory trade practices and ultimately trade war?  


“Economic globalisation has increasingly made economic diplomacy a significant factor in foreign policy… …in addition, it has also made it increasingly difficult to draw a clear-cut distinction between what is domestic and what is international. Global economic issues have great impact on domestic issues and in the process, economic diplomacy involves in global economic issues.” –Rashid


Fundamental Question: How have tactics of economic diplomacy been harnessed in reaching an accord between the US and Brazil on Upland Cotton so as to avoid retaliatory trade practices and ultimately trade war?  


Arbitration of Countermeasures August 2008, Brazil resumed arbitration proceedings for it’s retaliatory countermeasures. Brazil’s Countermeasure Request

US’s Argument Against

$2.5 billion sanctions made up of prohibitive and actionable subsidy countermeasures.

-Removed prohibited subsidies in 2008 Farm Bill. -Operating GSM-102 at “no net cost” to the government since 2005. -Should dismiss all claims regarding prohibiting subsidies that now operate at “no net cost”. -Had eliminated Step 2 -Brazil had done calculations based on the adverse effects to entire world, not just to Brazil. -Total effects of counter-cyclical payments and marketing loan payments on Brazil from 2005-2007 were $30.4 million/year.

#1: One-time countermeasure for Step 2 Programme of $350 million #2: Annual countermeasures proportionate to annual amount of GSM 102 of $1.155 billion #3: Annual countermeasures until US withdrew subsidies valued at $1.037 billion #4: Right to engage in cross-retaliation in the areas of US copyrights, patents, and services.


Arbitration of Countermeasures -August 2009, arbitrator ruled in favor of some of Brazil’s requests. Gave Brazil the right to put $294.7 million (from 2006) in trade sanctions against the US and entitled to crossretaliation. Contained fixed amount and variable. -November 2009, DSB authorized Brazil to impose countermeasures consistent with arbitrators decisions. -December 2009, Brazil announced $829.3 million trade retaliation measures against US goods in 2010. -March 2010, Brazil released a final list of goods of US origin valued at $561 million subject to import tariffs and a preliminary list of patents and intellectual property rights it could restrict, within 30 days unless a last minute agreement was reached.


Settlement Negotiations BRAZIL Sanctions to begin in 30 days.

UNITED STATES Not doing much. *Outside Actors!

Apply sanctions if subsidies aren’t canceled. Could accept US pledge to send reform bill, if Brazil were compensated for damages until the bill’s approval. Could compensate through US investment into cotton research, imports on Brazilian beef, orange juice, and ethanol.

Intend to comply-sanctions not necessary. Suspending concessions/obligations could present “economic and other challenges”

Could suspend trade privileges to Brazil under GSP. *Outside Actors!

US submits a proposal to Brazil. Brazil suspends sanctions for 60 more days.

FRAMEWORK AGREEMENT


Framework Agreement Accepted in June 2010 and includes: -$147 million fund from US to help support Brazilian cotton growers. -Quarterly discussions on potential limits to tradedistorting cotton subsidies. -IDs parameters for a future annual limit on US domestic support. -Changes to GSM 102. -More US imports of Brazilian beef, orange juice, and ethanol.


Fundamental Question: How have tactics of economic diplomacy been harnessed in reaching an accord between the US and Brazil on Upland Cotton so as to avoid retaliatory trade practices and ultimately trade war?  


How have tactics of economic diplomacy been harnessed in reaching an accord between the US and Brazil on Upland Cotton so as to avoid retaliatory trade practices and ultimately trade war?  

-Both Brazil and the US used economic and diplomatic powers to advance their policies. -Involved international economic institutions, national governments, and non-state actors. -Used economic and diplomatic incentives within negotiations. -Were able to successful reach an agreement, pending on the US Farm Bill 2012. -Sets an example with other nations on international scale.


THANK YOU Bibliography Bloom Times: The best prices since the Civil War, The Economist, 20 January 2011. http://www.economist.com Brazil Asks for Cross-Retaliation Under TRIPS, GATS in Contton Dispute with US, International Center for Trade and Sustainable Development, Bridges Weekly, Vol. 9, No. 34, 12 October 2005. www.ictsd.org Brazil Ponders Cotton Retaliation. International Center for Trade and Sustainable Development, Bridges, Vol. 4, No. 6, February 2010 CAMEX Press Release, 17 June 2010. Brazilian Office of Foreign Trade (CAMEX)- Ministry of Foreign Relations (MRE) announcement regarding the cotton dispute. Online at: http://www.brazilcouncil.org/ Catlin B, Choe W, Deschauer C, United States vs. Brazil: Upland Cotton (DS267). Powerpoint Presentation for Global Trade Law. Online at www.global-trade-law.com/ Trade%20Relations%20(Monday%20Fall%202010).Team%201 (Cotton).ppt Cultivating Poverty: The impact of US Cotton Subsidies on Africa. Oxfam Briefing Paper, No. 30, 2003. Department of Finance Canada, Subsidies and Countervailing Measures Information Paper, Retrieved 15 January 2011 from http://www.fin.gc.ca/activty/pubs/sub_-eng.asp Fact Sheet: Export Credit Guarantee Program (GSM-102), US Department of Agriculture, Foreign Agricultural Service. Online at http://www.fas.usda.gov/info/factsheets/gsm102-03.asp Fact Sheet: Supplier Credit Guarantee Program, USDA Foreign Agricultural Service, March 2006 Id. Farm and Commodity Policy, United States Department of Agriculture: Economic Research Service The Institute for Agriculture and Trade Policy, Agreement on Agriculture Glossary: Exerpt from Sailing Close to the Wind, Navigating the Hong Kong WTO Ministerial. Online at www.iatp.org Item (j), Annex I, Agreement on Subsidies and Countervailing Measures, The Legal Texts, WTO 1999 Schnepf R, Brazil’s WTO Case Against the US Cotton Program, Congressional Research Service, 30 June 2010. Available online at www.nationalaglawcenter.org/assets/crs/RL32571.pdf Simi, TB; Brazil-US Upland Cotton Dispute: What Does it Augur for Agricultural Subsidies?, CUTS International Centre for International Trade, Economics & Environment, Trade Law Brief No. 2/2005. ur Rashid H, Economic Diplomacy in South Asia, Address to the Indian Economy & Business Update, 18 August 2005. USDA Changing Export programs in Response to WTO Ruling, Delta Farm Press, 1 July 2005. http://deltafarmpress.com/ usda-changing-export-programs-response-wto-ruling WT/DS267/ABR/1, WTO, 31 August 2009. WT/DS267/43, WTO, 12 March 2010. WT/DS267/45, WTO, 31 August 2010. WTO Uruguay Round Agreement on Agriculture. http://www.wto.org/english/docs_e/legal_e/14-ag.pdf


The Upland Cotton Dispute DS267