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In early March, Brazil and the US completed their representations to the arbitration panel that is deliberating on the level of trade retaliation that Brazil will be allowed to undertake following the United States’ failure to remove all cotton subsidies found to violate WTO rules.
Both countries held on to their initial claims: according to the US, the sanctions should not exceed US$30.4 million, while Brazil maintains its request for roughly US$2.5 billion.
The US argued in its December submission that the existence and value of trade distortion caused by export credit guarantees should be based on the net cost incurred by the government granting the support. No countermeasures should be authorised to offset the GSM 102 export credit programme incriminated by Brazil since the scheme had not resulted in a long-term cost to the government, the US contended (Bridges Year 12 No.6 page 13).
Brazil countered in January that “the amount of the subsidy must be based on the legal standard that values the subsidy in full, which includes all ‘benefits’ conferred thereby.” The continuation of prohibited export subsidies under the GSM 102 programme had helped US producers “export more product, at lower prices, to all corners of the globe, at the expense of foreign producers’ market share, both at home and abroad,” Brazil argued. It also strongly defended its position that there was nothing in the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) that would prohibit Brazil from “adopting countermeasures corresponding to the full amount of the prohibited GSM 102 export subsidies, as opposed to some ‘Brazilian share’ of that amount.” Based on this approach, Brazil estimated the full amount of prohibited US subsidies at US$1.3 billion, while the US claimed that Brazil must base its sanctions calculation on adverse effects suffered by Brazilian producers alone.
Following the same logic, Brazil argued that it should be entitled to countermeasures worth US$1,034 billion due to the global price effects caused by actionable US subsidies, such as countercyclical payments and marketing loans. The US had put this amount at US$30.4 million at the most. According to Brazil, the programmes in question “continue to cause significant distortion in the world market for cotton, suppressing the prices of cotton sales worth billions of dollars. Those suppressed prices also lead to less cotton being grown outside the United States than would be the case but for the US subsidies.” Brazil also noted that the world market price for cotton was projected at 46 cents per pound for the current marketing year (August 2008-August 2009), triggering marketing loan and countercyclical payments respectively worth 13.6 and 12.58 cents per pound.
In its oral statement to the arbitrators on 2 March, the US brushed aside Brazil’s contention that its marketing loan payments and economic adjustment assistance under the 2008 Farm Bill were prohibited subsidies, which should be taken into account when determining the level of retaliation. The measures would have to be found WTO-inconsistent by a separate, new dispute settlement process before Brazil could seek compensation for them, the US said.
The protagonists also disagree on the method of retaliation. Brazil argues that it should be allowed to suspend some of its services and intellectual property protection commitments in addition to taking countermeasures in the area of goods. According to Article 22.3 of the Dispute Settlement Understanding, trade sanctions should target the sector in which the violation occurred (in this case, goods) unless exceptional circumstances make this option ineffective.
The US maintains that Brazil’s economy is large and diverse enough to make it both ‘practicable and effective’ to limit retaliation to US goods. Brazil, however, contends that the matter should be decided solely under the SCM Agreement, which provides that countermeasures must be ‘commensurate with the degree and nature of the adverse effects determined to exist’, but does not require the complainant to show that same-sector retaliation is not practicable or effective. At the time of writing, the arbitrator’s award was expected in late March.
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