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In a final victory in its long-running dispute against US cotton subsidies, Brazil has been awarded the right to impose trade sanctions, including in the form of cross-retaliation.
In August, WTO arbitrators awarded Brazil the right to slap trade sanctions worth US$294.7 million due to the United States’ continued use of cotton subsidies that have been repeatedly found illegal under WTO rules. Half of the award is a fixed annual amount (US$147.3 million) for actionable subsidies, such as marketing loans and counter-cyclical payments. The other half corresponds to harm caused by prohibited subsidies under the GSM-102 programme, which provides export credit guarantees. The arbitrator based the award on 2006 subsidy data, but said the level of sanctions on prohibited subsidies could vary according to the amount of US government support actually granted in a given year. The Dispute Settlement Body (DSB) authorised Brazil to undertake countermeasures on this basis in November.
Although the award is the second largest ever granted by the WTO, it is far less than the US$2.6 billion sought by Brazil. The main reason is that the arbitrator did not accept Brazil’s argument that the level of retaliation should reflect the global impact of the US subsidies on cotton prices, production and the market share of other exporters. On the other hand, the award is nearly ten-fold the US estimate of US$30.4 million.
Brazil: Sanctions Could Exceed US$800 million
In December, Brazil told the DSB that, based on complete data for the year 2008, the total amount of authorised countermeasures would amount to US$829.3 million. This means that, according to Brazil’s calculations, the United States spent US$682 million on prohibited subsidies in 2008, or more than four and a half times the amount estimated by the arbitrator on the basis of 2006 figures. Brazil also said that, based on 2008 data, US$561million of the US$829.3 million total would fall under the threshold established by the arbitrator for retaliation in the goods sector, i.e. tariffs or other countermeasures on imports from the US (see below). The remaining US$268.3 million could be applied to other sectors.
Cross-retaliation Will Depend on Annual Amount
Brazil had argued before the arbitrator that it needed the latitude to extend countermeasures beyond raising tariffs on goods due to the asymmetries in the two countries’ economies. It therefore proposed to suspend some of its WTO commitments on intellectual property rights and services as well. Measures could include the suspension of protection for some copyrights, patents and trademarks, as well as suspending market access commitments in services sectors of particular interest to the US, such as communication, distribution and financial services.
The arbitrator followed this argument in principle, but set a relatively high threshold for taking such action. It estimated that if the United States’ share of Brazil’s imports of a given consumer good was less than 20 percent, Brazil would be likely to find alternative sources of supply. Applying trade sanctions to those goods would not harm the domestic economy, the panel said, and should therefore be the first course of action. Only if the annual amount of prohibited subsidies - calculated on the basis of GSM-102 disbursements - exceeded the 20-percent threshold, could retaliation be extended to IPRs and services, the arbitrator concluded. Based on 2006 figures, the arbitrator had estimated that Brazil had US$409.7 million worth of US goods to choose from.
Negotiated Solution Unlikely, Sanctions Decision Expected in February
When the award was made public, both sides said they were open to a negotiated solution. It was widely speculated that Brazil would seek the elimination of US ethanol duties, as well as better market access for some other key exports, such as orange juice. However, at the time of writing this possibility appeared to have stalled, and there were no indications that the US was ready to eliminate its WTO-illegal support for cotton. Brasilia was yet to decide whether it would resort to trade retaliation, but if it does, the list of countermeasures, their starting date and the definitive amount of the sanctions will be announced in February.
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