Bridges Weekly Trade News Digest • Volume 15 • Number 23 • 22nd June 2011

US Attempt to Defund Brazil Cotton Institute May Reignite Trade Tensions

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Questions are being raised about the future of the hard-won US-Brazil cotton agreement, thanks to last week’s vote in the US House of Representatives to end payments to the Brazil Cotton Institute. In a 223-197 vote, members passed an amendment to the Agricultural Appropriations bill for fiscal year 2012 that, if enacted into law, would violate the terms of the 2010 WTO US-Upland Cotton agreement between the two countries (see Bridges Weekly, 8 June 2011).

The US$147.3 million annual payments were part of an agreement between the two countries that meant to hold Brazil back from imposing US$830 million in WTO-authorised countermeasures. The agreement came after a protracted WTO dispute that deemed various aspects of the US cotton subsidy regime as illegal. As the US continuously failed to comply with the ruling, Brazil had been given permission to both retaliate in goods and cross-retaliate in intellectual property.

Brazil chose not to impose these countermeasures only upon last year’s signing of a Memorandum of Understanding and subsequent “Framework Agreement” (see Bridges Weekly 14 April 2010 and 23 June 2010, respectively), in which Washington promised to provide annual payments of US$147.3 million for the establishment of a technical fund for Brazilian farmers. These payments would continue until the US reforms its subsidy programmes under the 2012 farm bill. These US$147.3 million payments amount to exactly the permitted annual retaliation in goods.

Brazil retained the right to impose countermeasures if the US does not comply with the terms of the Framework Agreement, e.g. by not providing the promised funds for the Brazil Cotton Institute.

Representative Ron Kind, a Democrat who proposed the amendment, heralded the decision. In a statement, Kind argues that “supporting Brazil’s cotton industry with taxpayer dollars is wasteful and unnecessary.” This win marked a major reversal of fortunes for Kind, whose February attempt at defunding the Brazil Cotton Institute had failed by a two-to-one margin (see Bridges Weekly, 24 February 2011).

Despite his win, Kind, a supporter of farm subsidy reform, was not pleased with the overall agriculture appropriations bill. He found that the “bill as a whole still irresponsibly overlooks other commonsense cuts such as the billions of dollars in outdated farm subsidies going to very few large agribusinesses.”

During the markup of the Agriculture Appropriations bill in committee, Representative Rosa DeLauro, a Democrat, had also offered an amendment to the bill that would have redirected the $US147 million being paid to Brazil in fiscal year 2012 to Women, Infants and Children (WIC), a federal food assistance program for low-income mothers and children. The amendment was rejected by Republicans in the House Rules Committee, before the rest of the spending legislation made it to the House floor. Under the latest version of the bill, the WIC would now face US$650 million in spending cuts; in a statement, DeLauro described the legislation as a “disaster for American families.”

Meanwhile, US cotton farmers will continue to receive subsidies, despite strong opposition from both parties. On the House floor, Representative Jeff Flake, a Republican, sought an amendment to prohibit countercyclical payments for upland cotton, which had been one of the subsidies that the WTO had ruled against. Earlier, during the Appropriations Committee markup of the bill, Flake had also proposed banning direct payments to farmers with average adjusted gross incomes exceeding $US250,000. Both amendments were rejected on the House floor.

Agriculture Committee Chairman Frank Lucas expressed disappointment about the attempted defunding of the Brazilian Cotton Institute, cautioning that if the Kind amendment passes through the Senate and garners presidential approval, the United States could risk over $US800 million in retaliatory tariffs. Lucas predicted that Brazil will target non-agricultural sectors, causing Americans to be exposed to “job-killing sanctions.”

In a statement, the National Cotton Council (NCC) - the industry’s main lobbying body in the US - also expressed dismay at the decision to withhold funding from the Brazil Cotton Institute. “The [framework] agreement allowed Brazil to withhold implementation of prohibitively high tariffs on US exports and provided for a series of consultations that could lead to a resolution of the dispute,” they said.

Recent comments by Brazil Foreign Relations Minister Antonio Patriota seem to confirm the renewed risk of Brasilia-issued countermeasures. On Friday, Patriota stated that “the eventual suspension of payments to the cotton fund would constitute a break of a bilateral agreement.” Patriota warned that Brazil would be forced to take steps against American imports as authorised by the WTO, including the right to ignore United States intellectual property rights on genetically modified crops.

Brazil Wins Ethanol Tariff Cut

Despite concerns about cotton, Patriota was encouraged by a decision made in the US’ other legislative chamber with regard to ethanol subsidies. On Thursday the US Senate repealed a $US0.54 per gallon tariff on Brazilian ethanol imports. Washington has faced mounting pressure to end the 30-year tariff since April 2010, when Brazil eliminated a 20 percent tariff on ethanol imports.

Patriota has cautioned that the Senate decision is not definitive, and that “the ethanol proposal will still need to take a long path through legislature, but in any case the government appreciates the decision taken in the Senate because it’s a response to an old request that we had made.” The Senate vote still requires approval from both the House and US President Barack Obama before becoming law.

Marcos Jank, president of Brazil’s Sugarcane Industry Association (UNICA), considers the decision an important victory: “Undoubtedly, this is a major advance towards a freer global market for biofuels, particularly in the case of the ethanol produced from sugarcane.”

Critics argue that the tariff cut, if signed into law, could be of only limited significance to Brazil. High sugar cane prices this past year have made it more profitable for Brazil to sell unprocessed sugar cane rather than convert it into fuel; the country has actually been importing ethanol from the United States to meet domestic demand.

ICTSD reporting; “WTO cotton settlement ripped in ag budget debate,” ASSOCIATED PRESS, 20 June 2011; “Food fight: how battles over turf and trade killed an increase in WIC funding,” CONNECTICUT MIRROR, 16 June 2011; “Ethanol industry is unruffled by Senate vote against tax breaks,” NEW YORK TIMES, 17 June 2011; “Brazil to retaliate if US ends cotton payments,” MARKETWATCH, 18 June 2011; “Agriculture bill narrowly clears House,” POLITICO, 16 June 2011; “UNICA vê avanço histórico em decisão do Senado dos EUA contra tarifa sobre etanol,” UNICA, 16 June 2011.