Bridges Weekly Trade News Digest • Volume 14 • Number 9 • 10th March 2010

Brazil Releases List of US Goods for Retaliation in Cotton Dispute

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Brazil has announced that it will impose retaliatory tariffs worth US$591 million on 102 US products. The move is part of Brazil’s retaliation against Washington for failing to bring its cotton subsidies into compliance with WTO rules.

The list of US goods exports, which was made public and notified to the WTO on Monday, mainly comprises luxury goods such as tyres, automobiles, cosmetics, toiletries, and certain foods. Brasilia’s levies also include 14 percent duties on pharmaceuticals and 100 percent duties on cotton-based products. The new tariffs are set to take effect 30 days after they were announced.

The retaliation begins another sparring phase in the eight-year dispute over Washington’s subsidies on cotton. The WTO’s Dispute Settlement Body ruled in 2005 that the US’ direct subsidies and a loan guarantee programme violate the country’s commitments at the WTO. In response to Washington’s failure to comply with the ruling, the WTO later awarded Brazil the right to retaliate with trade sanctions.

Goods for now, but more to come

The list notified to the WTO this week focuses exclusively on retaliation against US goods. However, the global trade body has also given Brazil permission to impose sanctions on US intellectual property, and Brasilia has indicated that it intends to make use of that opportunity.

The WTO Dispute Settlement Understanding states that if it is not ‘practical’ or ‘effective’ for a complainant country to retaliate in the same sector or same agreement in which a violation occurred, the country can seek to retaliate under another agreement - or ‘cross-retaliate’.

In August, a WTO arbitration panel authorised Brazil to cross-retaliate by suspending US intellectual property rights under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The panel also gave Brazil permission to withhold services concessions under the General Agreement on Trade in Services (GATS).

After a public consultation process starting March 23, Brasilia plans to release a list of intellectual property sanctions, which could amount to an additional US$238 million.

Brazil’s strategy of delaying both the implementation of this tariff list and the suspension of IP rights will keep US firms on their toes and could compel lobbies outside the cotton sector to push for the US to bring its cotton subsidies into compliance with WTO rules.

But Brasilia could stand to lose in a trade spat with the Washington. Because of perceived threats to US economic security, the Office of the US Trade Representative could return Brazil’s IP classification from ‘watch list’ to ‘priority watch list’, say some Brazilian officials who fear that such a move could greatly deter investors. Additionally, some have speculated that the US could suspend the more than US$2.5 billion in trade privileges that it offers Brazil under its Generalized System of Preferences (GSP).

But some analysts predict that the US - which was recently surpassed by China as Brazil’s biggest trading partner - will not take any drastic measures, as Washington is keen not to lose its economic influence in South America.

Negotiated solution still a possibility

Although negotiations have thus far failed to resolve the long-running dispute, some observers say that the looming spectre of potentially damaging trade restrictions could spur renewed engagement on the diplomatic front.

“We hope we can resolve this matter because retaliation creates distortions and that doesn’t benefit anyone,” Foreign Ministry Chief of Economic Affairs Carlos Márcio Cozendey told Reuters. But Cozendey added that he understands that the legislative process moves slowly in the US. Indeed, the next farm bill - the massive legislative package that sets out the structure and funding levels of US agriculture subsidies and other support programmes - is not due until 2012. “We know this depends on Congress and can take time,” Márcio Cozendey said.

The Obama administration also says it wants a swift resolution.

“We will be presenting ideas because…the Brazilian action doesn’t come into effect for 30 days. So there is time for us to try to resolve this in a peaceful and productive way without any further action,” Secretary of State Hillary Clinton said on visit to Brazil. She announced that the US would submit an alternative proposal.

Another possible route out of the dispute could take the form of financial compensation from the US. Potential examples include a US-supported fund for Brazilian producers to invest in technology, and eliminating US import restrictions on Brazilian meat, orange juice, and ethanol.

ICTSD reporting; “Brazil Details US Cotton Retaliation,” REUTERS March 8, 2010.