Bridges Weekly Trade News Digest • Volume 14 • Number 13 • 14th April 2010

US, Brazil Agree to Negotiate End to Cotton Dispute

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Defusing a long-running trade dispute over American cotton subsidies, the United States and Brazil agreed last week to begin negotiating a compromise deal that could prevent the implementation of Brazilian trade sanctions on a wide range of US goods and intellectual property. Brazil agreed to hold off on retaliation as a result of the deal, which was announced on 6 April, although punitive trade measures could still be imposed at a later date.

The agreement to negotiate came just one day before Brazil was to impose retaliatory tariffs on more than 100 US goods, ranging from automobiles and tyres to cosmetics and pharmaceuticals.

To stave off those penalties and to take the first step towards a negotiated settlement, US officials agreed to make three concessions: to offer Brazil US$147.3 million per year in a “technical assistance” fund; to make changes to an export credit programme that supports buyers of US cotton; and to begin a process that could open up the US market to imports of Brazilian meat.

“Now we have a serious negotiating process,” Carlos Cosendey, head of the Brazilian Foreign Ministry’s economic department, told journalists last week, according to a report from Bloomberg. “Given these signs, Brazil agreed to postpone the retaliation.”

The three concessions offered by the US are the subject of preliminary negotiations until 21 April. If Brazil is satisfied with the initial results of the talks, then the delay on Brazilian retaliation will continue as negotiators try to hammer out the framework for a final compromise deal before a second deadline in June. However, should the negotiations go awry, Brazil could still implement retaliatory measures on US goods and intellectual property worth more than US$ 800 million.

A WTO compliance panel authorised those sanctions last year, seven years after Brazil brought its case against US cotton subsidies to the global trade arbiter. A WTO dispute settlement panel first ruled against Washington’s cotton subsidies in 2004, declaring that several aspects of the support illegally tipped the playing field in favour of US producers. The WTO’s Appellate Body upheld that ruling the following year. In 2008, a compliance panel ruling concluded that subsequent US cotton reforms had not gone far enough to bring the subsidies in line with WTO rules. Last year’s follow-up arbitration review established the type and level of trade sanctions that Brazil is allowed to impose in retaliation.

The threat of those measures loomed large, as the WTO granted Brazil the right to break patents and copyrights on US intellectual property (IP), in addition to the more traditional right to impose punitive tariffs on imports of US goods. Following 20 days of public consultations, the Brazilian government is now weighing how it would go about imposing the IP sanctions, which would likely target US pharmaceuticals, biotechnology, films and music. That process is continuing even as US and Brazilian officials are working toward a negotiated settlement to the dispute. If Brazil were to follow through with the cross-retaliation, it would be the first country ever to do so in the history of the WTO.

The battle ahead: The Farm Bill

Despite last week’s breakthrough announcement, Brazil may have to wait at least two years to secure any significant changes to US cotton subsidies. All forms of cotton support, along with the rest of US agriculture subsidies, are set out in the Farm Bill, a far-reaching piece of legislation that Congress renews roughly every five years. The most recent Farm Bill was passed in 2008, and the next revision is not due until 2012.

Because the Farm Bill is both written and voted on by Congress, US negotiators haggling with their Brazilian counterparts will be hard put to make any promises for specific reforms in the next version of the legislation. Brazilian officials seem to have accepted this political reality, and are willing to work around it.

But the US cotton lobby is sure to put up a fierce fight when Farm Bill hearings begin next year. Supporters of strong agriculture subsidies have some close friends on Capitol Hill, including Blanche Lincoln, a Democrat from Arkansas who currently chairs the Senate Agriculture Committee. Lincoln, whose family until recently owned a rice farm that was generously subsidised by the government, has long been a vocal advocate for strong farm support.

Scott Lincicome, a blogger and international trade lawyer, says that if the Brazilians are hoping for significant cotton reforms in the next Farm Bill, they are “optimistically ignoring decades of reality.”

“We’ve seen over and over and over that congressmen and senators who are big supporters of agribusiness don’t care about WTO rulings,” says Lincicome. “US cotton farmers are a very powerful agricultural lobby.”

Indeed, the National Cotton Council, a group that represents US cotton growers, welcomed the 6 April announcement. The decision to negotiate a settlement to the dispute “puts the serious discussion concerning changes in the US cotton programme before Congress in the 2012 Farm Bill, which is where that discussion belongs,” Eddie Smith, chairman of the National Cotton Council, said in a statement.

But the ongoing threat of retaliation from Brazil could make the idea of reform more politically palatable in Washington. Indeed, the US has already ceded ground on three fronts and the negotiations are just getting underway. In one of the concessions announced last week, the US made a substantive shift in its cotton support: it agreed to cut off any further payments through its GSM-102 programme, an initiative that offers credit guarantees to foreign buyers of US cotton. The WTO has ruled that the programme is illegal. Similar moves from the US could be announced in time for the first deadline next week.

C-4 on the sidelines

If agreed, a US-Brazil cotton deal would have implications beyond the US and Brazilian economies, some analysts say. An accord could strengthen the hand of developing nations that have been fighting for reductions in rich-country farm subsidies in the WTO’s Doha Round of trade talks, says Rabih Nasser, a law professor at Fundação Getúlio Vargas, a university in São Paolo.

Speaking to Bridges on Friday, Nicolas Imboden, Executive Director of the NGO Ideas Centre Geneva, lamented the fact that cotton-producing countries in Africa were being left on the sidelines of the cotton negotiations between the US and Brazil. The so-called C-4 countries - Benin, Burkina Faso, Chad and Mali - have been pushing hard in the WTO’s Doha Round of global trade talks for the US to trim down its domestic cotton support. The African countries have long argued that US subsidies depress world cotton prices and undercut their domestic producers. So far, to the growing frustration of the C-4, the US has declined to take part in any serious negotiations on the matter.

But even if the African countries are not a party to the current dispute, Imboden said, at least the US has finally shown that it is willing to consider reforming its cotton subsidies, and “that’s a big success in itself.”

ICTSD reporting; “Brazil delays US trade retaliation to allow for more talks,” BLOOMBERG, 6 April 2010.