24th June 2010

Bridges Weekly | Brazil, US Strike ‘Framework’ Deal in Cotton Dispute

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Trade officials from Brazil and the United States reached a place-holder accord last week that delays until 2012 the imposition of trade sanctions in a protracted dispute over Washington’s cotton subsidies.

The ‘framework’ deal that was announced on Friday outlines a new set of negotiations and consultations that will take place over the next two years as US lawmakers revise the Farm Bill, the omnibus legislation that governs the form and value of subsidies for US farmers. The current Farm Bill, which was passed in May 2008, will expire on 30 September 2012.

“The framework would not serve as a permanent solution to the cotton dispute,” the Office of the USTR said in a statement released on Friday. “However, it would provide specific interim steps and a process for continued discussions on the programs at issue with a view to reaching a solution to the dispute.”

The framework agreement obligates the US to fork over US$147.3 million per year in the form of a “technical assistance fund” to help Brazilian farmers. Washington officials have also agreed to work toward benchmarks for specific changes to its controversial GSM-102 programme and to establish “a limit on trade-distorting cotton subsidies,” according to a statement from the Office of the US Trade Representative. Officials from both sides will meet four times a year as the next Farm Bill takes shape.

“This is not a final solution, but it lays out elements that will allow for consultations and reforms to the Farm Bill that will take place by the end of 2012,” said Roberto Azevedo, Brazil’s ambassador to the WTO, according to a report in The Financial Times. “Brazil doesn’t rule out taking countermeasures at any moment.”

A brief history of the dispute

The WTO has ruled on two separate occasions - the first in 2005, the second in 2008 - that Washington’s cotton subsidies were out of line with the United States’ commitments at the global trade body. Those two judgments led to an arbitration ruling published in August last year that authorised Brazil to impose trade sanctions to the tune of more than US$800 million.

Significantly, the arbitration ruling granted Brazil the right to impose sanctions on items other than those covered by the agreement that the United States had breached in maintaining its illegal cotton subsidies. The WTO does not often grant countries the right to “cross-retaliate” in another sector; in fact, no country has ever followed through with the practice.

In April - less than one week before Brazil was to impose trade sanctions on more than 100 US goods - the two sides announced that they had agreed to negotiate a resolution to the dispute. Brasilia was also in the process of establishing sanctions that would target US intellectual property in the form of films, pharmaceutical products and the like. All of those sanctions have been put on hold pending the outcome of the negotiations, but - in theory, at least - they remain a viable threat.

The April breakthrough accord set a 60-day deadline for negotiators to agree on a process for moving the negotiations forward. Last week’s framework deal was announced one working day before that deadline expired.

Some Brazilian observers grumbled that last week’s deal does not go far enough to right the wrongs of US cotton subsidies. The framework agreement “lacked the symbolism of change” in US policy that Brazil has sought with its WTO suit, wrote Pedro de Camargo Neto, a former secretary of Brazil’s agriculture ministry, in an op-ed in Sao Paolo’s o Estado newspaper on Friday. Camargo Neto also lamented the fact that the Obama administration had not taken more forceful steps to reform the aspects of the cotton subsidies that are under its control. He predicted that significant changes will become increasingly difficult to achieve the longer they are delayed.

Doha implications

The United States’ cotton subsidies have long been a sticking point in the Doha Round of world trade talks at the WTO. A number of developing countries, including Brazil, have urged the US to reform the support it offers its cotton farmers, but US officials have so far failed indicate what changes they might be willing to adopt.

Washington’s failure to overhaul its cotton programme has had important implications for cotton farmers in Brazil and other developing countries, according to a recent study conducted by Mario Jales, a graduate resident fellow at Cornell University, and commissioned by the International Centre for Trade and Sustainable Development, the publisher of Bridges Weekly.

The analysis found that world cotton prices would have jumped by 6 percent if the US had agreed to make cuts outlined in proposals that African nations have put forward in the Doha talks. Such an increase could have brought significant gains to cotton farmers in the developing world.

“There is an urgent need to rebalance existing trade rules that permit developed countries to highly subsidise domestic production, depress world prices, push farmers elsewhere out of production and impair prospects for economic advancement in the developing world,” Jales said.

ICTSD reporting; “Brazil to suspend action in US cotton dispute,” THE FINANCIAL TIMES, 18 June 2010; “Faltou o simbolismo de uma mudança concreta,” O ESTADAO DE SAO PAOLO, 18 June 2010.

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