Wall Street Journal
By Peter Fritsch and John Lyons
September 1, 2009
www.wsj.com

A ruling against the U.S. in a long-running fight with Brazil over American payouts to cotton growers sets an important precedent for developing nations concerned by what they see as excessive U.S. support for farmers.

A World Trade Organization arbitration panel ruled Monday that Brazil is entitled to $295 million upfront, and nearly $150 million a year, for the U.S. failure to eliminate subsidies to the cotton industry. The annual penalties are far below the $2.5 billion Brazil had sought.

In a statement, Brazil said that these damage figures were calculated using 2006 trade figures, and that it will seek a bigger payout of around $800 million to reflect current trade flows.

"Brazil hopes that the United States will bring itself promptly and effectively into compliance with the WTO rulings, so that the imposition of the countermeasures authorized today is not necessary," Brazil’s Foreign Ministry said in a statement.

But the ruling opened an important door to retaliatory measures that, under certain circumstances, could punish American pharmaceuticals companies and other owners of intellectual property.

The WTO panel said Brazil could target other American goods for retaliation if U.S. cotton supports rise significantly beyond current levels for its 25,000 farmers. Brazil, which has a robust pharmaceuticals and generic-drug industry, has targeted patented U.S. drugs for potential retaliation. That means the country could allow domestic drug makers to manufacture copies of U.S. pharmaceuticals that are still under patent protection.

The issue of "cross retaliation" in global trade disputes is contentious. Many smaller countries need U.S. capital goods in order to grow, leaving them without effective tools to fight back with when the WTO finds that U.S. trade policy has injured the smaller nations.

The WTO cotton ruling for Brazil is, therefore, "the big banana in terms of smaller countries having effective means of retaliation," said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics in Washington. "This will cause the intellectual-property community a few shakes and quivers."

Small nations such as Ecuador and Antigua and Barbuda have sought the right to retaliate against the U.S. over trade in bananas and Internet gambling, respectively. But they don’t have the wherewithal to make life uncomfortable for American companies — at least not without hurting their own importers at the same time.

Brazil, the world’s biggest exporter of coffee, sugar, beef, chicken and iron ore, imports $18 billion a year of American goods and has long complained that many of its products face unfair obstacles to the U.S. market. It still needs most of those U.S. goods, but some of its sectors — particularly pharmaceuticals — could profit from import tariffs.

Some experts said the possibility of retaliating against the U.S. by flouting U.S. patents on medicines, films and other intellectual property gives Brazil an important new weapon.

The U.S. sees closer ties with Brazil as a way to improve its broader standing in the region, where governments in Venezuela, Argentina, Ecuador and Bolivia have become opponents to U.S. influence.

Monday’s ruling has another, broader political aspect: Brazil is an important player in sputtering global trade talks. Brazilian Foreign Minister Celso Amorim grabbed a starring role in the WTO’s Doha Round of trade talks by orchestrating a coalition of nations that blocked a global trade deal proposed by the U.S. and Europe. Ministers will gather in New Delhi this week to discuss ways to kick-start those talks.

The National Cotton Council, of Memphis, Tenn., said the dispute was outdated, arguing U.S. cotton production has dropped 45% since 2005 while Brazil, China and India have increased their exports.

In response to a series of international legal defeats on cotton, the U.S. in 2006 scrapped certain export credits and in 2006 repealed a program that gave payments to companies that bought higher-priced American cotton. But the 2008 farm bill left other cotton supports intact.

Write to Peter Fritsch at peter.fritsch@wsj.com and John Lyons at john.lyons@wsj.com

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