To no great surprise, a three-member WTO compliance panel has upheld its findings in a July interim report that the U.S. has not sufficiently reformed its cotton support programs as directed in a March 2005 ruling. USDA and the USTR continue to believe the programs are in compliance with U.S. obligations under the WTO rules, but the WTO dispute resolutions process maintains a contrary view. The U.S. has 60 days to appeal the ruling, which it is expected to do.

In 2006 the Congress eliminated Step 2 subsidies to domestic users and exporters of U.S. cotton which discriminated against foreign sourced cotton and was not on the WTO list of approved export subsidies. At issue now are two export credit programs that are available to all farm program crops and price-contingent payments under the marketing loan program and the counter-cyclical payment program that are also available to the other crops. The Bush Administration has made changes in the credit programs by making fees risk based and suggested language for Congress to consider in the 2007 farm bill. Complying with the cotton ruling without exposing other farm program crops to more scrutiny is hard to do. Corn programs are already a target of separate WTO cases initiated by Canada and Brazil.

Appealing the recent ruling will provide more time for a WTO Doha Round agreement which could address issues raised in the report, but that has been the unfilled hope of the last few years. The additional time would also allow Congress to change the programs in the 2007 farm bill or in separate action. According to a September 13, 2007 analysis by Randy Schnepf of the Congressional Research Service, the House version of the 2007 farm bill, H.R. 2417, repeals the GSM 103 credit program and the Supplier Credit Guarantee Program and removes the 1 percent origination fee cap on the GSM 102 program as recommended by the Bush Administration.

The House bill does not fundamentally change the marketing loan program or the counter-cyclical program. The cotton target price under the counter-cyclical program is reduced by $0.024 per pound to $0.70 per pound, but the world price used by USDA to calculate marketing loan repayments is switched from a Northern Europe price to a Far Eastern price that may increase payments to producers. A cotton users payment of $0.04 per pound was also created. This would be available to domestic and imported cotton, but virtually all of the cotton used in the U.S. is produced in the U.S. H.R. 2417 also does not address the prohibition of planting fruits and vegetables on farm program acres which was also part of the Brazilian case. The Senate Agriculture Committee is expected to write its version of the 2007 farm bill during the week of October 22.
Brazil originally requested the right to impose $1.037 billion in annual sanction on U.S. imports to Brazil, but reserved the right to have as much as $4.0 billion in annual sanctions. If the case cannot be resolved in some other manner, sanctions will likely be less than the requested amount because of compliance actions taken by the U.S. If sanctions are applied by Brazil, they will likely be against service providers and intellectual property rights holders rather than against goods. They want to spread the burden of sanctions to non-agricultural businesses to encourage them to convince the U.S. government to make agricultural policy changes. The Brazilians have also realized that high tariffs on imports will hurt their own industries more than they will hurt U.S. industries.

Total merchandise imports by Brazil from the U.S. in 2006 were $19.2 billion, with the largest category being machinery and parts at $5.8 billion, followed by aircraft and parts at $2.4 billion. Other major categories included electrical equipment and sound/video/TV equipment at $2.0 billion, organic chemicals at $1.4 billion and optic, photo, medical and surgical equipment at $0.98 billion. All of these are important for a rapidly developing country like Brazil, and a billion dollars of sanctions would substantially increase costs for many key industries.

The U.S. government has an obligation to comply with WTO rulings, even when it disagrees with the rulings. To do otherwise sets a bad precedent for resolving disputes when U.S. industries are the aggrieved parties. Brazil wants to resolve the cotton case without doing harm to other industries. The months needed for the appeals process to run its course should be used by both governments and industries in both countries to work out a compromise.

Any compromise for the U.S. will need the agreement of the cotton industry, other commodities that have similar programs, Congress which controls farm policy legislation and other industries that have been caught in the cross-fire of agricultural trade policy for the six years that the Doha Round of talks have been crawling along. While some countries in the WTO have tried to single out cotton for larger reductions in support programs, that is hard for U.S. agriculture to do under the current policies. With U.S. policy for corn also subject to the WTO dispute resolution process, now is the time to resolve the overhang of disputes from the low-price period of 1998-2005 and then work to avoid a repeat of trade disputes in the future.

The recognition by Brazil that they have nothing to gain from increasing import tariffs on critically needed goods is encouraging for the cause of more open trade. They recognize that trade is a positive sum game and that importers and exporters are hurt by trade barriers. Brazil and other developing countries need to apply that same logic to the Doha Round of trade talks for the benefits of consumers and producers around the world.