The U.S. and Brazilian governments announced a framework for discussions related to a WTO case won by Brazil on trade-distorting U.S. export credit and cotton programs. Brazil will not impose tariffs on goods and countermeasures on intellectual property valued at more than $800 million annually. The framework extends a previous agreement reached in early April of this year. Officials will meet quarterly on future legislation related to these programs as Congress prepares for new farm policy legislation in 2012.

The framework agreement is not a permanent solution. The Brazil government reserves the right to retaliate at any time by implementing the counter measures if the U.S. does not follow through. Brazilian officials believe negotiations and reforms are better than retaliation that does not benefit Brazilian producers. Brazil is the 10th largest trading partner of the U.S. with two-way goods trade of $60 billion in 2009 and concluded it could not retaliate without hurting itself in trade.

The Brazilian government took the correct approach of negotiations over retaliation. Under WTO rules, retaliation is allowed as a last option, but is not the preferred outcome. The U.S. found this out in a 13-year old beef hormone case with the EU when retaliatory tariffs were imposed after the WTO ruled EU restrictions on U.S. imports were not based on science. Last year the U.S. agreed to drop the tariffs in return for increased access for beef from animals not receiving hormones and a commitment from the EU to negotiate a resolution over the next three years. Both cases point out the need for ongoing negotiations in the WTO to resolve disputes as part of a broader trade policy agreement. The Doha Round of WTO trade talks that began in November of 2001 have been stalled since 2005.
The Doha talks have been held-up partly over U.S. cotton programs. The U.S. had agreed as part of the talks to address cotton programs “ambitiously, expeditiously and specifically”. This is generally translated by non-U.S. cotton producing countries to mean that U.S. cotton programs would be reduced more than other commodity programs and in a shorter period of time. Some countries, like the Cotton-4 countries in Africa, Burkina Faso, Mali, Benin and Chad, have said they will not support an overall agreement unless faster action is taken on cotton.

Export credit programs were addressed by the Doha talks with proposed language to limit developed countries to 180 days of credit and self-financing by recovering costs on a commercially viable standard over a rolling period of four or five years. Had the Doha talks been completed, the GSM-102 credit guarantee program would be a non-issue. For fiscal year (FY) 2009 (October 1, 2008-September 30, 2009) payment guarantees totaled $5.3 billion, up from $3.1 billion in FY2008. Registered guarantees for FY2010 as of June 1 were $2.1 billion. Total U.S. agricultural exports were $96.6 billion in FY2009 and are projected at $104.5 billion in FY2010.

Critics of WTO procedures can rightly claim that the outcome of the Brazilian case points out the shortcomings of the WTO dispute process. The case was filed in 2002 and a WTO dispute panel ruled in favor of Brazil in 2005. The U.S. made some changes in cotton and credit programs, but a subsequent review in 2008 found those change were not sufficient. Cotton production and trade has changed substantially in the U.S. and other major producers since the years 1999-2002 used in the case. This calls into question the relevance of the case to today’s market conditions and of any actions based on the 2005 ruling.

For 1999-2002, U.S. cotton area harvested averaged 13.2 million acres, 16.6 percent of total world acres, with production at 17.9 million bales, 19.5 percent of the world total. For the 2009 cotton crop, U.S. cotton area fell to 7.5 million acres, 10.0 percent of world cotton area, as other crops have been more profitable in recent years, while U.S. production was 12.2 million bales, 11.9 percent of world production. At the same time, world use of cotton increased from an average of 94.0 million bales in 1999-2002 to an estimated 116.4 million bales in 2009, a 23.8 percent increase. In 1999-2002, Brazilian cotton area averaged 1.9 million acres with production of 3.7 million bales. In 2009, Brazil’s acres harvested had increased to 2.1 million acres and production to 5.8 million bales due to higher yields per acre. The biggest change in production over the last ten years has been in India where acres harvested averaged 20.8 million in 1999-2002 and increased to 25.3 million in 2009. Production has increased from an average of 11.5 million bales in 1999-2002 to 23.5 million bales in 2009 as yields increased 68 percent. The story in cotton production has been higher yields in developing countries.
In the WTO case Brazil was somewhat of a stand-in for African cotton producing countries that could not afford to file a case against the U.S. and did not have enough trade with the U.S. to make retaliation a real threat. The Cotton-4 countries in Africa had 2.2 million acres of cotton in 2009 and produced 1.6 million bales. They have missed the changes occurring in cotton production because their yields have not increased over the last 10 years.

Discussions on the 2012 farm bill that could change U.S. cotton support programs have already begun in Congress. The House Agriculture Committee held hearings in Washington and in major agricultural areas around the country. Cotton growers at those hearings expressed support for continuation of current programs. The Senate Agriculture Committee has scheduled a hearing for June 30. Federal government spending will be a major issue in the 2012 farm bill as large increases in government spending and slow growth in revenues has resulted in large annual deficits. Whether or not these conditions will facilitate necessary changes in cotton farm programs to meet Brazil’s requirements is unknowable at this time.

The Brazilian government is in control in the framework discussions. It won the WTO case and the U.S. has to negotiate on meeting its needs. With no prospects for a new WTO agreement that would include credit and cotton provisions acceptable to both countries, a resolution based on the WTO ruling is the only option. Doing that in a rapidly changing world cotton market will test the ability of the WTO dispute resolution process to be relevant to market conditions.