The Brazilian and U.S. governments have disagreed over U.S. domestic cotton and export credit policies at the WTO for the last twelve years. They now have a Memorandum of Understanding (MOU) that is much different from what either expected at the beginning. Trading relationships have changed over time making these policies much less meaningful than twelve years ago.
In 2002, Brazil challenged U.S. domestic support programs for cotton and export credit guarantees at the WTO as being inconsistent with the U.S. WTO policy commitments. A WTO Dispute Resolution Panel ruled in 2004 that the programs as operated then were not proper under the WTO agreement. The U.S. appealed the ruling and the Appellate Body upheld the ruling in 2005. In August 2009, WTO arbitrators decided that Brazil could impose $830 million per year in sanctions against U.S. trade, including on intellectual property rights. The two countries have spent the last five years working out an arrangement to avoid the imposition of additional tariffs on products exported from the U.S. to Brazil.
Brazil’s government first published a long list of U.S. goods against which it might retaliate, including the potential cross-retaliation on intellectual property rights. The U.S. and Brazil struck a temporary framework arrangement in 2010 for the U.S. to pay the Brazilian Cotton Institute $12.3 million per month for industry research and development until a new farm bill could be passed that modified the programs. Representatives of the two governments also met quarterly to discuss provisions that could be in the new farm bill. The farm bill was a year and a half late before being passed by Congress and the Secretary of Agriculture ran out of money to pay the Brazilians in September 2013, but the framework remained in-place and expired on February 7, 2014, when the 2014 farm bill was enacted.
Because the U.S. was the losing party in the original 2004 decision, the U.S. had the responsibility to seek a resolution of the dispute or face retaliation by Brazil as allowed by the WTO. The facts of the case were no longer an issue; both countries only needed to agree on a solution to the ruling. But the Brazilian government was far from united on how to respond. To no surprise, the cotton growers had pushed for retaliation. Brazil’s foreign ministry and the country’s large businesses urged caution. They thought that enacting protectionist measures would hurt Brazil’s sluggish economy. Supply lines are more likely today to cross international borders than in the past and increasing import tariffs would have hurt Brazilian manufacturers and consumers. One observer noted that the agreement decouples trade opportunities from policy disagreements when both sides in a dispute are major trading partners.
Under the settlement, the Brazilian Cotton Institute will immediately receive $300 million from the U.S. and be allowed to use the money on an expanded list of activities. The U.S. will not change the current program for U.S. cotton producers for the life of the 2014 farm bill. The U.S. will also change the GSM-102 commodity export loan program to limit the length of loans to 18 months and link them to benchmark interest rates set by the Organization for Economic Cooperation and Development (OECD) Arrangement on Officially Supported Export Credits. Loans for 12 months up to 18 months will be assessed at 90 percent of the OECD rate risk adjusted by country by USDA. Loans of 18 month will be assessed at 95 percent of the risk adjusted rate.
The U.S. gets much in return. Brazil will drop its pending litigation at the World Trade Organization by October 22 and give up its right to $830 million per year in retaliatory measures authorized by the WTO in 2009. Brazil agreed it will not launch new complaints (a ‘peace clause’) on the current cotton subsidy program as long as the current U.S. farm bill is in force (until September 2018) and the U.S. meets the terms of the bilateral agreement with Brazil. Also, there will be no complaints against agricultural export credit guarantees under the GSM-102 program if it is operated consistent with the agreed terms.
Brazilian cotton producers now appear to be willing to live with STAX, a crop insurance program for cotton producers with an 80 percent subsidy by the federal government, even though it is still skeptical about the program’s impact on Brazilian producers and plans to monitor the effects. The Brazilian Cotton Association had earlier said their analysis indicated STAX would provide more subsidies than the previous programs.
The MOU is slated to last through Sept. 30, 2018, with two exceptions. The first is that the provisions on GSM-102 export loans will stay in place as long as the U.S. continues to operate the program in accordance with the MOU. The second is that the provisions outlining the uses of funds by the Brazil Cotton Institute will be enforced until projects are completed and no funds remain available for allocation by the institute.
The 12-year dispute did change U.S. policies for cotton and the export credit program. Cotton is no longer a farm program crop like corn, wheat, soybeans, rice and peanuts. Cotton producers cannot receive payments under the Price Loss Coverage (PLC) because cotton does not have a fixed reference price like the other crops. The length of commodity export loans has been cut from 36 months to 18 months. Interest rates are rated by the default risk of the country covered and a higher percentage of the total program costs are paid by the program’s users.
The U.S. cotton program will continue to be an issue, but less so, at the WTO. Exports have been about 75 percent of total uses of the U.S. crop recently compared to 60 percent in 2000-2002 and 28 percent of world trade recently compared to 38 percent in 2000-2002. U.S. domestic use declined with the ten-year phase out of the Multi-Fiber Agreement at the end of 2004. U.S. production has been 15.6 million bales annually on average in recent years compared to 18.2 million bales per year in 2000-2002. A bigger issue is that some of the poorer countries in the world are cotton producers who do not access to technology used by U.S., Brazilian and Chinese producers. Increased farm program spending by middle income developing countries (Brazil, India & China) is also getting more attention.