Seven years after Brazil requested a panel to the World Trade Organization about the legality of the United States subsidy program on cotton, and after repeated decision in its favor, this past August the WTO authorized Brazil to impose retaliatory measures on more than US$800 million worth of American exports. On Dec. 14, 2009, the Brazil Institute held a seminar to examine the implications of the case, which has now reached its final stage.

Aside from eliminating subsidies to cotton farmers, which is an unlikely outcome in the foreseeable future, the U.S. government seems clueless to what Brazil would demand to bring the case to a negotiated solution. If there is room for such outcome, however, the Brazilian government expects Washington to take next step.

"There is a real perception problem on this issue here in the States and in Brazil," said Jon E. Huenemann, an expert on trade policy and a former senior official at the United States Trade Representative's (USTR) office.

The U.S. cotton industry argues that the situation on the ground has changed since the cotton price has reached a lower level, and other major growers, such as India and China, have emerged in the global trade.

"The U.S., unlike others, has been scrutinized by the WTO and got caught with his pants down; and getting caught with his pants down has sent some shivers down the spine," Huenemann said, expressing the hope that Brazil takes the time to work through the dispute, instead of retaliating.

Although Brazil has the right to implement retaliatory measures, this may not settle the case, explained Ricardo Camargo Mendes, executive director at Prospectiva, a Brazilian consulting firm. The reason is that "it is not possible for Brazil to reach the authorized amount by retaliating only against cotton products or even other agriculture products,"

A possible solution, according to Mendes, would be a political settlement in line with the WTO objectives. That would require Brazil and the United States to be open to creative alternatives such as trade compensations or financial compensation for cotton growers and other agriculture sectors.

The first move to a negotiated outcome has, however, to come from the United States, said Philip Fox-Drummond Gough, who presented a detailed history of the case, which Brazil won at every stage. "If it is difficult for the U.S. to come up with suggestions, imagine what it is for us to guess what could be the possible list," Gough said.

U.S.-Brazil Relations

Gough said that Brazil and the United States have a mature relationship, whereas the cotton dispute is but one issue among a wide range of issues and its resolution should not disrupt the overall ties between the two nations.

Huenemann disagreed. "If Brazil thinks through this exercise it's going to measurably and in very significant ways by itself move the ticker, I think we are headed for a train wreck here," he said.

While the dispute can be viewed as a technical litigation, it goes beyond agricultural competition to a broader trade policy relationship and even the broader perceptions that exist in both Brazil and the United States, according to Huenemann.

More specifically, Huenemann indicated that Senator Charles Grassley (R- Iowa) could use the imposition of retaliatory by Brazil as an opportunity to ensure that the U.S. Generalized System of Preferences (GSP), designed to promote economic growth in the developing world by exempting part their exports to the U.S. from tariffs, would no longer cover exports to the United States. Huenemann said Brazil itself is not considered distortion free by the U.S. agricultural sector.

"If you ask some people in the U.S. agricultural community what the biggest problem they face are, they will say the ethanol program. The incentives system has had an adverse effect on their ability as an industry," he said. A reduction on the US subsidies for corn ethanol production could and should become part of a negotiated solution, said Huenemann.

The point, nevertheless, is to solve the problem of Brazilian cotton growers, who were affected by the U.S. subsidies and are expecting some compensation for this distortion until the subsidies are removed, Mendes pointed out.

Although ending the cotton subsidies is a matter that pertains to the U.S. Congress, and is thus out of the hands of the U.S. Trade Representative, there is political will to negotiate an alternative solution on the Brazilian side but not on the American, Gough suggested.

The WTO did not specify a timeframe required for retaliation, which leaves the door open for both sides to explore a satisfactory solution through dialogue.


By Renata Johnson and
Paulo Sotero, Director, Brazil Institute

Update: Brazil postponed any decisions on the sanctions against U.S. goods to February at the earliest.