The 2012 Farm Bill and the Brazil Cotton Case

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INTRODUCTION

The Brazil Cotton case is a decade-long dispute settlement case in the World Trade Organization that was initiated by Brazil against the United States in 2002 over provisions of the cotton and other agricultural commodity support programs. The most important result so far of this effort is that Brazil now has a role in framing and approving the future of U.S. farm policy in this year's legislative reauthorization of farm support programs. Historically a product of interested senators, representatives, and farmers, the commodity program in the 2012 Farm Bill now has a new player at the legislative table.

Specifically, Brazil initiated and won a dispute over agricultural support programs for cotton and other crops that are authorized by the farm legislation through the marketing loan program, countercyclical program, and provisions of the export credit guarantee program. After the final appeal was won by Brazil, the United States faced over $800 million in potential tariffs on U.S. goods and services exports to Brazil. The potential retaliation extended beyond goods as Brazil was awarded "cross-retaliation" ability by the WTO arbitration panel in August 2009.

Under a Framework Agreement reached by the parties in June 2010, (1) Brazil agreed not to proceed with retaliatory measures, and the United States agreed to make annual payments of $147.3 million to the Brazilian cotton industry and to hold quarterly discussions on potential limits of trade-distorting U.S. farm subsidies, as well as consultations on the form of the cotton program and the export credit program in the 2012 Farm Bill.

Discussions between the United States and Brazil under the bilateral Framework Agreement have included the development of the 2012 Farm Bill, the $147.3 million annual payment to Brazil's cotton industry, and the operation of the export credit program.

THE FRAMEWORK AGREEMENT

The WTO ruled in 2004, and again on appeal in 2008, that U.S. marketing loan payments and countercyclical payments caused "serious prejudice" to the trade interests of Brazil. It also ruled that U.S. export credit guarantees for cotton and other commodities such as rice, soybeans, and corn under the GSM-102 program constituted illegal export subsidies. As a result, Brazil is entitled to impose retaliatory tariffs and other sanctions, initially valued at over $800 million, against the United States. Brazil was also granted cross-retaliation, which entitles it to impose sanctions not only on goods, but also on services and probably most seriously, intellectual property (IP) rights.

Rather than face the full force of Brazil's retaliations, USDA struck an interim deal with Brazil in June 2010. Under the Framework Agreement, Brazil agreed not to impose retaliatory measures against U.S. exports, while the United States agreed to limit the use of its GSM102 export credit program, provide a $147.3 million annual payment to Brazil to help its cotton sector through the creation of a "Brazilian Cotton Institute," and engage in discussions with Brazil on how to reform U.S. cotton-specific farm subsidies to meet the direction of the WTO ruling. The Framework Agreement is intended to bridge the time between the WTO ruling and the development of the 2012 Farm Bill, the next opportunity for the cotton program and export credit program provisions to be considered. The deal is set to expire at the end of 2012.

If the United States were to stop making its annual payment, Brazil could begin applying sanctions on U.S. goods and services. While Brazil is fully within its rights to change the retaliation list of products at any time, the Brazilian government's actions in 2010 gave a good indication of what its strategy will be. In March 2010, Brazil announced its final list of tariffs and the preliminary IP/patent list. In the press release, Brazilian officials indicated that they would impose $591 million of sanctions in goods and $238 million in intellectual property, patent, and services sanctions, such as for a limited time suspending U. …