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Defending Brazilian Cotton: Background and Analysis, By Flávio Damico, Permanent Mission of Brazil to WTO in Geneva

Could you in a few words come back to the genesis of the Brazilian “battle” for its cotton production? What triggered the filing of a case against the US?

At the time Brazil requested consultations with the United States in September 2002, the US 2002 Farm Bill and other US legislation guaranteed and mandated the payment of a wide variety of export and domestic subsidies for the production, use and export of US upland cotton. US upland cotton producers were among the highest-cost producers of upland cotton in the world with average total costs far exceeding US and world market prices over the five-year period before Brazil requested the establishment of a panel in February 2003.  Since 1998, those costs had increased but at the same time world cotton prices had fallen significantly. This situation persisted until very recently.

The percentage of US production exported had accelerated as had the US share of world exports which had increased from 25 per cent of world share in 1998 to 38 per cent of total world exports by mid‑2002.  This made the United States by far the largest exporter of upland cotton in the world.  Brazil’s interests had suffered serious prejudice from lower world prices and excess US export market share since at least 1999.  Significantly depressed and suppressed Brazilian and world prices due to the effects of US upland cotton subsidies had impacted negatively on Brazilian farm income, trade balance, cotton‑related services, federal and state revenues, and employment, among other factors.

The 2002 Farm Bill and other US laws mandated the payment of numerous subsidies until 2007.  These guaranteed levels of subsidies meant that the United States would continue to produce massive volumes of upland cotton regardless of US costs of production and regardless of world prices for upland cotton.  The United States’ projections at the time demonstrated that during the remaining life of the 2002 US Farm Bill, US production would remain at very high levels and the expected world price level would remain far below the US cost of production.

Why did Brazil choose the legal approach to defend its cotton production? Was a negotiation option ever considered?

Before requesting the establishment of a panel, Brazil and the United States held three rounds of consultations concerning the subsidies between December 2002 and January 2003. These consultations did not result in a mutually acceptable negotiated solution to the problem. The problem before Brazil was to find the most effective solution to a situation where we were convinced that the US subsidies were inconsistent with WTO disciplines. The recourse to the WTO dispute settlement mechanism was the most adequate tool available to address such situation.

Could you please identify and comment on key moments, turning points, arguments in the defense of the Brazilian case, up to the decision made by the WTO Dispute Settlement? Could you please explain the arrangement both countries agreed on?

Brazil and the United States concluded a Framework for a Mutually Agreed Solution to the Cotton Dispute in the World Trade Organization (WT/DS267) on 25 June 2010. The Framework does not in itself constitute a mutually agreed solution to the dispute. It sets out parameters for discussions on a solution with respect to domestic support programs for upland cotton in the United States, as well as a process of joint operation reviews as regards export credit guarantees under the program GSM-102. Brazil and the United States also agreed to hold consultations not less than four times a year, unless they agree otherwise, with the aim of obtaining convergence of views in respect of a solution to theCotton dispute. The Framework also provides that, upon enactment of successor legislation to the 2008 Farm Bill, Brazil and the United States will consult with a view to determining whether a mutually agreed solution to the Cotton dispute has been reached.

Brazil and the United States also concluded a Memorandum of Understanding on 20 April 2010, whereby the United States has started to make monthly payments that amount to USD 147.3 million per year to an institution designated by Brazil. The monies received are to be used for authorized activities of technical assistance and capacity building related to the cotton sector in Brazil and to international cooperation in the same sector (for example, in countries in Sub-Saharan Africa).

What are your views on the situation in the Doha Round at the moment? How could the negotiation dynamic be reactivated?

Negotiations are at critical juncture. We came very near to a possible and balanced conclusion in 2008. Since then, some developed Members added their voice to the US seeking to increase ambition in the round selectively, requesting further concessions from key developing countries in NAMA and Services, with no members willing to provide further concessions in Agriculture. This would fundamentally change the equilibrium found in the 2008 package. The only way to find a solution in the narrow window of opportunity available in 2011 would be in the confines of the 2008 package, as the only realist and pragmatic basis for the negotiations.

How much have the US achieved in terms of cotton subsidy suppression since the introduction of the sectorial initiative on Cotton by the C4 in 2003?

Very little have been achieved so far in terms of subsidy suppression.  The relative decline in US cotton subsidies in recent years results from a market situation where high international prices prevail. Therefore, the current situation is not the product of substantive reforms in cotton subsidy programs in the US. In the event of a price decline, should the US maintains its current policies in place, subsidies, due to their countercyclical nature, would rise again. In this context, it is also important to note that the US has not fully implemented the results of our cotton dispute until now.

What is the current US cotton subsidy situation and how is it impacting Brazil?

The domestic support measures that were challenged by Brazil and found to cause adverse effects in the form of price suppression in the world market are still in place and have not been changed. Although the effect of such measures is temporarily withhold due to the prevailing high prices, the fact that the distorting policies are still in place, they provide the necessary hedge for subsidized farmers to continue to expand their production incurring less market risks than their unsubsidized competitors in the developing world.

In your opinion what should be expected from the 2012 Farm Bill in terms of cotton subsidy suppression?

The outcome of the discussion of the 2012 Farm Bill is still open. The US indicates that reforms to its subsidy programs are contingent on the conclusion of the Round. Anyhow, if the scenario of high cotton prices is confirmed, the US administration might have more room for changes in its programs, which might help the implementation of the results of our dispute in the WTO and address some of the concerns that are being dealt in the Doha negotiations. According to some press articles recently published, the US National Cotton Association is currently focusing its demands on the continuation of programs that are considered “green box”, such as “direct payments decoupled from production”, or non-product specific crop insurance, which are the only programs in operation at the moment due to high international prices. These trends and the domestic pressures for budget cuts might have some impact in facilitating reforms in the most distortive programs, such as “marketing assistance loans” and “countercyclical payments”. As yet, we have no certainty that this is going to be case.

Do you think the “African cotton question” will find a solution within the WTO? Is this likely to happen in the near future?

It is very hard to anticipate whether the “African cotton question” will find a solution to the satisfaction of the C-4. Moreover, it is quite clear that it has taken more time than it should and that African producers have incurred great losses over time. In any event, in 2012, in the context of the Farm Bill discussion, we are hopeful that the results of the WTO panel will be taken into account and that the legislators will bring the US into compliance by significantly reforming such programs. If such step is taken, significant progress will be achieved in redressing this situation. As to the Doha Round, another source of pressure, as stated above, the negotiations are through a critical stage and, at this juncture, it does not appear evident that we will be in a position to achieve results in 2011.

Following into the steps of your country what do you think about a potential African countries’ case against the US cotton subsidies within the WTO Dispute Settlement body?

The domestic support measures that were challenged by Brazil and found to cause adverse effects in the form of price suppression in the world market are still in place and have not been changed. In that regard, as far as the interpretation of legal provisions is concerned, a dispute launched by other WTO Members could build to a great extent on the case-law developed in the dispute that was brought by Brazil. On the other hand, the current market situation is very different now from what it was at the time Brazil decided to launch its case. This may have an impact on the way a panel assesses the adverse effects caused by the subsidies, the need for further evidence with possible impact on costs to be incurred by the complainants.

Are there any important lessons the Brazilian delegation have learnt (expert papers to support the case, negotiation techniques, work with NGOs and cotton producer’s organizations…) which would be useful for the African countries if they were to file a case against the US cotton subsidies?

It is important to have a solid legal basis for the complaints, as well as a very good understanding of US legislation, a well developed factual database on the specifics of production, costs, price trends and the way market actors operate. At the panel stage, the testimony of knowledgeable producers who are familiar with the way the cotton market works (and how the subsidies impacts on it) can be very helpful.

Are these arguments still relevant given the current high cotton price market and the future evolution of the international cotton prices?

The current market situation is indeed quite different from the situation that Brazil faced at the time it launched its dispute. These developments may have a bearing on a panel’s factual analysis of the effect of the subsidies.

The South-South cooperation is an interesting development. Could you please tell us more about the projects related to African cotton your country is involved in (type of projects, countries, resources, Brazilian organization involved…)?  What is the diagnosis on which these projects rely? Are there any noticeable impacts assessed already?

Brazil is implementing an ambitious program of cooperation, technical assistance, technology transfer and capacity-building with Benin, Burkina Faso, Chad and Mali in the field of cotton. The Brazilian Agency of Cooperation (ABC) and the Brazilian Enterprise for Agriculture Research (Embrapa) are sending us reports on the advanced state of the cooperation and the implementation of this program.

The main activities include (a) the construction and development of a “Model Farm for Cotton” in Mali, for the benefit of all Cotton-4 countries (estimated value of US$5,5 million) ; (b) capacity building in systems of cotton cultivation and genetic enhancement; (c) introduction of varieties; (d) biological control of plagues; and (e) enhancement  of the cotton industry profitability.

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