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The new Farm Bill will subsidize U.S. cotton production in ways that shield farmers from international market forces. (Photo: David Nance/USDA)
Wednesday, February 12, 2014

Brazil-US Cotton Dispute Continues

Failure to solve the Brazil-U.S. cotton dispute will ultimately damage both nations' economies, experts warn.


Inter-American Dialogue


The United States and Brazil have been engaged in a long-running dispute over U.S. subsidies to cotton farmers that Brazil successfully challenged at the World Trade Organization, winning the right to implement tariffs of $829 million per year. The massive Farm Bill passed by the U.S. Congress this month proposes changes to the subsidies at the heart of the matter. What is at stake for both sides in this dispute? How is the controversy likely to play out? Will there be a resolution soon or will the dispute get worse?


Charles Dittrich, vice president for regional trade initiatives at the National Foreign Trade Council in Washington: There is a lot at stake in this case, ranging from the liberalization of international markets in cotton to the integrity of the rules-based global trading system, which has passed judgment on Brazil's claims in the WTO. As the Farm Bill has been recognized by both sides as the benchmark for change to satisfy the dispute, it is now up to our respective governments to determine whether the new legislation brings the United States into compliance with the WTO rulings. Failure to gain agreement on that point has the potential to escalate a cotton dispute into a dangerous distortion of the overall U.S.-Brazil economic relationship. As the world's seventh-largest economy, Brazil is the U.S.'s eight-largest trading partner, with  two-way trade in 2012 at $78 billion, and is a major market for U.S. investment, machinery, chemicals, aircraft/spacecraft, computers and electronic products. The United States is a large destination for Brazilian tourism and its second-largest export market. Failure to solve the cotton dispute will ultimately damage both nations' economies and the competitiveness of a range of industries. Only the U.S. and Brazilian negotiators can now determine how this dispute will play out, and a road map for complying with international rules has been provided by the WTO through its decisions on the case. To date, the U.S. Trade Representative, the U.S. Administration and the Brazilian government have acted thoughtfully in finding a solution, but the next several months will be critical.


Mark S. Langevin, director of BrazilWorks and international advisor to Associação Brasileira dos Produtores de Algodão (ABRAPA): The Agricultural Act of 2014 will distort world markets in measurable ways that harm Brazilian cotton producers, undermine the competitiveness of Brazil's cotton-based production chain and lower government revenues. The new Farm Bill will subsidize U.S. cotton production in ways that shield farmers from international market forces. The 2014 legislation renews the marketing loan and export credit guarantee program, known as the GSM-102, both found in violation of WTO disciplines. Also, Congress added on a special income protection scheme for cotton farmers, known as STAX. The U.S. government will pay 80 percent of the STAX premiums, the administrative costs of the private insurance companies that will underwrite these policies, and will reinsure these companies against any losses. U.S. cotton producers and private insurance companies will win, and the U.S. government will pay most of the bill. Most importantly, this insurance scheme encourages producers to grow more cotton than they would if they had to pay most of its costs. As a consequence, U.S. taxpayers will finance these subsidies and Brazilian farmers will pay the costs through falling prices and decreased production. The Obama administration is trying to sell the new law as a solution, but few are buying. The Brazilian government will allow the U.S. an opportunity to negotiate a settlement followed by the implementation of a targeted, escalating regime of sanctions and suspension of concessions, including those associated with intellectual property. Recent studies indicate that such measures can be carried out without harm to the Brazilian economy. Also, if such sanctions are carefully targeted, then the U.S. government will have to decide whether subsidizing cotton production is in the national interest. In this sense, Brazil's efforts to coax and eventually press for compliance serve to strengthen a rules-based international trading system that advances the mutual interests of both nations and could eventually frame a meaningful bilateral partnership on questions of international economic policy--but in the meantime, Washington may turn its back on Brazil.


Marjory L. Walker, director of communications at the National Cotton Council of America: The upland cotton policies in the new Farm Bill represent fundamental reform in the support provided to cotton farmers.  The legislation addresses the two remaining provisions of cotton policy found to be non-compliant with U.S. WTO commitments. We believe these changes and the new insurance product, STAX, provide the basis for resolving the case.


Burleigh Leonard, senior consultant to Prime Policy Group, former senior staff member for the Senate Agriculture Committee and former special assistant to President Reagan for food and agriculture: The U.S. Congress has finally completed work on the omnibus Farm Bill which includes significant changes to the U.S. cotton program. It remains to be seen whether the changes will be sufficient to keep Brazil from retaliating against the U.S. as it has been authorized to do by the WTO. Brazil's cotton producers are not convinced that the new insurance program for U.S. cotton growers will be less market-distorting than what it replaces, especially given the substantial premium subsidies that will be provided by the U.S. Department of Agriculture. Brazilian growers also are upset by the U.S. decision to halt the $147 million in annual payments that were part of an interim agreement to delay retaliation until Congress had a chance to enact the Farm Bill. The Brazilian government is in a difficult position. It has been working with other developing countries to dismantle the agricultural subsidies of the developed world. To withhold on retaliation in this instance might foster the belief that Brazil is not serious about that undertaking. On the other hand, if Brazil resorts to retaliation, and especially if it engages in cross-retaliation against intellectual property rights of U.S. companies, Brazilian consumers would pay the price and an unfortunate precedent would be established for future WTO trade disputes. In the United States, workers in industries that do not benefit from government-provided assistance to cotton growers would shoulder the costs associated with retaliation. In a trade war, there are no winners--only losers.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor