Following a lengthy dispute, the WTO Arbitration Panel has issued a ruling in favor of Brazilian claims that U.S. government payments to cotton farmers have been excessive. As compensation, Brazil is able to immediately impose $295 million in sanctions on U.S. imports with the possibility for even more. The amount is the second-largest ever allowed by the WTO.

In a case filed in 2002, Brazil claimed excessive U.S. cotton subsidies caused overproduction and depressed world cotton prices. In 2004, a WTO panel supported Brazil's claims and the United States appealed. When its appeal was denied in 2005, the United States was required to implement policy changes — something the U.S. cotton industry insists happened.

Aiming to play up a positive in the ruling, U.S. cotton interests pointed out the award was only a tenth of the $2.7 billion Brazil originally sought.

“We are pleased that the arbitration award is far less than requested by Brazil, that the panel provided no award with respect to the Step 2 cotton program, and that Brazil is not authorized to cross-retaliate at this time,” said Jay Hardwick, National Cotton Council chairman. “This award, however, is based almost exclusively on 2005, the peak of U.S. cotton production, and doesn't consider any U.S. policy changes made in the 2008 farm bill. The U.S. cotton program and export credit guarantee programs have changed considerably since 2005, with U.S. cotton production down 45 percent and the export credit guarantee program operating at no net cost. Today's programs cannot possibly be determined to be causing injury in the world market.”

Hardwick was backed by Sen. Saxby Chambliss (R-Ga.), who said the panel ignored changes to U.S. cotton programs in recent years.

“In 2005, USDA implemented a risk-based fee structure to GSM-102 and in the farm bill, Congress repealed authority for the Supplier Credit Guarantee Program (SCGP), the GSM-103 intermediate credit guarantee, and the 1 percent cap on loan origination fees for the GSM-102 program,” said the ranking Republican on the Senate Agriculture Committee. “In addition, Congress repealed the Step 2 program four years ago while making significant reforms to the cotton program in the 2008 farm bill.”

The American Farm Bureau Federation “is disappointed the WTO found in Brazil's favor,” said Bob Young, AFBF chief economist, during an interview with Delta Farm Press on Sept. 1. “When you look at the markets today — who is increasing cotton acreage, who is decreasing — we have a problem with the fundamental premise that the United States was at fault.”

Iowa Sen. Tom Harkin, chairman of the Senate Agriculture Committee, said the “decision obviously sets up a new challenge for the United States in carrying out our farm programs. …The WTO continued certain errors in interpreting the U.S. cotton program and world cotton markets. Still, the decision is final and we must now find a practical way to deal with it. That is why it would have been preferable to settle these trade disputes through careful negotiations rather than WTO litigation, and it is unfortunate that the matter has had to come to this point.”

Brazil's “new ability to infringe on intellectual property rights has the potential to impose significant costs on the United States' economy,” continued Harkin. “Additionally, today's ruling is flawed because the case record is established based on how the program impacted the cotton market between 1996 and 2002, when the United States' cotton programs were much larger. This compensation does not accurately reflect what is happening in the world cotton market today.”

Claims that the WTO panel used outdated information continued during an NCC press conference.

“We're pleased the award was less than was requested by Brazil,” said Mark Lange, NCC president, on Aug. 31. “But we're very concerned that the panel's deliberations stayed focused on 2005.”

Lange then went through a long list of changes made to the U.S. cotton program in recent years.

“We will be discussing the outcome of this decision with the U.S. Trade Representative (USTR) office, seeking an opportunity to introduce to the WTO these many changes I've just mentioned. We think (those) now operate the Export Credit Program at no net cost to the U.S. government. In fact, the CBO and Office of Budget and Management think there's a slight surplus generated by the new program.

“We're also looking at a U.S. cotton industry that's substantially different in 2008 and 2009 than it was in 2005. Our production is down 45 percent, a reduction of 11 million bales.”

Over the same period, Lange claimed production in Brazil, India and China has increased by 11 million bales.

“There doesn't seem to be, at this point, recognition of some the adjustments in world markets that should be there,” said Lange. “We compete in the international market with a manufactured fiber called polyester. That is heavily subsidized by India and China in its manufacture and distribution. That's a significant concern to the world's cotton producers.

“So, we're hopeful there'll be an opportunity in working with USTR to bring many facts of the world market that have changed between 2005 and 2008 — as well as the factual changes in our programs — to the WTO.”

How might that be accomplished?

“I believe the USTR has several options,” said Lange. “Of course, the NCC has no particular, real standing inside the WTO. This would be things done by the U.S. government. But it's our understanding the U.S. government can seek a compliance panel to reconvene on this case. Or, it can seek a new panel. We're willing to work with USTR to find the approach it believes best suits the case.”

Regarding polyester, Lange said the NCC has “looked at that several times. Our real concern is there are national subsidies to the production of polyester, particularly in China and India. The production there now exceeds one-half the world's polyester production.

“Unfortunately, those policies aren't nearly as transparent as most subsidies and programs operated by the United States. So, it's far more difficult to get a clear handle on the subsidy that would allow the U.S. government to move forward. But we believe it deserves the scrutiny of the U.S. government.”

The NCC testified before the International Trade Commission (ITC) “just a couple of months ago about Indian cotton trade policies. And we've been in discussions with the U.S. government — USTR and ITC — on both India's cotton policy and polyester.”

Asked if an emboldened Brazil might next take Chinese and Indian subsidies before the WTO, Lange was unsure.

Even so, “it's been our contention that, particularly, India formally announced this spring an export subsidy program. (However), India has no export subsidy table in the WTO so any export subsidy India runs is inconsistent with its WTO commitments.”

Lange also claimed India purchased “directly from gins and producers” more than 12 million bales of cotton from the 2008 crop. That's “virtually the size of the entire U.S. crop that was purchased by the Indian government and held in stocks. Of course, the impact from such activities … continues to depress (world cotton) prices.”

Based on the WTO ruling, Brazilian retaliation could impact U.S. industries outside cotton. If that happens, Lange predicted U.S. cotton will face additional criticism

“Presuming the numbers we see today — $147 million each on export credit guarantees and cotton — are upheld, Brazil has an opportunity to provide countervailing duties on the import of U.S. products of, roughly, $300 million.

“We anticipate that if Brazil exercises that authority then U.S. products that face such duties would be unhappy. And that will be difficult for U.S. cotton industry, absolutely.”

How might that translate?

“I presume that if I was a producer of some product being exported to Brazil and suddenly found a tariff is placed against it because of a cotton dispute, I wouldn't be very happy.”

Due to the WTO ruling, will the U.S. cotton industry seek additional changes in the cotton programs before the next farm bill?

“No,” said Lange. “Our industry believes there were reductions of support made in the 2008 farm bill. The counter-cyclical target price was reduced, loan benefits were reduced. Once those things are taken into account, we're in compliance and no further changes are needed.”