Summary of Arbitration Decision in Brazil WTO Case

As the result of an earlier compliance panel decision that the United States had failed to fully comply with the original WTO panel’s findings in the ongoing dispute with Brazil, an arbitration panel established the level of retaliation Brazil may take with respect to the U.S. export credit guarantee program (also known as General Sales Manager or GSM-102) and selected provisions of the U.S. cotton program.

Published: February 27, 2002
Updated: November 19, 2009

As the result of an earlier compliance panel decision that the United States had failed to fully comply with the original WTO panel’s findings in the ongoing dispute with Brazil, an arbitration panel established the level of retaliation Brazil may take with respect to the U.S. export credit guarantee program (also known as General Sales Manager or GSM-102) and selected provisions of the U.S. cotton program.

In two separate documents, the Panel developed distinct awards that are ultimately summed together for the purpose of determining whether or not Brazil is allowed to seek retaliation beyond trade in goods. The Panel adopted a formula approach to retaliation authority applicable to the export credit guarantee program (also known as the GSM program) and stated that the formula would authorize $147.4 million in retaliation authority for the GSM program based on 2006 data.  The Panel also authorized $147.3 million (a fixed amount) in retaliation authority for cotton -- far less than Brazil had requested. The Panel also adopted a formula approach concerning so-called "cross-retaliation" that requires the parties to sum the two awards outlined above and determine whether that sum exceeds a "trigger" level which would authorize Brazil to  cross-retaliate against intellectual property rights of U.S. companies. 

GSM
The level of retaliation authorized for the GSM program is based on the Panel’s analysis of the program for the following commodities: cotton, oilseeds, corn and corn starch, protein meals, rice, tallow, hides and skins, poultry meat and pig meat. With the exception of rice, poultry and pig meat, the commodity list generally reflects those commodities with no export subsidy schedule under the Uruguay Round commitments. Program usage for commodities not included in the report such as wheat and vegetable oils have no bearing on the Panel’s findings.

For the GSM program covering the identified commodities, the Panel authorized Brazil to seek $147.4 million in retaliation based on FY2006 program data. The Panel’s award is comprised of the following impacts: (1) a price effect due to an interest rate subsidy; (2) a trade effect due to full additionality for non-creditworthy recipients; and (3) a trade effect due to marginal additionality for creditworthy recipients. Each of the three areas is further disaggregated into impacts due to credits going to Brazilian recipients and those to non-Brazilian recipients. The impacts of the allocations to non-Brazilian recipients are apportioned based on Brazil’s share of world trade in the GSM commodities covered in the dispute. Although the FY2006 calculations are based on the three areas discussed above, the Panel developed a simplified approach for updating the calculations based on current data.

In short, the Panel put forward the following formula based on transaction values under the GSM program:
Retaliation in Calendart+1 =
1.033947*(GSM Transaction Value to Brazilian recipients in FYt) +
0.7731148*(Brazil’s World Trade Share)*(GSM Transaction Value to non-Brazilian recipients in FYt).

In 2007, Brazil’s share of world trade of GSM commodities included in the dispute was 11.7%, according to the UN’s Comtrade database. For 2008, their estimated trade share is 13.5%. Under this assumption, the equation simplifies to:
Retaliation in Calendart+1 =
1.033947*(GSM Transaction Value to Brazilian recipients in FYt) +
0.098705*(GSM Transaction Value to non-Brazilian recipients in FYt).

Cotton
Using an economic model introduced by Brazil, the Arbitration Panel based the retaliation award on data for the 2005 marketing year. The model concluded that in the absence of the marketing loan and counter-cyclical payment programs for upland cotton, the A Index price of cotton would have been 9.4% higher in 2005. Based on the estimated price impacts and Brazil’s cotton production in 2005, the Panel calculated an annual award of $147.3 million, which is fixed and not subject to updates.

Authority to Cross-retaliate
The Arbitration Panel established a threshold level that must be achieved by the sum of the two individual awards before Brazil is authorized to cross-retaliate in intellectual property rights and services.

The threshold level of $409.7 million is based on Brazil’s imports of consumer goods from the United States, excluding books and related materials, and automobiles and products. For food, medical products, and arms, the threshold includes only the import values for tariff lines where the U.S. market share of Brazil’s imports is less than 20%. The threshold also includes the full value of imports of the “Other Consumer Goods” category. As in the case of the GSM award, the cross-retaliation threshold is also updated on an annual basis using the most recently available trade values.