Brazil/Cotton WTO Dispute - Ruling of the Appellate Body

Significant Findings of the Panel Concerning U.S. Programs

• Export Credit Guarantees – prohibited export subsidy
• Cotton’s Step 2 program is a prohibited export subsidy and a prohibited import substitution subsidy
• Direct Payments and Production Flexibility Contract payments are not green box because of fruit and vegetable planting restriction
  -- Panel declined to rule on issue of base updating
• For cotton – the effect of the marketing loan program, counter-cyclical payment program¹ and the Step 2 program is significant price suppression and serious prejudice to Brazil’s interests.
• Panel declined to rule on whether effect of subsidies was an increase in U.S. world market share
• Brazil failed to make a prima facie case regarding the ETI legislation
• Panel declined to make any Article XVI:3 (GATT 1947) ruling

Significant Legal Findings of the Panel

• Brazil allowed to expand export credit claim past cotton to all commodities
  -- Important for compliance for this dispute
• Fruit and vegetable planting restriction in direct payment program led to finding that U.S. direct payment programs are not exempt green box programs
  -- Not important for compliance for this dispute – this is a compliance issue for another day and for another case w With respect to a finding of serious prejudice, Panels are not required to quantify precisely the benefit conferred on cotton nor must they identify the precise amount of payments that benefited upland cotton (broad; makes compliance problematic)
• All the other factors affecting world markets in cotton did not attenuate the effect of U.S. cotton subsidies
• Step 2 program is not one program that makes the same payment to a universe of recipients, but is actually a program that benefits two distinct groups in two distinct ways
• Article 10:2 of the URAA does not exclude export credit guarantees from coverage under the export subsidy provisions of Article 9 of the URAA
  -- As a corollary to this – the Panel’s approach assumes that the U.S. consciously agreed to language that made its primary agricultural export program prohibited and consciously decided not to seek export subsidy schedules for those commodities participating in that program
  -- All challenged programs involving cotton – whether they required planting or not – were deemed “support” to cotton under the peace clause analysis - if properly allocated (technical, but broad)
  -- There is a “world market” for cotton – even though buyers and sellers never come together in the “world” market to buy and sell cotton (technical, but broad)

How is Cotton Going to Respond?

• First deadline currently being discussed is July 2005 for the United States to withdraw the prohibited subsidies (Step 2 and Export Credit Guarantees)
• We do not envision any immediate changes to the U.S. cotton program. It will take some time to evaluate what, if any, changes should be made. Once that determination is made, it will not be a simple process to make a substantive change in U.S. farm policy.
• The National Cotton Council is discussing the case with USTR and USDA in the hopes we can coordinate a strategy to respond to the decision. This decision has short-term implications for U.S. cotton, but it also has long-term implications for cotton and other commodities. Many of the cotton policies deemed unacceptable by the Panel are generally applicable to the other “basic” commodities as well.
• The NCC is also discussing its policy options internally.
• The NCC intends to be a participant in this process, working with the government to ensure that this decision does not cripple U.S. international trade efforts, either generally or in the Doha Round.
• The NCC agrees with USTR that the kind of policy changes suggested by the Panels in this dispute should be the subject of negotiation, not litigation.

[1] The Panel also found that the market loss assistance payment program had the effect of significant price suppressions, but since that program is no longer in operation, that finding is less significant with respect to the current program.