Global Policy Forum

Brazil Threatens Trade Retaliation, Forges New Agreement with US




Sewell Chan

April 6, 2010

U.S. and Brazil Reach Agreement on Cotton Dispute

The United States and Brazil have reached an agreement aimed at settling a long-standing trade dispute over American subsidies to cotton growers, officials in both countries said Tuesday.

The announcement came one day before Brazil was to begin imposing up to $830 million in sanctions with authorization from the World Trade Organization. The trade body had ruled last August that American subsidies to cotton growers had violated global trade rules.

Under the preliminary deal, Brazil would hold off on retaliation in exchange for American concessions that include the modification of an export loan program and the establishment of a temporary assistance fund for the Brazilian cotton industry. The broader issues in contention would be deferred until Congress takes up the next farm bill, most likely in 2012.

The Brazilian sanctions were to include $591 million in higher tariffs on a wide array of goods, including autos, pharmaceuticals, medical equipment, electronics, textiles and wheat.

The case was also closely watched because Brazil would have been the first country to violate American intellectual property rights in retaliation for unfair trade policies under the approval of W.T.O. arbitrators.

Brazil had threatened, for example, to stop charging its farmers technology fees for seeds developed by American biotechnology companies and to break American pharmaceutical patents before their scheduled expiration. Those retaliatory actions would have cost American businesses up to $239 million.

"Traditionally, retaliation in trade has been the preserve of the largest developed countries, which have market power," said Robert Z. Lawrence, a professor of international trade and finance at the Harvard Kennedy School. "But this mechanism - suspending intellectual property protection - gives smaller, developing countries a way to enforce their rights under trade rules."

The compromise was reached after Miriam Sapiro, a deputy trade representative, and James W. Miller, an under secretary of agriculture, met last Wednesday with Brazilian officials.

Under the agreement, the Agriculture Department will modify a program that guarantees loans extended by American banks to approved foreign banks for purchases of American agricultural products by foreign buyers.

The United States will also set up a technical assistance fund of $147.3 million a year. The amount represents the value of the retaliation the W.T.O. had authorized for American payments to cotton producers under a marketing loan program and a countercyclical loan program. The fund would remain in place until passage of the next farm bill or a mutually developed solution, whichever occurs first.

Finally, the United States agreed to evaluate whether fresh beef can be imported from Brazil while preventing the introduction of foot-and-mouth disease. The authorities will move to recognize Santa Catarina, a state in southern Brazil, as free of the disease.

Both sides said they hoped to agree by June on a process to conclusively resolve the dispute, although such a resolution would probably await action by Congress.

The United States trade representative, Ron Kirk, and the agriculture secretary, Tom Vilsack, announced the deal. It was applauded by lawmakers, including the top Democrat and the top Republicans on the Senate and House Agriculture Committees.

Eddie Smith, a cotton producer in Floydada, Tex., and the chairman of the National Cotton Council of America, called the agreement "a positive development in this very long dispute."

He said in a statement the deal "avoids the immediately harmful economic effects of trade retaliation and it puts the serious discussion concerning changes in the U.S. cotton program before Congress in the 2012 farm bill."

The Brazilian government said the preliminary agreement "may establish the basis for a future and final mutually satisfactory solution for the dispute." In a statement, the government said it "expects the parties to reach an understanding that makes it unnecessary to adopt the retaliation measures authorized by the W.T.O."

The Brazilian government, under pressure from its cotton growers, filed the case in 2002. In 2005, and again in 2008, the W.T.O. found that the American agricultural subsidies violated trade agreements.

Cotton is grown in at least 17 states, from Virginia to California, with Texas accounting for nearly half of production. The country produces between 12 million and 20 million bales of cotton a year, and exports about 70 percent of the crop, worth roughly $4 billion, according to the National Cotton Council, which represents most of the 20,000 or so cotton growers.

Spending on the nation's cotton program has subsided recently because rising commodity prices have reduced the need for the support.


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