Bridges Weekly Trade News Digest • Volume 12 • Number 28 • 4th September 2008

Brazilian Cotton Dispute Moves Forward, Biofuels May Soon Follow

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Brazilian Foreign Minister Celso Amorim says that his government will be moving ahead with its request for sanctions against US cotton subsidies and is considering a similar case on biofuels.

The US lost its final appeal in the cotton dispute, which has been ongoing since 2002, in June of this year (see BRIDGES Weekly, 11 June 2008, http://ictsd.net/i/news/bridgesweekly/12287/). Brazil says that the US has not significantly altered its system of payments to cotton producers, and that they are moving ahead with arbitration at the WTO to decide appropriate retaliatory measures.

Brazil, joined by a handful of West African cotton-producing countries, has long argued that Washington’s support for US cotton farmers depresses world prices and floods the global market for the commodity, making it hard for other producers to compete.

The WTO largely agrees. According to a compliance ruling made public in December, US subsidies - even after reform - continue to cause “significant price suppression” in the world market for cotton. The elimination of the Step 2 programme, which compensated processors and exporters for using US cotton, did not “affect the price suppressing effects of [continued US] marketing loan payments and counter-cyclical payments in the world market for upland cotton,” the panel found. It further argued that without such payments the level of US cotton acreage and production would be considerably lower, and world prices therefore higher.

Analysts have been predicting the rise of protectionism and a new wave of litigation before the WTO’s Dispute Settlement Body (DSB) since the collapse of Doha Round negotiations on 29 July. While disputes such as these were generally on hold in the lead-up to the July mini-ministerial conference in Geneva, it appears this is no longer the case. “If we don’t make progress [in the WTO negotiations], disputes will be the only way to resolve the problems,” Amorim said at a recent appearance in Rio de Janeiro.

WTO meetings are scheduled to resume this month and Brazil expects to receive a decision on whether it will have the right to retaliate - with measures potentially totalling as much as US$ 4 billion - by the end of the year. To get the process moving, on 25 August Brasilia formally asked the chair of the DSB panel to resume consultations with the US on the amount of compensation to which Brazil is entitled.

But even after a retaliatory amount is fixed, Brazil will still have to face the potential political repercussions of imposing sanctions against its primary trading partner. Brazilian industry, which depends heavily on US supplies, is particularly vulnerable to worsening trade relations between the two countries. Thus, some speculate that, instead of imposing measures that would cut off the flow of goods between the two countries, Brazil will ‘cross retaliate’ through the suspension of intellectual property protection obligations (in copyrights, trademarks, patents, industrial property rights and the protection of undisclosed information), as well as through the suspension of concessions in several services sectors.

'Cross-retaliation’ - the imposition of sanctions under an agreement other than that at issue in the dispute - has never been put to practice under the WTO, although Ecuador (in the banana dispute) and Antigua and Barbuda (in the gambling dispute) obtained authorisations to use the method.

Sean Spicer, a spokesman for US Trade Representative Susan Schwab, said that Schwab would work with the US Congress to “vigorously” defend American interests on cotton, the Associated Press reported.

Ethanol challenge may be in the works

Along with its current litigation against the US, Brazil may also be launch a dispute over a US$ 0.14 per litre (US$ 0.54 per gallon) duty imposed on ethanol imports to the US. The US considers its ethanol tariff an “other duty or charge” that falls outside WTO regulation. Critics of the tariff consider it a pure protectionist measure intended to give a leg up to US corn growers.

Foreign Minister Amorim told reporters on 2 September that Brazil “has a very strong case and there is a good chance” that Brasilia will launch a dispute against the US at the WTO, according to the Associated Press. Amorim further indicated that the case could be launched in the next one to two months.

US corn-based ethanol is much more expensive than Brazilian ethanol, which is produced from sugar cane. The US is currently the world’s largest producer of the biofuel, while Brazil is the largest exporter.

As in the cotton case, Brasilia hoped to resolve the issue during Doha Round negotiations and was awaiting the outcome of the mini-ministerial before deciding how to proceed. During the July talks, Brazil pushed for the inclusion of ethanol as an environmental good, which would help to free up access to markets based on the product’s potential environmental advantages. But while the US and the EU currently support increasing the use of biofuels, they are against the idea of its inclusion as an environmental good, claiming that there have not yet been enough studies on the environmental impacts of ethanol.

Despite Brasilia’s announcement that it was considering going ahead with the issue at the WTO, some say a negotiated solution is preferable. Marcos Jank, president of the Brazilian Sugar Cane Industry Association (UNICA), supports the government’s move to retaliate, but also hopes a negotiated settlement can be reached. Officials say they hope the disputes serve as a tool to help revive stalled Doha negotiations.

Meanwhile, recent squabbling on Capitol Hill has revealed that the issue is a controversial one even among US lawmakers.

US Senator Dianne Feinstein of California sent a letter to US Trade Representative Susan Schwab on 8 August, calling on her to consider whether Brazil has a ’substantive case’ against the US ethanol tariff and, if so, what countermeasures Brasilia might be able to take were it to win a WTO dispute on the subject. Feinstein also suggested that Brazil’s argument could be weakened if the US voluntarily lowered the duty.

Feinstein’s remarks were quickly blasted by the ranking Republican member of the Senate Finance Committee, Charles Grassley of Iowa. The US was “clearly within its WTO rights” since it had bound the tariff in its schedule of agricultural goods as an ‘other duty or charge’, he wrote.

ICTSD reporting; “Brazil seeks billions in trade sanctions from US,” ASSOCIATED PRESS, 27 August 2008; “Brazil presses US, EU to include ethanol in any WTO trade pact,” ASSOCIATED PRESS, 28 July 2008; “Brazil may press WTO on US ethanol tariffs,” ASSOCIATED PRESS, 3 September 2008; “Brazil sees WTO ethanol case against U.S. soon,” REUTERS, 2 September 2008.