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Background on the U.S.-Brazil WTO Cotton Subsidy Dispute

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In late 2002, Brazil initiated a World Trade Organization (WTO) dispute settlement case (DS267) against specific provisions of the U.S. cotton program. On September 8, 2004, a WTO dispute settlement (DS) panel ruled against the United States on several key issues in case DS267. On October 18, 2004, the United States appealed the case to the WTO's Appellate Body (AB) which, on March 3, 2005, confirmed the earlier DS panel findings against U.S. cotton programs.

Key findings include the following: (1) U.S. domestic cotton subsidies have exceeded WTO commitments of the 1992 benchmark year, thereby losing the protection afforded by the "Peace Clause," which shielded them from substantive challenges; (2) the two major types of direct payments made under U.S. farm programs -- Production Flexibility Contract payments of the 1996 Farm Act and the Direct Payments of the 2002 Farm Act -- do not qualify for WTO exemptions from reduction commitments as fully decoupled income support and should therefore count against the "Peace Clause" limits; (3) Step-2 program payments are prohibited subsidies; (4) U.S. export credit guarantees are effectively export subsidies, making them subject to previously notified export subsidy commitments; and (5) U.S. domestic support measures that are "contingent on market prices" have resulted in excess cotton production and exports that, in turn, have caused low international prices and have resulted in "serious prejudice" to Brazil.

What happens next? On March 21, 2005, the AB and panel reports were adopted by the WTO membership, initiating a sequence of events, under WTO dispute settlement rules, whereby the United States will bring its policies into line with the panel's recommendations or negotiate a mutually acceptable settlement with Brazil. First, the panel recommended that all "prohibited" U.S. export subsidies (i.e., Step 2 payments and exports of unscheduled commodities -- including cotton -- made with GSM export credit guarantees) must be withdrawn by July 1, 2005. Second, as concerns a ruling on "actionable" subsidies under a finding of serious prejudice caused by "price contingent" subsidies (e.g., loan deficiency payments, marketing loss assistance payments, counter-cyclical payments, and Step-2 payments), the United States is under an obligation to "take appropriate steps to remove the adverse effects or withdraw the subsidy."

It is noteworthy that the panel finding that U.S. direct payments do not qualify for WTO exemptions from reduction commitments as fully decoupled income support (i.e., they are not green box compliant) appears to have no further consequences within the context of this case and does not involve any compliance measures. This is because direct payments were deemed "non-price contingent" and were evaluated strictly in terms of the Peace Clause violation.

This report provides background to the dispute, as well as details of the WTO dispute settlement case. It will not be updated. For information on the U.S. response to panel recommendations and their implications for the U.S. cotton sector, see CRS Report RS22187, U.S. Agricultural Policy Response to WTO Cotton Decision.