The World Trade Organization has issued an arbitration report in a dispute between the United States and Brazil over US cotton subsidies, giving Brazil the right to use trade countermeasures against the US, and in certain circumstances to suspend intellectual property obligations.

[Note: Brendan McGivern of White & Case in Geneva has issued an analysis of the WTO decision, available here.]

Brazil claims that the volume of US subsidised transactions is already higher this year than the reference year used by the arbitrators, which means a threshold provided in the report would be exceeded and make it possible for Brazil to suspend IP obligations. The US reaction to the arbitration report was relief about the amount of countermeasures granted to Brazil although domestic US producers denounced the WTO ruling.

In 2002, Brazil filed for WTO consultations with the United States over subsidies to cotton producers. In 2003, a panel was formed, which in 2005 found the US in violation of its WTO commitments on subsidies. In 2005, the US took measures to comply with the ruling, but in 2006, Brazil requested a panel on US compliance, which issued a report in December 2007 finding the US had not complied correctly.

In February 2008, both the US and Brazil appealed. In June 2008, the appellate body report was adopted upholding the ruling of the compliance panel that the US is inconsistent with WTO agreements and maintaining the recommendations and rulings adopted by the Dispute Settlement Body in 2005.

In August 2008, Brazil requested resumption of arbitration relating to its request for retaliation. The arbitrators decided in their report that Brazil could retaliate in proportion to the amount of US subsidised transactions on cotton, found in violation of WTO rules.

According to the WTO, the US has no further possibility of appeal in this case and Brazil can apply the awarded countermeasures after the WTO Dispute Settlement Body gives its green light, probably later this month.

The suspension of IP rights obligations under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or the General Agreement on Trade in Services (GATS) was awarded twice before by the WTO in a procedure described as cross-retaliation. Cross retaliation was awarded to Antigua and Barbuda in a dispute with the United States over internet gambling and to Ecuador in a dispute with the European Union over the EU banana import regime.

Cross-retaliation was awarded after a WTO member was found in violation of trade rules, and it was determined that retaliating in the same sector as the violation could prove more harmful than not for the winning country.

Mixed Outcome

In the case of Brazil, the arbitrators agreed that the country could suspend certain obligations under the TRIPS and/or the GATS as retaliation for US subsidies but conditioned it on a yearly threshold calculated according to a formula based on Brazilian imports of US consumer goods, according to the WTO arbitrators’ report.

Brazil had claimed the value of retaliation should be a total of approximately $2.68 billion, according to sources. Its claims were based on several elements. The first was a claim on the US “Step 2” programme, found in violation of trade rules by the WTO in 2005. The others were an export incentive programme for agricultural products called GSM 102, a claim on US marketing loan and countercyclical payments, and a claim to suspend IP rights obligations under TRIPS and GATS.

The suspension of obligations under TRIPS and GATS by the arbitrators would be over and above countermeasures permitted to be taken by Brazil and would be applicable only if the threshold is reached.

The Step 2 programme issued marketing certificates to US domestic mills to help reduce the gap between the price of US and foreign cotton, according to the National Cotton Council. This programme was declared by a WTO panel to be in violation of trade rules and the US asked to dismiss this programme by a deadline of July 2005. However, the US complied a year later. Brazil sought compensation for the period of non-compliance. This request was dismissed by the WTO arbitrators.

The GSM 102 payments, also called export credit guaranties, are incentives to exports of agricultural products overseas.

The WTO arbitrators found this programme not compliant with trade rules and awarded Brazil a possibility of countermeasures in the amount of US$ 147 million based on 2006 figures. This amount is subject to reassessment every year and depends on the volume of GSM 102 payments.

For marketing loan and countercyclical payments, which are direct domestic subsidies to compensate lower market prices for cotton, the WTO arbitrators decided on an annual level of countermeasures also in the amount of US$147 million.

Brazil Rejoices, Foresees Higher Countermeasures in 2010

Brazil said in a release that “the value [of the award] is significant, being the second-largest amount ever authorised in the history of the WTO.”

The countermeasures on the GSM 102 programme have to be recalculated every year, and Brazil estimated the possible countermeasures in 2009 could be in the realm of US$800 million. If this estimation proved right, Brazil would be able to use cross retaliation on some US intellectual property or services.

Following the arbitrators’ decision, the suspension of IP rights obligations will only be possible after the amount of permissible countermeasures goes above a threshold determined by the set calculation. In the fiscal year 2007, the threshold would have been US$409 million, a Brazilian official told Intellectual Property Watch. In 2009, it might reach US$460 million, he said, above which Brazil would be able to cross-retaliate.

Brazil said “the present award contributes to strengthen the WTO dispute settlement mechanism, demonstrating that the system is capable of recognising the evident asymmetries between developed and developing countries.”

USTR Philosophical, US Cotton Producers Irked

The Office of the US Trade Representative in a release expressed disappointment with the WTO ruling but said it was “pleased that the arbitrators awarded Brazil far below the amount of countermeasures it asked for” and “grateful that the arbitrators denied Brazil’s request for unlimited ability to suspend concessions on intellectual property or services.”

USTR spokeswoman Carol Guthrie stated that, “At this time, we do not know when or if Brazil will move to obtain final authorisation to suspend concessions or when or if Brazil would act on any such authorisation.”

The National Cotton Council along with the North American Export Grain Association, CoBank, the Farm Credit Council, US Rice Producers Association and the National Council of Farmer Cooperatives released a statement on 2 September on the WTO ruling.

They voiced their disappointment and argued that the WTO panel had based its decision on the GSM program that was in use in 2005 without taking into account the “significant changes” that had been made since.

They urged the US government to request a new compliance panel to update the ruling so that it reflects the changes in the GSM program by the US Congress and the US Department of Agriculture.

William New contributed to this report