Given world cotton market conditions and the dramatic changes that have been made in the U.S. cotton program, Brazil’s latest actions are imposing unwarranted harm on Brazilian and American interests in times of economic hardship for all. Historically, dispute settlement is frequently made more difficult, not easier by the application of retaliatory trade measures. Both Brazilian and American firms will find themselves economically disadvantaged by the imposition of such duties.
Brazil is taking retaliatory steps even though world cotton prices are more than 50 percent higher than 2005, which served as the basis for the original Panel ruling. U.S. cotton harvested acreage and production are down by more than 40 percent, while production in Brazil, China and India has expanded.
In response to the findings of the original World Trade Organization (WTO) panel, cotton's Step 2 program was eliminated in 2006. The 2008 U.S. farm bill lowered the upland cotton counter-cyclical target price and made changes in the marketing loan program, effectively lowering the average loan benefit to producers. The costs of U.S. cotton price-related programs are down more than 80 percent from the previous five-year average and are projected to be minimal for the foreseeable future.
The U.S. cotton program’s share of the retaliation awarded to Brazil by the WTO is relatively small and fixed at $147 million. The retaliation damages associated with the export credit guarantee program, which are determined annually using a formula developed by an arbitration Panel, were recently claimed by Brazil at more than $600 million.
The higher import duties announced by Brazil do not take effect for 30 days. The two governments should engage in discussions to avoid the harmful effects of retaliation, but any resolution must recognize the realities of today’s cotton market and the previous changes in U.S. programs.