A Good Deal Settles the Brazil Cotton Dispute

October 2, 2014 3:15 PM

A long-running dispute between the United States and Brazil over US cotton subsidies has at last been settled. In an announcement on October 1, the two sides disclosed that their deal has two key terms: The United States will pay Brazil $300 million immediately, for the benefit of Brazilian cotton farmers, and Brazil will drop its case against the United States at the World Trade Organization (WTO), launched in 2002 and won in 2004.

The case derives from Brazil's complaint that US domestic support to cotton violated its WTO commitments. In siding with Brazil, WTO arbitrators authorized Brazil to propose countermeasures against US exports and intellectual property rights. That ruling led to modest and unsatisfactory changes in US law, accompanied by intense negotiations on both sides and periodic side payments to Brazil. The United States feared that Brazilian countermeasures could damage US economic interests to the tune of $800 million. The new agreement calls for Brazil to relinquish its rights to future countermeasures in return for new guarantees by the United States, including a new $300 million contribution to the Brazil Cotton Institute, or IBA.

This is a good deal for the United States, Brazil, and the world trading system. There are four reasons for congratulating the negotiators:

  • It averts Brazilian retaliation, authorized by the WTO, up to $800 million, against US exporters or US owners of intellectual property rights (pharmaceuticals, films, trade names, etc.). If implemented, this concentrated retaliation would have soured US-Brazilian relations. Instead the cost is spread widely across the US population, around 90 cents a person.
  • Money damages, paid in this way, are much fairer, and do not destroy the benefits of international commerce, unlike concentrated retaliation against firms that had nothing to do with the original dispute. The WTO system is only designed to authorize such retaliation, but the US-Brazil settlement points the way towards a better way of satisfying breaches of WTO obligations.
  • Moreover, the money damages will actually benefit the parties harmed by US cotton subsidies, namely Brazilian cotton farmers. By contrast, trade or IPR retaliation would do nothing to help the farmers.
  • Brazil's agreement to drop its WTO case against US cotton subsidies (specifically an export credit program known as GSM-102) and not to launch a new case expires at the same time that the US Agricultural Act of 2014 expires in 2018. What this means is that the US Congress in 2018 will face pressure not to renew a subsidy program that enriches a few already rich American farmers.

Not bad for government work.