On the Road to Retaliation? / by Mark Langevin

For over a decade Brazil and the United States have sparred over the latter’s agricultural support programs, largely within the institutional arena of the World Trade Organization.  This commercial conflict came to a head in 2010 upon the WTO’s authorization of $829.3 million in international trade retaliation against U.S. goods and services exported to Brazil, largely because of the U.S. federal government’s subsidies to U.S. cotton growers and the agricultural commodity export credit program (today known as GSM-102).

Click here for a quick review of BRAZTAC’s WTO Cotton Case.

In March of 2010 the Brazilian government published a list of U.S. goods whose import tariffs would be greatly increased under the WTO’s retaliation authorization.  Also, Brazil announced its intention to carry out so called “cross-retaliation” on a number of intellectual properties, as authorized by the WTO.  Quickly thereafter, the U.S. Chamber of Commerce and its Brazil-U.S. Business Council, representatives of many U.S. headquartered industries targeted for retaliation by the Brazilian government, advocated a solution or suspension of this historic commercial conflict.  A month later, the Brazilian and U.S. governments agreed to suspend this conflict temporarily under a Memorandum of Understanding (MOU) that among several points of agreement provides for an annual payment of $147.3 million to the Brazilian Cotton Institute (known as IBA).  The Brazilian government agreed to suspend trade retaliation in exchange for this financial support of Brazil’s cotton industry and a good faith effort to reform U.S. subsidies for domestic cotton producers.

Accordingly the U.S. Trade Representative reported,

“On April 1, Deputy USTR Miriam Sapiro and USDA Undersecretary for Farm and Foreign Agricultural Services Jim Miller met with Ambassador Antonio Patriota, Secretary General of Brazil's Ministry of External Relations to discuss possible resolution of the dispute. As a result of that dialogue, the Government of Brazil agreed not to impose any countermeasures on U.S. trade on April 7. In exchange, the United States agreed to work with Brazil to establish a fund of approximately $147.3 million per year on a pro rata basis to provide technical assistance and capacity building. The MOU signed today implements this commitment.

The United States also agreed to make some near term modifications to the operation of the GSM-102 Export Credit Guarantee Program, and to engage with the Government of Brazil in technical discussions regarding further operation of the program. On April 6, USDA announced that it was cancelling unutilized balances from the GSM-102 program announced fiscal year 2010 to date, and that these balances would be re-announced under new fee rates. New fee rates were announced by USDA April 19 and the unutilized balances were re-announced today.   

The United States also agreed to publish a proposed rule by April 16, 2010, to recognize the State of Santa Catarina as free of foot-and-mouth disease, rinderpest, classical swine fever, African swine fever, and swine vesicular disease, based on World Organization for Animal Health Guidelines. This proposed rule was published on April 16, and includes a 60-day public comment period. The United States also agreed to complete a risk evaluation that is currently underway and to identify appropriate risk mitigation measures to determine whether fresh beef can be imported from certain other regions of Brazil while preventing the introduction of foot-and-mouth disease in the United States.”

The MOU laid out the principles for a more detailed accord, called the Framework Agreement, that was signed in June of 2010 and obliges the U.S. government to conform to the WTO agricultural subsidies rules through the reauthorization of its Farm bill, slated for 2012.  Henceforth, the U.S. committed itself to reduce cotton grower subsidies to

The level of the limit would be significantly lower than the average annual level of trade-distorting domestic support provided for upland cotton in the period MY 1999- 2005.”

 Moreover, the U.S. government agreed to reform the GSM-102 export credit program to conform to WTO rules regarding such favorable finance measures intended on providing a critical competitive advantage to U.S. agricultural commodity exports.

The parties agreed that either could terminate the MOU and Framework Agreement upon 21 days written notice, but the intention of both parties was to resolve the conflict once and for all through the

“Enactment of successor legislation to the Food, Conservation, and Energy Act of 2008 [the Farm bill]…”

The Farm bill will expire on September 30, 2012 and there is no reauthorization in site, or an extension legislation that would resolve the bilateral conflict over U.S. cotton subsidies. Indeed, the reauthorization language approved by the Agricultural Committees of both the House of Representatives and Senate continues to provide generous, albeit reformed support programs for cotton growers and other agricultural interests.  The big winner in these proposed Farm bills is the crop insurance industry whose market will likely increase as the U.S. government shifts its support from direct and counter-cyclical payments to producers to provide crop insurance premium supports to growers.

For cotton, both chambers of the U.S. Congress are contemplating the establishment of a shallow-loss income protection program for cotton growers, referred to as STAX and described by the Chairman of the National Cotton Council, Chuck Coley.  Coley reported to the House Agricultural Committee in May of 2012,

“The STAX revenue product would be funded using available upland cotton baseline spending related to the CCP, DP and Average Crop Revenue Election (ACRE) programs. In addition, producers would bear a portion of the cost of the program by paying some part of the premium. However, producer premiums would be offset to the maximum extent possible through the use of available upland cotton spending authority for the CCP, DP and ACRE programs. The cotton industry believes that the premium offset should be no less than 80%, which is the current subsidy level for all enterprise unit policies.”

In other words, STAX would provide comparable support, but in a much different form, as current support programs provide to U.S. cotton farmers.

Amidst general congressional consensus favoring the replacement of direct payment schemes for risk management tools, such as crop or income insurance, STAX has been proposed as the solution to the bilateral commercial conflict.  Yet, there are challenges to such an interpretation given that both Agricultural Committees have approved versions of the STAX program with 80% of the insurance premiums paid by the U.S. Department of Agriculture (USDA).  For some observers, STAX places nearly all the risk of growing cotton on the U.S. Treasury.  Moreover, many Southern Republican house members and senators, normally supporters of U.S. cotton producers and agricultural subsidies, have voiced opposition to the Farm bill reauthorization versions now being considered in Congress, alleging that subsidies, whether for cotton farmers or recipients of food stamps, undermine the government’s fiscal stability.

In addition, the Government of Brazil has remarked to U.S. congressional leaders that STAX, at least as approved by both Agricultural Committees, does not conform to the WTO decision or the bilateral framework agreement.

In short, with the government paying 80% of premiums and the insurance industry’s administrative costs, STAX can be easily understood as an indirect subsidy. Moreover, the nature of STAX provides clear incentives to cotton producers to plant more acres, thereby raising production and deflating world prices, the very effect that motivated Brazil and its cotton growers to claim foul play in the first place.  Most importantly, the University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) May 2012 report, Impacts of Selected Provisions of the “Agriculture Reform, Food and Jobs Act of 2012” projects that STAX net annual indemnities would average about 5 percent of the market value of cotton production over the next decade, and that the program would lead growers to increase planted acreage, thereby reducing global prices for cotton on average by 1.61%. Herein lies the rub; STAX could be more market distorting than direct payments and counter-cyclical payments made to farmers without reference to current year planting.

The U.S. Congress, assisted by the USDA and the USTR, are paving the way toward retaliation by challenging the Brazilian government to either capitulate to STAX and the continuation of the GSM-102, or implement trade sanctions that will hurt consumers, undermine investment, and spoil bilateral relations for some time to come. Ironically, USTR Ron Kirk recently chastised Brazil’s for the latter’s recent adoption of a new tariff schedule that modestly protects Brazilian industry against a host of cheap imports.  Brazil’s measures are WTO compliant, while USTR Kirk has been unable or unwilling to convince the U.S. Congress to comply with the WTO decision finding U.S. cotton grower subsidies in violation.

In the end, Brazil is a developing country and a global power, the latter fact being a relatively recent outcome.  This means that many of the Brazilian government’s decisions on international trade and development will be unprecedented, but necessary for further growth and development.

In terms of the bilateral spat over cotton subsidies, the road to retaliation runs right through congressional support for the STAX program. Without a concerted effort by all affected parties, including both governments and the cotton producers they represent, to make STAX look more like a risk management tool and less like a price distorting subsidy; expect Brazil to follow Robert Frost’s Road Not Taken,

I shall be telling this with a sigh Somewhere ages and ages hence: Two roads diverged in a wood and I— I took the one less traveled by, And that has made all the difference.