The Brazil–United States Cotton Dispute
Updated August 2017
Compiled by Mark S. Langevin, Ph.D., Director of the Brazil Initiative
Elliott School of International Affairs-The George Washington University
The Brazil–United States cotton dispute was a World Trade Organization (WTO) dispute settlement case (DS267). The case focused on United States cotton production support programs and agricultural commodity export credit guarantee programs that were found to be non-compliant with the WTO Agreement on Agriculture (AoA) and the Subsidies and Counter Measures (SCM) Agreement. Brazil brought the case to the WTO in 2002. The WTO’s Dispute Settlement Body (DSB) ordered the U.S. government to eliminate its cotton production subsidies as well as its agricultural commodity export guarantee programs in 2005. The United States appealed, but eventually lost the case altogether in 2009 when the WTO arbitrator approved the largest trade sanctions in history. The arbitrator also ruled that Brazil could impose so-called “cross-retaliation measures” that could include intellectual property protections.
Following the 2009 decision, the U.S. government quickly moved toward negotiations with Brazil. In early 2010, a temporary bilateral agreement was negotiated and the U.S. agreed to pay the Brazilian Cotton Institute $147.3 million a year, an amount based on the WTO arbitrator’s calculation of average annual damages to Brazilian cotton growers, until a mutually agreeable solution could be negotiated. On May 17, 2013, the Brazilian cotton producer’s association, known as the Associação Brasileira dos Produtores de Algodão, and the U.S. National Cotton Council signed a “Letter of Joint Recommendations” that aimed to assist the two governments in negotiating a final solution to the case.
On October 1, 2014, Brazil and the United States reached an agreement to resolve the long-running cotton dispute by signing a new memorandum of understanding (MOU) that included: 1) Brazil relinquished its rights to countermeasures against U.S. trade or any further proceedings in the dispute; 2) the United States agreed to new rules governing fees and tenor for the GSM-102 export credit guarantee program; 3) Brazil agreed to a temporary Peace Clause with respect to any new WTO actions against U.S. cotton support programs while the Agricultural Act of 2014 is in force or against any agricultural export credit guarantees under the GSM-102 program as long as the program is operated consistent with the agreed terms; and 4) the United States would make a one-time final payment of $300 million to the Brazil Cotton Institute (IBA).
This partial annotated bibliography assists efforts to further examine the cotton dispute, the underlying global political economy, the WTO dispute settlement mechanism, and bilateral relations between Brazil and the United States. The bibliography was compiled by Mark S. Langevin, Ph.D., Director of the Brazil Initiative and Research Professor at the Elliott School of International Affairs-The George Washington University and International Advisor to the Associação Brasileira dos Produtores de Algodão (ABRAPA).
Review the entire annotated bibliography here.
Please send additions and corrections to Mark S. Langevin, Ph.D. at: email@example.com.
Brazil’s Backstop: The Modernization of Brazilian Agriculture and its Contributions to National Development /
Brazilian agriculture is a fundamental pillar of national economic development in the 21st century. Baer reminds that agriculture has been the “engine of economic growth” since the colonial era (2014:281) and Barros reports that “Agriculture was the foundation upon which Brazil’s economic system functioned up to the beginning of the twentieth century (2009:83).” Agriculture was exclipsed by manufacturing and services during the twentieth century, but the onset and deepening of Brazil’s import substitution industrialization (ISI) model and the rapid pace of urbanization required signficant income redistribution from agriculture and mining to finance mounting fiscal demands placed upon the state. Today, Brazilian economic and fiscal stability continues to be anchored to agriculture and agricultural commodity exports. Agriculture is Brazil’s backstop.
Read the entire Brazil Initiative Working Paper here.
 The term “backstop” is used in finance and refers to “the act of providing last-resort support or security in a securities offering for the unsubscribed portion of shares. A company will try and raise capital through an issuance and to guarantee the amount received through the issue, the company will get a back stop from an underwriter or major shareholder to buy any of the unsubscribed shares.” Investopedia. Accessed at: http://www.investopedia.com/terms/b/backstop.asp.
Brazilian President Michel Temer dodged a bullet yesterday by galvanizing a majority in the lower house of deputies of the Brazilian Congress to vote against his removal and trial by the Supreme Court for corruption. Temer’s approval ratings hover around 7 percent, and most Brazilians want him investigated for corruption; but these documented facts did not dissuade 263 deputies (from a total of 513) from absolving the president.
Why did so many betray the popular will?
Earmark populism is a method for obtaining the votes of congressional representatives and pacifying their constituents at home. President Temer used the promise of earmarks to trigger votes in his favor; and supply his congressional supporters with justification that can be sold to voters back home. According to the Folha de São Paulo’s report, Temer has promised more than 4 billion reais in additional spending in 2017, spread across dozens of earmarks, to obtain the necessary parliamentary support to stave off a trial in the Supreme Court. Contas Abertas also reports that Wladimir Costa, federal deputy from the state of Pará and member of the Solidariedade party, made famous by his tattoo “Temer” received a promise of $7 million reais in earmarks. Costa stated that his tattoo cost 1,200 reais and served as a memorial to Temer, “The best president in the history of Brazil.” His claim does not deserve a response.
Costa’s earmarks will apparently be spent on such programs as sustainable rural development and strengthening the universal health care program SUS in the state of Pará. These seem to be worthwhile public initiatives, but the use of government funds to secure a vote to avoid prosecution for corruption is ironic and disappointing for those committed to fighting corruption in Brazil. Moreover, most of Temer’s supporters in the lower house of congress voted in favor of the impeachment of former President Dilma Rousseff last year for her fiscal management, her use of the so-called “pedaladas.” Many of these same deputies were willing to accept or coordinate earmarks just as the government appears to be failing to meet its fiscal deficit targets (spending more than forecasted to deepen the deficit).
Remember, many notable economists supported Dilma’s impeachment due to what they argued was fiscal mismanagement. Today, these economists are either silent or stand betrayed by the consequence of their own political action.
The well-respected economist Monica de Bolle defended her support for Dilma’s impeachment in the pages of Terraço Econômico, in part by claiming that the former president was responsible for fiscal mismanagement related to the pedaladas. It is important to remember that the so called pedaladas were budgetary operations that simply delayed transfers from the Federal Treasury to the Banco do Brasil e Caixa Economica for public programs, including small farmer financial support and the Bolsa Familia social welfare programs. Bolle and others, including Mansueto Almeida, claimed these budgetary actions were irresponsible at best and possibly constituted the “crime of responsibility” that served as the justification for impeachment. Then came Temer.
Today, Mansueto Almeida remains in his position with Temer’s government, but silenced by the President’s earmark populism to avoid prosecution. Monica de Bolle is a strident critic of Temer, and recently noted that he needs to leave or risk “institutional corrosion” that might place Brazil on the path to become another Venezuela. Ameida, last May, argued that the government must carry out a fiscal adjustment and push forward a reform agenda that can initiate economic recovery, and that two years under Temer is sufficient to place Brazil back on the road to growth and fiscal stability.
Monica and Mansueto are entitled to their critique of former President Dilma and her fiscal affairs. They both spent 2015 and 2016 trying to explain the details of the pedaladas and how they may have jeopardized fiscal stability and economic development. However, Temer’s earmark populism and Attorney General Rodrigo Janot’s charge of corruption against the president pose a more straightforward challenge to explain. No doubt Monica and many others will bear down on the damage done by failing to achieve the fiscal targets set for 2017, and others including myself, will point to the now obvious connection between earmark populism and congressional efforts to protect the guilty from prosecution. Mansueto continues to work for Temer’s Finance Ministry, but for how long? How long will it take for Mansueto and his boss, Finance Minister Henrique Meirelles, to understand that the government they work for is now actively working against fiscal stability, economic recovery, and the Lava Jato prosecutions?
I hope it does not take too long because Brazilian democracy hangs in the balance.
Brazilian President Michel Temer has stepped back from the country’s commitment to protect the Amazon. Economic recession has pushed people toward the frontier, some in search of work and others in search of exploitative opportunities left by a government unwilling or incapable of enforcing the law. Temer’s government appears to be unwilling to take the necessary measures to combat deforestation.
According to the World Resources Institute, Brazilian deforestation spiked up to 29 percent in 2017. Even though the annual rate is well below historic highs, it signals that the federal government is turning its back on environmental protection and international commitments.
Temer’s willing neglect has consequences. The government of Norway, sponsor of the Amazon Fund, recently announced a cutback in funding of more than $35 million USD due to the “rise in forest destruction.” According to Reuters,
“Norway has invested more than $1.1 billion in an Amazon Fund since 2008 to help Brazil protect the forests, which are under threat from logging and their conversion to farmland.”
Temer responded that
“Brazil was working to protect the Amazon, for example, by expanding national parks.”
However, reasonable people would conclude otherwise. The Financial Times quotes the World Wildlife Federation to report that Temer and his government are poised to pass a new law that opens up the Jamanxim national forest in the state of Pará to the private sector. Temer’s Minister of the Environment, José Sarney Filho, has also reassured landowners in the Jamanxim area that the government is committed to opening up the forest reserve, even though Temer vetoed earlier legislation that would have reduced national forests by 600,000 hectares.
Temer does need to find ways to reboot the Brazilian economy, but risking further deforestation and the support of the government of Norway does not seem like a sensible alternative, especially as the world’s attention is turned toward the “carne fraca” scandal that calls into question Brazilian law enforcement and regulatory control over the production of agricultural exports. Temer should work with both producers, environmentalists, and residents near the forest reserves to path together policies and programs that expand sustainable economic activities that provide prosperity while also highlighting the federal government’s commitment to environmental protection.
Unfortunately, Temer is more worried about his own job, than the Amazon and the people who live there.
The Committee on Agriculture Special Session (COASS) of the WTO was held last week on July 19 to 20, 2017. The meeting anticipates the 11th WTO Ministerial meeting to be held in Buenos Aires in December. Nothing surprising happened at last week’s meeting, but a few comments are in order since agriculture remains the largest obstacle to concluding the Doha round in the Trump era.
First, the COASS meeting is important because it provides an arena to advance interests, proposals, and possible solutions to the political and structural bottlenecks that plague the international trading relations between developed and developing nation-states. It is an X-ray that all can see.
Last week the European Union, Brazil, Colombia, Peru and Uruguay floated an updated proposal to gradually phase out domestic subsidies for tradable agricultural commodities, including cotton. The proposal is sensible, really offering member-states the opportunity to decide what level of subsidies should be permitted today, and then setting up a rational system to phase them out, in a graduated process that favors developing nations, but only modestly and during a short time frame. It also allows the least developed nations (few of which are commodity exporters of any consequence) greater latitude.
This element of the proposal reads:
A) Developed Members shall not provide tradedistortingdomesticsupportinexcessof [X%] ofthetotalvalueofagriculturalproduction asof, whiledevelopingMembers shall not provide trade distorting domestic support in excess of [X+2%] of the total value of agriculturalproductionasof.
B) Developed Membersshallnotprovidetradedistortingdomesticsupportinexcessof [X%] ofthetotalvalueofagriculturalproductionasof, whileDevelopingMembers shallnotprovidetrade-distortingdomesticsupportinexcessof[X%] asof[XXXX]. From  until[XXXX], developingMembersshallnotprovidetrade-distortingdomestic supportinexcessof[X+Y%] ofthetotalvalueofagriculturalproduction.
Thisparagraph shall not apply to least developed Members
Of course, the placeholders are key, but global trade liberalization depends on agreeing to their numbers. Otherwise, fences will be built and the Trump era will confirm, possibly codify the process of hand picking markets, diversionary regional trade agreements, and increasing inequalities among member-states of the WTO.
It would seem impossible to focus on the placeholders and get an agreement in the era of Trump, but stranger things have happened… Trump’s election for one.
The document also provides a way forward for cotton, and consistent with the overall logic of the proposal. Accordingly, the proposal reads,
Members shall review the impact on trade of the product specific limit for cotton no later than  with a view to agreeing on the next steps to be taken in phasing out trade-distorting domestic support provided for cotton.
The proposed meeting in 2019 could provide the big bang that most cotton producers around the world are looking for. By 2019 the Trump effect, namely the open defense of nationalistic protectionism will have already reached its rhetorical apex, and its main proponent, the Trump government may be in intensive care. Also, the U.S. Congress is unlikely to pass a Farm bill in 2018, so 2019 could be a critical year that repeats a duel between beneficiaries of U.S. agricultural socialism (subsidies) and opponents of such fiscal largesse.
Yes, all quiet on the WTO agricultural front for now, but expect the next two years to heat up considerably.