Brazil's WTO Challenge to U.S. Cotton Subsidies: The Road to Effective Disciplines of Agricultural Subsidies
| Author | 1. Scott D. Andersen - 2.Meredith A. Taylor |
| Position | 1.Managing Partner, Sidley Austin, LLP, Geneva, Switzerland. - 2.PhD Candidate, WTO and International Trade Law, University of Berne, Switzerland; Lecturer in Law and International Business, Boise State University, Idaho, U.S.A. |
| Pages | 01 |
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Brazil's landmark 2003-2009 challenges before the World Trade Organization (WTO) targeted massive United States (U.S.) government subsidies supporting cotton production.1 The five Cotton decisions clarified the breadth and limits of agricultural subsidy disciplinary actions through the dispute settlement process of the WTO. The result of the Cotton2 jurisprudence is increased vulnerability of U.S. and European Union (E.U.) agricultural subsidies to future successful WTO challenges. This article sets forth the background and relevancy as well as key novel legal and evidentiary issues of the case; various important lessons learned for future serious prejudice and prohibited subsidy claims; and various examples of potential claims in other contexts arising from the Cotton jurisprudence.3
The Cotton case is important because it was the first successful challenge to highly trade-distorting, actionable, and prohibited agricultural subsidies under the WTO. In September 2002, Brazil initiated WTO dispute resolution complaining that (1) world cotton prices were significantly suppressed as a result of billions in annual U.S. domestic support subsidies and (2) prohibited subsidies were granted to facilitate the domestic purchase and export of high-cost U.S. cotton.4 The initiation of the dispute coincided with surging U.S. production and exports of cotton, plunging world cotton market prices,5 and severe revenue losses by Brazilian, African, and other world cotton producers. The sinking revenues were allegedly due, in part, to U.S. WTO-inconsistent subsidies.6
The resulting WTO litigation continued over the period of 2003-2009 and culminated into the issuance of five Cotton WTO decisions.7 Collectively, these decisions created a body of precedent that will be highly important for future challenges to agricultural subsidies. As the first challenges under the WTO Subsidies and Countervailing Measures (SCM) Agreement's8 "actionable subsidy," prohibited local content and prohibited export subsidy rules, the Cotton decisions generated a considerable new jurisprudence and interpretations. As detailed herein, the results generally illuminated the vulnerability of trade-distorting agricultural subsidies, particularly in the U.S. and the E.U.
Further, from a practitioner's viewpoint, the strategic choices made and the documentary and expert evidence successfully presented by Brazil offer guidance for future challenges to a range of agricultural subsidies in the years ahead. More broadly, the breadth of the trade distortions established as facts in the various Cotton rulings continue to have an important impact on the ongoing Doha Round negotiations to reduce total amounts of trade-distorting domestic and agricultural export subsidies. Additionally, the rulings have encouraged domestic reform efforts in the U.S. and the E.U. by highlighting the severe negative impact of such subsidies on least-developed and developing country producers of cotton and other agricultural products.
The Cotton dispute involved a number of novel legal and evidentiary issues under the WTO subsidies disciplines relating to various forms of agricultural subsidies. The highlights of some of the key issues are discussed in the brief summaries of the Cotton rulings set forth herein.9 The determinations of these issues create a legal and evidentiary roadmap for potential future challenges to U.S. and E.U. agricultural subsidies.
Of primary importance, these were the first and only WTO decisions applying the WTO rules to "actionable" subsidies causing "serious prejudice" to agricultural products. The WTO SCM Agreement only prohibits a relatively narrow range of export and local content subsides10 — all other subsidies are permitted, if they do not cause various forms of serious prejudice to other WTO Members.11
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A major focus of Brazil's claims was that a variety of U.S. subsidies supporting the production and export of cotton caused "serious prejudice" in the form of significant price suppression in the world cotton market, which was in violation of Article 6.3(c) of the SCM Agreement12 The original panel examined Brazil's primary claim that the collective effects of eight different subsidies supporting the production, use and export of U.S. upland cotton caused significant price suppression in the world market in violation of Article 6.3(c) of the SCM Agreement13 The panel found that three of the price-contingentsubsidies— the marketing loan, the countercyclical payments (and the predecessor market loss assistance subsidies), and the domestic Step 2 subsidies14 — collectively caused significant price suppression in the world market during the reference period of 1999-2002.15
In response to the original panel and Appellate Body rulings, the U.S. eliminated the Step 2 subsidy but did not make any changes to the price-contingent marketing loan or countercyclical subsidies programs. Despite the fact that these remaining two price-contingent subsidies constituted the bulk of the subsidies examined by the original panel, the U.S. argued their effects were not sufficient to cause significant price suppression in the world market.16 Accordingly, Brazil commenced compliance proceedings in Fall of 2006 claiming that the U.S. had neither complied with the requirement to withdraw the marketing loan and counter-cyclical subsidy programs nor removed the adverse effects of those subsidies.
Brazil claimed that the effect of the new "basket" of marketing loan and counter-cyclical subsidies caused present serious prejudice, inter alia17 in the form of significant price suppression in the world cotton market. The compliance panel found that there were no material changes to the nature, object, effect, or magnitude of the U.S. marketing loan18 or counter-cyclical subsidies,19 which continued during the 2005-2006 period. The panel found that these continuing programs paid the same, if not higher, levels of subsidies than those during the 1999-2002 period.20 Further, based on considerable new evidence concerning the operation of these subsidies during the new reference period of 2005-2006, the compliance , panel found that the marketing loan and countercyclical subsidies continued to significantly impact the planting decisions of upland cotton farmers and affect the "level of U.S. upland cotton acreage and production as a result of their mandatory and price-contingent nature and their revenue-stabilizing effect"21 and "insulate revenues of U.S. upland cotton producers when prices are low."22 The panel's causation finding also emphasized that it was appropriate to assess the effects of subsidies by examining the longer term impact on farmers entering or exiting the production of cotton, and in covering their total costs of production.23 In conclusion, the compliance panel found that "without these subsidies the level of US upland cotton acreage and production would likely be significantly lower."24
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On appeal of the second proceedings, the Appellate Body decided against the United States challenge and affirmed all of the major serious prejudice-related findings and underlying reasoning of the compliance panel.25 In particular, the Appellate Body agreed with the compliance panel's rejection of a U.S. jurisdictional argument that would have excluded from the compliance proceedings any subsidy payments made after 2005.26 The effect of the decision required the United States to eliminate or otherwise make significant changes to the marketing loan and counter-cyclical program legislation.27 Inaddi-Page 4tion, the Appellate Body endorsed the use of economic modeling and other quantitative techniques to "provide a framework to analyze the relationship between subsidies, other factors, and price movements."28 The Appellate Body's decision criticized the compliance panel for not examining in detail the parameters of the competing economic models presented by Brazil and the U.S. and for not going far enough in its comparative analysis of these models.29 Finally, the Appellate Body clarified that the effect of subsidies need not be the only cause of price suppression.30 This is a pragmatic acknowledgement that there will be other factors impacting the movement of prices and that a significant price suppression claim may be maintained even if there are other factors influencing world prices.31
The Cotton cases were the first WTO decisions examining local content (import substitution) subsidies to processors of basic agricultural products as well as export subsidies for agricultural products contingent upon the export of U.S. agricultural products (cotton under the Step 2 program32). The SCM Agreement prohibits subsidies granted contingent upon the use of local products, such as U.S. grown cotton, or upon the export of products, such as U.S. cotton. Brazil successfully fought off a number of U.S. arguments in demonstrating that the "Step 2" local content and Step 2 export refund subsidies were de jure contingent either on the use or export of U.S. cotton in violation of Article 3.1 of the SCM Agreement. The original panel and the...
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