WTO Formally Backs Cotton Ruling; U.S. Slams Appellate Body Analysis

GENEVA--The World Trade Organization's Dispute Settlement Body formally adopted March 21 a landmark ruling against U.S. subsidy programs for cotton, triggering the start of the process for determining when the United States will be expected to comply with the decision.

The United States took the occasion to slam both the WTO panel which issued the ruling and the WTO's Appellate Body which upheld the ruling for what it described as their flawed analysis and reasoning, in particular their finding that certain U.S. support programs constitute prohibited export subsidies and should be removed quickly.

Under WTO rules, the United States will now have 30 days to inform the organization of its intentions with regards to the implementation of the ruling.

The United States will also have 45 days to reach an agreement with Brazil on the deadline for implementing the ruling; if an agreement on the deadline cannot be reached, a WTO arbitrator will be asked to fix the deadline for the two parties, a process which must be completed within the next 90 days.

Neither side has indicated what it views as an appropriate delay for ensuring implementation, although Brazil told the DSB it hoped the United States would 'fully and timely comply' with the ruling. As a guideline, WTO arbitrators are advised under the rules that the delay should normally not exceed 15 months from the date a ruling is formally adopted by the DSB.

Determination of Compliance Deadline

Determining the compliance deadline is complicated by the fact that the panel called on the United States to remove the support programs deemed to be prohibited subsidies within six months of the DSB's adoption of a final ruling or by Jan. 1, 2005, whichever is earlier. The deadline was left standing by the Appellate Body in its ruling.In its ruling, the Appellate Body maintained the panel's key finding that the U.S. subsidies in question--totaling $12.9 billion between 1999 and 2002--had caused serious harm to the trade interests of Brazil by significantly depressing global prices for cotton. It also agreed with the panel that the United States misclassified direct payment programs for U.S. cotton producers as 'green box' support exempt from WTO subsidy spending caps and that U.S. export credit guarantees for cotton and other commodities such as rice, soybeans, and corn, constitute illegal export subsidies.

U.S. 'Deeply Disappointed' With Ruling

In remarks delivered to the DSB meeting, U.S. ambassador to the WTO Linnet Deily said the United States was 'deeply disappointed' with the ruling.

Deily noted that the panel and Appellate Body rejected Brazil's claim that U.S. direct payments and crop insurance payments had contributed to significant price suppression for cotton. Economic studies 'demonstrate that such non-tied, or decoupled, support has at most minimal effects on production,' she said.

Unfortunately, 'the analysis in the reports was not as careful with respect to other elements of Brazil's claims,' Deily continued. 'The Appellate Body simply did not require anything close to the analytical rigor from the panel--either in its legal interpretations or its economic analysis--that is expected in the WTO dispute settlement system.'

'The analysis by the panel, particularly whether 'the effect of the subsidy' was to cause 'significant price suppression,' would not survive WTO scrutiny had it been undertaken by a domestic investigating authority,'the U.S. ambassador declared. 'Nor did the Appellate Body itself exercise close to that level of rigor in its analysis or reasoning.'

'Given the potential ramifications of serious prejudice to domestic support programs, we question whether Members are well served by a dispute settlement system that allows panels to make rulings without demonstrating precisely how their conclusions were reached,' she added.

Examination of Dissenting Opinion Urged

In regards to export credit guarantees, Deily urged members to carefully examine the dissenting opinion of one of the three Appellate Body judges reviewing the case, who argued the U.S. export credit programs at issue should not have been deemed prohibited subsidies.

The judge, who was not named, argued that Article 10.2 of the WTO's Agriculture Agreement specifically calls on WTO members to develop international disciplines governing the provision of export credits, credit guarantees, and insurance programs. Because those international disciplines have not yet been developed, the judge said, those programs are not yet subject to Agriculture Agreement disciplines and, as a result, are not prohibited subsidies under the WTO's Agreement on Subsidies and Countervailing Measures.

'Had Members agreed that export credit guarantees were export subsidies and included them within the list of measures subject to reduction under the Agreement on Agriculture, the United States would have scheduled its extensive export credit guarantee activity during the base period,' Deily said. 'The United States would then have been able to operate its current program within substantial volume reduction commitments.'

'Instead, the United States was precluded from scheduling such program activity because export credit guarantees were not included in the list of export subsidy measures,' she added. 'And now, under the Appellate Body's majority interpretation, we find that the United States was also immediately subject to a zero export subsidy commitment for most products using the program.'

'We fail to see how the WTO Agreements can fairly be read to prohibit U.S. export credit guarantees for most products while Members' direct export subsidies are subject only to reduction,' the U.S. ambassador concluded.

Brazil Rejects U.S. Suggestion for Solution

In its statement to the DSB, Brazil rejected U.S. suggestions that a solution to the cotton dispute--which Brazil claimed had cost its farmers some $450 million in lost revenue due to depressed global prices from U.S. subsidies--could only be found in the ongoing Doha Round talks on farm trade.

The case against the U.S. subsidies 'is 100 percent founded on the existing multilateral disciplines on trade in agriculture,' Brazil declared. 'We should not be called upon to pay again for the very same rights and obligations we bargained for a decade ago.'

Brazil nevertheless admitted that the ruling has an 'obvious and important impact' on the Doha agriculture negotiations.

The ruling 'provides [WTO] members with a better understanding about today's content and reach of some of the issues at the heart' of the round, including decoupled payments, export subsidies, trade-distorting subsidies, and the interplay between the WTO's agriculture and subsidies agreements.It also 'reinforces the legitimacy of the position of those who defend that the distortions in world agriculture trade have to cease,' Brazil added.