Financial Times (3.8.10)

Brazil and US near cotton subsidies showdown

By James Politi in Washington and Jonathan Wheatley in São Paulo

Brazil takes another step towards a final showdown with the US in its long-running battle over cotton subsidies when it releases on Monday a list of about 50 American products it will punish with higher tariffs.

Last year, Brazil won an eight-year long battle at the World Trade Organisation against the US after arguing that its cotton producers had been unfairly hurt by illegal subsidies to US cotton farmers.

Brazil has already published a preliminary list of more than 200 US products on which it may raise tariffs as a result of the WTO victory, from sardines and cherries to shampoo and sunglasses to medical equipment, as well as cotton itself.

On Monday, Brazil will announce a final, narrower list of 50 products – worth about $560m (€411m, £370bn) in total – that are slated for punishment. Those retaliatory measures will take effect in April.

In addition, Brazil is expected this month to lay out its plans to impose a further $270m in penalties on the US through so-called “cross-retaliation”, which involves a tightening of non-tariff trade restrictions.

Such a move, which is only rarely authorised by the WTO, would allow Brazil to take action over intellectual property rights, breaking patents in key sectors such as technology and pharmaceuticals.

When Hillary Clinton, US secretary of state, visited Brazil last week, much of the attention was focused on the disagreement between the two countries over imposing sanctions against Iran.

But in a sign that a deal over the cotton dispute was becoming urgent, Mrs Clinton said she would dispatch two high-level officials to Brazil to discuss what further concessions the US could make in order to avoid retaliation. “There is time for us to resolve this in a peaceful and productive way without any further action,” Mrs Clinton said.

The US measures attacked by Brazil in the WTO case involve direct subsidies to cotton farmers to protect them from price fluctuations in the global market as well as a loan guarantee programme designed to bolster credit for international buyers of American cotton.

The programmes have already been modified during the course of the trade dispute and it remained unclear what the terms of a new deal would be.

Large-scale changes to US cotton subsidies would probably involve modifications to agricultural legislation – a difficult request to Congress in a very tough US political climate.

The US is the world’s largest exporter of cotton, with Texas and Georgia being the biggest producers.

“We hoped the US would present a proposal that would include complying with the WTO ruling,” said Carlos Marcio Cozendey, head of the economics division at the Ministry of Foreign Affairs.

“We know this depends on Congress and can take time so we have always said we are open to negotiations. But so far we have had various indications they are willing to negotiate, but no proposals.”

Meanwhile, media reports in Brazil suggested an agreement might involve technology transfer from the US to Brazilian cotton farmers. The office of the US trade representative and the US department of agriculture declined to comment.

“We have reached the endgame stage and the US is clearly engaged in trying to work with Brazil to come up with a solution that is agreeable to both sides,” says Peter DeShazo, director of the Americas programme at the Center for Strategic and International Studies, a Washington think-tank.

If the negotiations fail, it may not only harm US interests, but also Brazil, according to Joao Paulo Viega of the Institute of International Relations at São Paulo University.

“It would be very bad for Brazil,” Mr Viega said. “It opens a bad precedent and it’s not in our tradition to take advantage of this kind of ruling.”