By Larry Dreiling

The U.S. and Brazil have resolved a decade-long trade battle over subsidies Washington provided to U.S. cotton growers.

The agreement announced Oct. 1 resolves a bitter trade fight that had strained relations between the two countries since 2002, when Brazil brought a case against the U.S. charging that the U.S. cotton subsidies were a violation of global trade rules. The World Trade Organization (WTO) ruled in Brazil’s favor, and the U.S. had been forced to make annual $147 million payments to Brazil.

Under the terms of the agreement, Brazil will terminate the cotton case, giving up its rights to countermeasures against U.S. trade or any further proceedings in this dispute. Brazil has also agreed not to bring new WTO actions against U.S. cotton support programs while the current U.S. farm bill is in force or against agricultural export credit guarantees under the GSM-102 program as long as the program is operated consistent with the agreed terms.

In June 2010, the U.S. and Brazil signed a Framework Agreement just before the South American country was set to raise tariffs against the U.S. that, at the time, would have affected approximately $800 million of U.S. trade, including goods like autos, pharmaceuticals, electronics and intellectual property rights. The framework provided specific interim steps and a process for quarterly discussions on the programs at issue.

The U.S. also made monthly payments to the Brazil Cotton Institute for technical assistance and capacity building activities for the sector under a related Memorandum of Understanding (MOU). During discussions under the Framework over the past four years, Brazil and the U.S. worked on the elements of a settlement to the dispute, including changes to the operation of the GSM-102 program and changes to cotton domestic support programs.

The Framework expired on Feb. 7, when the 2014 farm bill was enacted. The farm bill included significant changes to U.S. cotton domestic support programs, along with changes to the GSM-102 program.

U.S. Trade Representative Michael Froman, Secretary of Agriculture Tom Vilsack and their Brazilian counterparts signed the agreement in Washington April 1. Under the terms, the U.S. will make a final one-time payment of $300 million to Brazil, and Brazil will drop the cotton case.

“Through this negotiated solution, the United States and Brazil can finally put this dispute behind us,” Vilsack said.

“Without this agreement, American businesses, including agricultural businesses and producers, could have faced countermeasures in the way of increased tariffs totaling hundreds of millions of dollars every year. This removes that threat and ensures American cotton farmers will have effective risk management tools. I am pleased that the United States and Brazil have found a permanent resolution to the cotton dispute,” Froman said.

“(This) agreement brings to a close a matter which put hundreds of millions of dollars in U.S. exports at risk.”

The agreement would allow the President Barack Obama administration to fully implement the farm bill passed by Congress in February. That measure included a new insurance program for cotton growers that was crafted to comply with the WTO ruling.

Over the last several months, the U.S. and Brazil have held intensified discussions to resolve the dispute. The two governments have reached an agreement that provides for formal termination of the cotton case at the WTO Dispute Settlement Body within 21 days.

Brazil will also relinquish all rights to countermeasures against U.S. trade. Other terms and conditions are contained in a MOU that includes new rules governing the fees and tenor for guarantees under the GSM-102 Program, a final transfer of funds to the Brazil Cotton Institute, and limitations on new disputes against U.S. cotton domestic support programs and the GSM-102 program.

The 2014 MOU provides for additional support for the technical assistance and capacity building activities begun under the 2010 Memorandum of Understanding. The U.S. will make a one-time final contribution of $300 million to the Brazil Cotton Institute, or IBA. The 2014 MOU also provides for additional uses for the funds, such as research in conjunction with U.S. institutions.

Major agriculture groups released statements approving to the agreement. For example, the National Cotton Council said it appreciates the U.S. government’s successful efforts to conclude the dispute through negotiation, thereby avoiding retaliation.

NCC Chairman Wally Darneille reiterated that the U.S. cotton industry has undertaken extensive efforts to resolve this case. He said the NCC offered comprehensive reform of cotton policy as part of the new farm law.

“The new U.S. farm bill includes several necessary changes to cotton policy and the GSM export credit program,” Darneille said. “When compared to previous programs, cotton policy is more market-oriented with the primary safety net conveyed through insurance products that must be purchased by the producer.

“Officials from the Office of the U.S. Trade Representative and the U.S. Department of Agriculture are to be commended for reaching a comprehensive agreement that brings the dispute to a close. With the conclusion of the case, the U.S. cotton industry can bring a renewed focus to the challenges that lay in front of us.”

The American Farm Bureau Federation (AFBF) also stated its approval to the agreement with AFBF President Bob Stallman saying, “This agreement brings certainty to cotton growers and all U.S. farmers that the current structure of commodity programs will remain intact. Farm Bureau worked diligently with Congress to ensure that the nation’s safety net programs for agriculture were WTO compliant. (Oct. 1’s) agreement validates that approach.

“Farm Bureau appreciates the continuing efforts of Chief Agricultural Negotiator (Darci) Vetter, the Office of the U.S. Trade Representative and the U.S. Department of Agriculture to resolve this issue of importance to U.S. agriculture.”

Not everyone was thrilled with the deal. Rep. Rosa DeLauro, D-CT, said the U.S. should be funding nutrition programs, not making payments to support “big agribusiness.”

“The United States never should have been in a situation where we have to pay off Brazil while vulnerable families suffer,” DeLauro said. “Our farm subsidies need serious reform, and the last farm bill simply extends the status quo. The best way to resolve this issue is to remove our market-distorting cotton payments. Taking food out of hungry people’s mouths here at home while we subsidize big agribusinesses makes no sense.

“Congress used to have a bipartisan commitment to funding nutrition programs. We need to return to those days and ensure no American goes hungry.”

Rep. Ron Kind, D-WI, said, “This outrageous waste of taxpayer dollars continues. Our annual payoffs to Brazilian cotton farmers should have been eliminated long ago, but we’re sending them a $300 million payment instead.

“I pushed to resolve this mess when Congress was debating the last farm bill, but Congress didn’t act and now we are left with a bad deal that’s paid for by American taxpayers.”

Associated Press Economics Writer Martin Crutsinger contributed to this report.

Date: 10/20/2014