WTO Appellate Body Upholds Compliance Panel's Findings in Cotton Subsidies Dispute

I. Introduction

In September 2006, the WTO's Dispute Settlement Body (DSB) agreed to Brazil's request for a WTO panel to examine whether the US had brought its cotton subsidies measures into compliance with the DSB's recommendations and rulings in the well-known 2002-2005 case on US - Upland Cotton.[1] The compliance panel ruled in favor of Brazil and the US appealed. On June 2, 2008, the WTO Appellate Body (AB) issued a report[2] that in most respects upholds the compliance panel decision, finding that, notwithstanding changes made in US agricultural subsidy programs, the US has failed to bring its measures into conformity with its WTO obligations. The DSB's adoption of the panel and AB reports clears the way for Brazil to pursue its two requests for the DSB to authorize countermeasures by Brazil against US trade, including, possibly, cross-retaliation under the TRIPs Agreement. The decision also raises interesting questions regarding the scope of measures subject to compliance proceedings and the degree to which a compliance panel may rely on findings made in the original proceedings in light of changed circumstances.

II. The Original Dispute[3]

In the US - Upland Cotton dispute, Brazil argued to the panel that US subsidies to cotton producers between 1999 and 2003 violated the WTO Agreement on Agriculture and the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement). During the period in question, US support to cotton farmers peaked as the world market price for cotton fell to its lowest levels in over a decade. Brazil challenged the following and other subsidies:

• Step 2 payments - subsidies designed to enhance competitiveness of US cotton exports, by providing payments to buyers of US-grown cotton when its price exceeds a European benchmark price.
• Export credit guarantees - government guarantees for short-term export financing for cotton and other agricultural commodities.
• Marketing loan payments -a loan program that allows farmers to use cotton crops as collateral for a non-recourse government loan and to repay the loan at a lower rate when the world price for cotton falls below a certain threshold.
• Counter-cyclical payments - payments proportional to a farmer's cotton production on "base acres" during a past period, triggered when the market price for cotton falls below a target price.

The panel in the 2002-2005 proceeding found that Step 2 payments to cotton users and exporters were prohibited subsidies. It also found US export credit guarantees on cotton and other commodities not listed in the US schedule of export subsidy commitments, and for rice, are export subsidies that circumvent US export subsidy commitments under the Agreement on Agriculture. Finally, the panel found that price-contingent subsidies programs, including Step 2 payments, marketing loan payments and counter-cyclical payments, caused significant price suppression in the world market for cotton during marketing years 1999-2002, causing serious prejudice to Brazil. The panel found that the US should eliminate the prohibited subsidies (the Step 2 payments and export credit guarantees) by July 2005, and should remove the adverse effects of or withdraw the remaining subsidies by September 2005. The Appellate Body upheld the panel's findings. The DSB adopted the recommendations and rulings in these reports in March 2005.

In 2005, the US Department of Agriculture amended its export credit guarantee programs, adopting a new fee structure for one program and eliminating the rest. In 2006, Congress repealed the Step 2 program, but left the marketing loan and counter-cyclical programs unchanged.

III. The Compliance Panel

On July 4, 2005, three days after the first compliance period expired, Brazil notified the DSB that it would request authorization to take "appropriate countermeasures" under Article 4.10 of the SCM Agreement, possibly including suspension of Brazil's obligations under TRIPS and GATS.[4] The following day, the US and Brazil circulated to the DSB an agreement between them on sequencing of further procedures in this dispute. As agreed, the US objected to the countermeasures requested, and the matter was referred to arbitration under Article 22.6 of the WTO Dispute Settlement Understanding (DSU). However, the US and Brazil agreed to suspend the arbitration until (i) the DSB adopts a compliance panel report finding that the US has not taken adequate measures to comply with the DSB's original recommendations and (ii) Brazil requests that the arbitrator resume its work.[5] The DSB has adopted the compliance report, but until recently Brazil had not requested that the arbitrator resume its work.

At the time of the sequencing agreement, the parties may have hoped that the Doha Round would conclude by the end of 2006, and that the 2007 farm bill would implement the original DSB recommendations with US Doha Round agriculture commitments. By the end of 2006, any such hope had evaporated, and so Brazil requested compliance proceedings under DSU Article 21.5.

The compliance panel circulated its decision in December 2007. It found that, notwithstanding the new fee structure, US export credit guarantees issued after July 2005 constituted an export subsidy, and result in circumventing US export subsidy commitments under the Agreement on Agriculture for unscheduled products as well as rice, pig meat and poultry meat. The panel also found that payment of marketing loan and counter-cyclical payments to cotton producers after September 2005 caused significant price suppression in the world cotton market, thereby causing "present" serious prejudice to Brazil and constituting a failure by the US to comply with the DSB's recommendations and rulings.[6]

IV. The Appellate Body Report

The Appellate Body upheld the compliance panel's conclusions on US export credit guarantees and regarding serious prejudice to Brazil. Key findings included:

• Scope of the compliance proceedings: The Appellate Body found that when measures taken to comply are broader than the DSB's recommendations and rulings, the scope of those recommendations and rulings should not limit the scope of compliance proceedings under DSU Article 21.5. While a complainant who fails to prevail on a claim in the original proceeding may not relitigate the same claim regarding an element of a measure that remains unchanged, Brazil's claims against export credit guarantees for pig meat and poultry meat had not been resolved on the merits.[7]
• Scope of the compliance proceedings: marketing loan and counter-cyclical payments. Brazil alleged, and the compliance panel found, that marketing loan and counter-cyclical payments made after September 2005 (when the period for compliance expired) had caused serious prejudice to Brazil. The US argued that these payments were outside the scope of DSU Article 21.5, since the DSB's rulings in the original proceedings were limited to subsidies granted in marketing years 1999-2002.

The Appellate Body agreed with the panel that, to the extent these payments were provided under the same conditions and criteria as in the original proceeding, they are subject to the DSU's recommendations and to Article 21.5. The SCM Agreement requires that when a subsidy is found to have caused adverse effects, the WTO member granting that subsidy shall withdraw it or remove its adverse effects. Adopting the US position would allow a losing defendant to do nothing in expectation that the subsidy will expire or its effects will go away, and would deprive the wronged complainant of any remedy, forcing it to bring new proceedings to challenge the same WTO-inconsistent subsidies, simply because they were provided after the original proceeding.[8]

Whether marketing loan and counter-cyclical payments after September 2005 caused "present" serious prejudice to Brazil. The compliance panel found that subsidy payments insulated cotton producers from market signals, in spite of changes in cotton production and exports after elimination of the Step 2 program in 2006. The Appellate Body agreed that it was appropriate for the compliance panel to rely on findings made by the original panel, since the marketing loan and counter-cyclical payments programs remain essentially unchanged. As for market insulation, it observed that the panel weighed the new evidence submitted by the parties, but nonetheless concluded that the subsidies over time have an insulating effect. The fact that the panel weighed the evidence differently than the US was neither reversible error nor failure to make an objective assessment of the matter as required by the DSU.[9] Therefore, it upheld the panel's conclusion that the effect of these subsidies continued to be significant price suppression constituting "present" serious prejudice to Brazil's interests.

V. Brazil's response

The ongoing difficulties of the Doha Round suggest that a negotiated outcome to the cotton dispute is unlikely, and that a request by Brazil to resume arbitration over the countermeasures it may adopt is imminent. The press reports that Brazil recently filed such a request.[10]

Arbitration under DSU Article 22.6 will focuse on the amount and the type of countermeasures Brazil may be authorized to adopt. In 2005, Brazil requested countermeasures equivalent to approximately USD 4 billion annually, but in light of the compliance measures the US has already adopted and recent changes in market conditions, the US may argue for a lower amount.

Brazil may pursue authorization for suspension of concessions or obligations under not just the WTO agreements on trade in goods, but also the GATS and the TRIPS Agreement.[11] The DSB has authorized cross-retaliation before for two small countries, but the DSU only provides for cross-retaliation where suspending concessions with respect to the sector at issue (here, all goods) is not "practicable or effective." Given the size of Brazil's economy, it will be more difficult for it to demonstrate that suspending concessions on imports of goods from the United States is not "practicable or effective."

VI. Conclusion

The compliance panel in US - Upland Cotton found that US compliance measures following the original panel report were insufficient. The Appellate Body upheld the compliance panel's findings. Brazil is now positioned to resume arbitration proceedings over the level and type of countermeasures Brazil may be authorized to adopt in response. The recent collapse of the Doha Round talks greatly reduces any chance of a negotiated resolution and suggests that arbitration will resume. The prospect of cross-retaliation by Brazil plus the billions of dollars at stake ensures that US - Upland Cotton will continue to generate significant interest.

About the Author

Karen Halverson Cross is an ASIL member. She is a professor at the John Marshall Law School in Chicago, where she teaches contracts, international dispute resolution and international business transactions.

About the ASIL International Economic Law Interest Group
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