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Brazil vs. USA - WTO case: cotton the battlefield

On October 15, the World Trade Organization – WTO confirmed that the USA has failed to comply with its rulings in the Cotton Case.

The report is still confidential, but officials from both contenders confirmed its content. The dispute started back in September 2002, when Brazil contested certain USA agricultural subsidy schemes before the WTO. After years of ingrained legal discussion, it was determined that Washington subsidy programs were WTO-inconsistent and should be brought into conformity. Since the final decision of the Appellate Body, the USA has implemented some changes, such as the repealing of certain export subsidies, but Brazil kept arguing the inadequacy of the remaining measures, and now, finally, it has what it was chasing. Or maybe not.

Is the dispute really approaching its end? The answer lies in the analysis of the WTO dispute settlement system, specifically in its implementation mechanisms. According to the WTO routine, the USA will most likely appeal the recent ruling and postpone the compliance discussion until next year. Once this debate is over, both the extent and the way in which Brazil may decide to retaliate will be left to arbitration. As one may anticipate, it might take some time until Brasilia is granted the right to impose sanctions against its adversary.

Even so, the granting of such authorization is not yet the end of the road. WTO sanctions were not designed to replace, but rather stimulate, the implementation of WTO rulings. Therefore, the Cotton Case would only be properly concluded if Brazil managed to induce the USA to bring its illegal measures into conformity (i.e., eliminate the illegal subsidies), by exercising – or threatening to exercise – its right to retaliate. WTO sanctions generally consist of the raising of the complainant’s tariffs against the defendant’s exports within the same “sector” in which the violation was found (in this dispute, goods). In many cases, however, the penalty tends to hurt more than benefit the sanctioneer, as it affects the costs of imports, thus harming its national industries (i.e., raw materials and capital goods) and consumers (i.e., manufactured goods).

No wonder it is commonly said that WTO sanctions bite back. In the Cotton Case, Brazil has requested the right to impose countermeasures at an amount up to US$4 billion. However, expecting the mentioned obstacles, it has sought authorization for sanctions not only in goods, but also in other areas, such as services or intellectual property (“IP” ).

This is the concept of “cross-retaliation”, which – although rarely used – is allowed by the relevant WTO Agreement when regular retaliation is proved to be unfeasible or ineffective, and circumstances are serious enough.

The granting of the right to suspend concessions on IP could be a particularly persuasive alternative to induce USA compliance without harming Brazilian imports.

Upon the suspension of several rules in TRIPS, those affected USA IP owners could pressure Washington to abide by WTO law, strengthening the Brazilian position. Currently, there are two bills under discussion in the Brazilian Congress aimed at regulating the cross-retaliation through the suspension of obligations regarding IP. These are PL 5489/05 and PL 1893/07, respectively presented by Deputies Fernando Gabeira and Paulo Teixeira.

Brazil has also created a workgroup within the Chamber of Foreign Trade (“CAMEX”) to discuss suggestions on how to enhance such proposals.

In summary, there seems to be a long path in anticipation towards a satisfactory conclusion to the Cotton Case. The multilateral dispute settlement procedure still has a couple of stages left before WTO acknowledges Brazil’s right to impose retaliatory duties. Moreover, once this right is granted, Brazil will face thorny obstructions trying to persuade the USA to conform its subsidy policies, through either negotiation or retaliation itself. Having those difficulties in mind, cross-retaliation, especially on IP, could be seen as a light at the end of the tunnel: an encouraging contribution to the effectiveness of the system, mainly for developing countries.

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