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Cotton and Accountability

Cotton and Accountability

Wednesday, June 6, 2007

A U.S. Decision Not To Comply Could
Put Other American Industries At Risk

Ken Cook [1] & Chris Campbell
Environmental Working Group

Washington, June 9—It is the big 'what if' question occupying Brazilian policy experts and legislators in the wake of their country's stunning victory over the United States at the World Trade Organization (WTO) in March.

What if the U.S. does not comply with the WTO's broad rulings and fails to reform its multi-billion dollar cotton subsidy programs to Brazil's satisfaction? What retaliatory trade measures could Brazil possibly adopt that would force an economic giant like the United States to change a politically entrenched farm subsidy system?

The beginnings of an answer may be unveiled in Brasilia today, at a congressional hearing convened to examine a novel trade retaliation strategy: At issue is how Brazil might compel cotton subsidy reforms here by suspending the intellectual property rights protection American companies now enjoy in Brazil for a wide array of knowledge-based products, from pharmaceuticals, computers, software, and biotechnology, to books, musical recordings and films.

In other words, no reform by the U.S. in response to the WTO cotton decision might mean no patent or copyright protection in Brazil for targeted American drugs, computers, biotech crops, or the latest music CDs and DVD movies.

If the David-and-Goliath audacity of the proposal calls to mind the boldness of Brazil's long-shot WTO challenges both to America's cotton subsidies and to the European Union's sugar support system (another case Brazil recently won), it is hardly a coincidence. Both initiatives are the brainchild of Dr. Pedro de Camargo Neto, a former Brazilian trade negotiator and government official who wants to make sure his country has 'Plan B' prepared in case the United States stalls or evades the serious cotton subsidy reforms Brazil seeks.

The two initiatives also find unexpected, if limited advantage for developing countries in features of the global trading system that critics of the WTO tended to dismiss as irrelevant, or as benefiting only developed nations.

The majority of WTO litigation to date has pitted one rich country's lawyer's against another's, with the U.S. in the lead for filing trade challenges. Brazil's cotton and sugar victories, however, showed that smaller countries have the possibility of redressing serious trade disputes with much larger countries through WTO litigation when WTO negotiations alone fail.

Similarly, Brazil's intellectual property rights retaliation strategy owes it potential leverage to WTO rules that developed countries insisted on and developing countries adamantly resisted. Enshrined in the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement, those rules sanction the use of "cross retaliation" to discipline countries that violate international intellectual property rights by allowing the offended country to impose punitively high tariffs on goods the offending countries seek to import.

But in reluctantly agreeing to that form of cross-retaliation, developing countries won the right to reverse it. In principle, they can punish trade violations involving goods—like cotton—with sanctions aimed at suspending the intellectual property rights of an offending nation within the borders of the country that seeks relief.

Dr. Camargo, representing the Council of Sociedade Rural Brasileira, along with Dr. Maristela Basso, a legal scholar with Brazil's International Trade and Development Rights Institute (IDCID), will describe the 'architecture' of an intellectual property rights retaliation strategy at a June 9 hearing of the agricultural committee of the Brazilian Congress. Included in their testimony will be suggestions for amending Brazil's Industrial Property Law to allow suspension of intellectual property rights protection when a country fails to comply with a WTO ruling in Brazil's favor.

"The intellectual property rights strategy has the potential to level the playing field when economies that are comparatively small seek leverage to compel compliance by much larger economies with WTO decisions," Dr. Camargo said. "We are examining an option in preparation for potential retaliation, or cross-retaliation, against the United States, if it is needed, to ensure an outcome satisfactory to Brazil in the WTO cotton subsidy case."

Dr. Camargo added, "We want the U.S. to understand that we will pursue this option so that Brazil and other nations have the chance to compete on equal terms. It is the United States that speaks out strongly for fair trade, and it should be the United States that follows the fair trade rules."

In a paper prepared for the congressional hearing, Dr. Basso of the IDCID evaluated Brazil's potential use of conventional trade retaliation approaches, which typically subject imported goods from the offending country with punishing tariff increases. (An EWG translation summarizing Dr. Basso's paper can be found here.)

But the IDCID analysis concluded that straight retaliation against U.S. commodities might do Brazil more harm than good. It would likely raise the cost of imported goods in an economy that is recovering and embracing trade.

Under a cross-retaliation strategy, U.S. companies would face suspension of intellectual property rights in Brazil, instead of higher tariffs on goods exported to Brazil.

"Instead of transferring to society the onus of litigation by way of over-taxing imported products from the target retaliation county," Dr. Basso wrote, "society will benefit, for example in greater access to medicine, culture, entertainment and information."

For the strategy to work, Camargo and Basso explain, Brazil must first modify its domestic laws to allow trade-related suspension of intellectual property rights. Then it would have to receive WTO authorization of any specific cross-retaliation proposal under the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement. That could be a tall order. Some precedents suggest that the WTO may require Brazil to exhaust retaliation options via tariff increases against imported U.S. goods before the organization approves any cross-retaliation against intellectual property rights.

Publicly, trade and agriculture officials in both countries diplomatically insist that it will not come to retaliation. Brazil and the United States will negotiate satisfactory changes in due course, they say, obviating the need for Brazil to propose any retaliatory measures for WTO approval, much less implement them.

But after decades of talk, the failure of the United States to make progress on subsidy reforms is precisely what provoked Brazil into pursuing its grievances through WTO litigation in the first place. The strategy paid off in the historic ruling, finalized in March. The WTO determined that multi-billion dollar U.S. cotton export subsidies are outright illegal. An array of direct domestic U.S. cotton subsidies to farmers will also require significant reform, because the WTO concluded they constitute 'serious prejudice' against the economic interests of the cotton industry in Brazil, and other cotton producing nations in Africa and elsewhere. Both sets of violations set the stage for trade retaliation by Brazil if negotiation fails.

The U.S. Department of Agriculture, the president's trade representative, and the U.S. cotton industry are actively examining compliance options, first for the two export subsidy programs that the WTO decreed illegal. Under the organization's rules, those programs must be eliminated by July 1. One is the massive U.S. export credit program that is partially subsidized and supports the foreign sale of many U.S. commodities in addition to cotton. The second, the "Step 2" export subsidy (see EWG analysis), is unique to cotton. It provides taxpayer funds--$2.4 billion over the past decade--to U.S.-based cotton millers and exporters so they can afford to buy American cotton made expensive by another set of multi-billion dollar subsidies paid to farmers.

American officials have said the U.S. intends to comply fully with the WTO's cotton ruling, starting with the export subsidies. But no one in government has indicated how they will do so, or when.

So with no action at all expected in time for the first compliance deadline, for action on the illegal export subsidies, that looms just three weeks from now, some Brazilians are working on Plan B.

[1] President, Environmental Working Group. This analysis was supported by a grant from the Global Development Program of the William and Flora Hewlett Foundation.

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