The cotton case demonstrated that while the WTO provides a platform for dispute settlement, it cannot ensure implementation of its rulings. Brazil received a fair ruling in 2004 that US cotton subsidies violated WTO rules, but the US did not comply until settling with Brazil in 2014. The case also showed developing countries with little economic power may struggle to benefit from the world trading system. Recommendations include increasing WTO enforcement powers and creating a trade development fund to support developing nations.

1. Brazil’s WTO Cotton Case:
Negotiation Through Litigation
Devereaux et al. (2006), Case Studies in US Trade Negotiation:
Resolving Disputes, Institute for International Economics
Original: J. Katherine Milligan for Harvard Business School Professor Emeritus
Ray Goldberg and John F. Kennedy School of Government Professor Robert Z.
Lawrence
May 2020
Enock Kasimbazi
Delali Ansah
Carmen (Jia Wen) He

2. Hello from the Team!

3. Summary
• Using the cotton case as an example to understand WTO’s role and the rules of the world trade system
and determine whether they serve the purpose of providing fair access to all its members
MOTIVATION:
• In how far does the cotton case demonstrate developing countries can receive fair market access in the
world trading system?
RESEARCH QUESTION:
• Brazil filed charges against the US on unfair distortion in cotton trade in 2002
• West African Coalition filed separate complaint on similar issues in 2003
KEY ISSUES/PROCEEDINGS:
• Brazil won ruling in 2004 but no result for West African Coalition; WTO did not enforce its rulings on US
• Brazil received settlement from the US in 2014, ten years after the ruling
OUTCOME:
• WTO provided a platform for Brazil to receive a fair ruling but could not ensure implementation of
changes
• Delay in US implementation of changes: 1) how to balance domestic farm industry protection vs.
compliance with WTO rules and 2) power imbalance between US and Brazil
• Cotton case: an example of developing countries with little economic significance may face problems in
accessing the world trade system and benefiting from its rules
FINDINGS:
• Empower WTO to enforce its rules
• Create trade development fund for developing countries
• Capacity building: train trade experts for developing countries
RECOMMENDATIONS:

4. Agenda
Background
Key Issues/Proceedings
Outcome
Analysis
Conclusion and Recommendations

5. Background

6. What is the
World Trade
Organization
(WTO)?
Officially established in 1995
through the Uruguay Trade
Round
Three main
purposes
Provides rules of trade
Enables trade negotiations
Settles trade disputes
(Dispute Settlement
Understanding, “DSU”)

7. Uruguay Round
Agreements on
Agriculture
(URAA) 1992
Significance of Trade Round:
Terms signed by all members; included base subsidy rates which cannot be exceeded,
otherwise Peace Clause does not apply
Article 13 – Peace Clause:
WTO members prohibited from challenging other members’ agricultural subsidies
under DSU
Subsidies and Countervailing Measures (SCM):
Prohibited all subsidies; actionable subsidies causing “serious prejudice” could be
challenged
Three Key Pillars:
Market access Export subsidies Domestic support
Objective:
Reform agricultural trade and make policies more market-oriented

8. Key Trade
Instruments
Tariff: tax levied when a good is imported with a purpose to provide revenue
for the country and to protect domestic industries.
Tariff-rate quota: lower tariff rates for specified quantities, higher rates for
quantities that exceed the quota.
Red-tape barrier: restricting imports using normal health, safety and
customs procedures to place substantial obstacles in the way of trade.
Subsidy: a sum of money granted from public funds to help an industry or
business keep the price of a commodity or service low. [Source: Oxford Online Dictionary]

9. URAA -
Agricultural
subsidies
Export subsidies:
highly trade
distorting
Domestic support
(distorting vs. non-
distorting):
Green Box: does not distort
trade, government funded and
cannot involve price-support
mechanism e.g. R&D and
environmental conservation
 permitted without limit
Blue Box: does not tie to
production level
e.g. payment to limit
production, rural development
programs
 permitted without limit
Amber Box: highly trade
distorting and tied to production
levels e.g. price supports, input
subsidies
 must not exceed 1992 rates,
also known as “Aggregate
Measure of Support “AMS”)

10. Key Events of
Cotton Case
1986–1994
Uruguay Round;
Agricultural terms
agreed in 1992
Sep. 2002
Brazil filed
complaint against
US for Trade
Distortion
Apr. 2003
Benin, Burkina
Faso, Chad, and
Mali filed Sectoral
Initiative
Sep. 2003
African nations
received support
at Cancun
ministerial, but
no agreement
reached
Jun 2004
WTO DSU rules in
favour of Brazil

11. Cotton Case –
Pedro de Camargo Neto
• Unequal terms of trade between Brazil and US and EU
• Advocated for stronger positions in trade negotiations
• Key strategy: litigation
• Rules of URAA to mount case from soy to cotton
• Using cotton dispute to influence Doha Round of negotiations
Image source: https://www.ictsd.org/about-us/pedro-de-camargo-neto
Pedro de Camargo Neto
• Born 1949, family of cattle ranchers and
sugar farmers
• Master’s degree at MIT
• Ph.D. in engineering at University of Sao
Paulo
• President of Brazilian Rural Society (BRS)
1990
• Deputy Minister of Agriculture, 2000-02

12. Cotton Case –
Brief Background
How it Unfolded:
• East Asian financial crisis: 1997-98 fallen commodity prices
• US farm subsidies increased; 2002 Farm Bill not in line with URAA terms
• Started with US soybean case but dropped  politics and market conditions
• Cotton: world prices fell 40% between 2000 and 2002
• US cotton subsidies: $1.9B - $3.9B in $20B market (1998-2002); exceeded 1992
• Cotton case gained attention; World Bank and International Cotton Advisory
Committee (ICAC) findings:
US cotton production would have been lower without subsidies,
increasing world prices by 6 cents, 12 cents and 22 cents in 1999-2000,
2000-01 and 2001-02 respectively.
• Brazil filed WTO cotton case against US despite domestic ministers’ reluctance to
upset US
• Pedro used Oxfam to engage with West African countries

13. Key Issues/Proceedings

14. US Farm Policy
ORIGINATION
Modern Farm Policy originated from Agricultural Adjustment Act
1933. Main source of assistance was market loans at time of
harvest.
INTENTION
Allow market conditions to take in good times and provide safety
for farmers during sudden downturn of prices.
COMPLIANCE
1996 US Farm Bill had to comply with WTO URAA. Price based
programs such as loan deficiency payments were considered
amber box.
MARKET CONDITIONS IN EARLY-MID 90’S
Due to high commodity prices in early-mid 1990’s US base rates in
WTO remained relatively low.

15. US Farm Policy
1996 Freedom Act
Congress passed a system of decoupled payments but
prohibited farmers from growing fruits and vegetables.
FALLEN PRICES IN LATE 90’S
US congress passed $30 billion emergency payments.
Many efforts were continued in 2002 Farm Bill.
FARM PROGRAMS
Cotton farmers in US benefited from market loan
programs, direct payments and countercyclical payment
(initially called “emergency payments”), Crop insurance,
export credit insurance and Step 2 program to boost
export.

16. US Farm Policy
RESULT:
Massive amounts of support
to cotton farmers by US
government
Source: Institute for International Economics, CASE STUDIES IN US TRADE NEGOTIATION, VOL. 2

17. Brazil’s Case to
WTO
Brazil´s case can be subdivided into two arguments: legal and
economic
Legal terms
• US cotton subsidies in years 1999-2002 exceeded 1992 base rate
levels.
• This is a violation of Article 13 of Peace Clause which protects
countries when they don’t exceed the 1992 base rate levels.
• Brazil also argued that two additional programs, the export credit
guarantee program and Step 2 payments contained export
subsidies prohibited under URAA.

18. Brazil’s Case to
WTO
Economic terms
Brazil argued US cotton subsidies caused serious financial
harm to Brazilian farmers actionable under Agreement on
Subsidies and Countervailing Measures (SCM):
• US subsidies led to suppression of world cotton prices
which cost Brazilian farmers $478 million in losses.
• US subsides unfairly enabled US to gain market share,
which resulted in Brazilian farmers losing corresponding
market share.

19. West African
Countries’
Approach
Brazil tried to persuade four African nations, Benin, Burkina Faso,
Mali and Chad, to sign as “Co-complainants” but they were
reluctant; two signed as “Third Parties”.
They submitted a “Sectoral Initiative in Favour of Cotton” to WTO to
be included in the Cancun ministerial summit agenda demanding:
• Developed countries phase out domestic and export subsidies in
three years
• Compensation of $250 million per year as lost revenue

20. Outcome
Ruling vs. Reality

21. WTO Ruling
June 18, 2004
• US direct cotton payments did not qualify as “green box”
because they prohibited growing of fruits & vegetables;
hence encouraged cotton production.
• US subsidies between 1999-2002 exceeded 1992 levels;
hence breached the Peace Clause.
• US support (marketing loan & loss assistance) programs
suppressed world price.
• Export credit program and Step 2 program contained
prohibited export subsidies.

22. Reality: After
Effects of
Ruling
• US missed July 1, 2005 ultimatum to stop its subsidy programs
arguing Congress needed to amend the laws leading to verbal
escalations between the two countries.
• In August 2009, the WTO allowed Brazil to impose punitive tariffs
and lift patent protections on $829 million of US exports1.
• US agreed to annual $147 million payments to Brazil’s cotton
assistance fund but stopped due to disagreements on budget in
congress in 20112.
1Grunwald, M (2010, April 9). Why the U.S. Is Also Giving Brazilians Farm Subsidies. Time USA. Retrieved from
http://content.time.com/time/nation/article/0,8599,1978963,00.html
2Joffe-Walt, C (2010, November 9). Why U.S. Taxpayers Are Paying Brazilian Cotton Growers. NPR. Retrieved from
https://www.npr.org/sections/money/2011/01/26/131192182/cotton

23. Reality: After
Effects of
Ruling
• October 2014, after threats from Brazil, US agreed on a
one-time $300 million settlement payment for all
charges by Brazil to be dropped. This payment was made
in 2015 which closed the case1.
• Although US started some reforms, it never did anything
significant to stop its subsidies due political ramifications
to congress members from US Southern States.
• Four W. African countries could not get compensations
from the US because they lacked the capacity to
threaten the US.
1International Centre for Trade and Sustainable Development. (2014, October 2). US, Brazil Clinch Deal
Resolving Cotton Trade Row. Retrieved from
http://www.ictsd.org/bridges-news/bridges/news/us-brazil-clinch-deal-resolving-cotton-trade-
row?fbclid=IwAR0hpZoohc2XxzcrgV2zEtWfzoXu5tsNBflTvChPmQCIiNpGN6zcFZAM6Ew

24. Analysis

25. How far does the
cotton case show
that the world
trading system
allows developing
countries to get
fair access to
export markets?
From the cotton case the following key points were highlighted
Strengths:
• WTO prohibition of dumping: creation of SCM provided grounds for
Brazil to sue US on its export subsidies and win
• WTO created 1992 base subsidy levels as a limit on allowable subsidies,
providing fairer access to developing countries (especially those who
cannot afford large subsidies)
• Presence of WTO provides developing countries a platform where their
voices and complaints could be heard. E.g. Brazil’s cotton case filing and
West African countries’ Sectoral Initiative

26. How far does the
cotton case show
that the world
trading system
allows developing
countries to get fair
access to export
markets?
Weaknesses/Limitations:
• US’ ability to provide ~$4B subsidies vs Benin ~$40M: big
players may dominate the market leading to developing
countries finding themselves in disadvantaged position
• Market access was one of pillars for URAA. In practice,
domestic payments and strict product regulation from
developed countries may overshadow benefits from tariff
reduction. E.g. US farm subsidies and EU’s regulations against
GMO cotton
• WTO: fair in execution but still weak; e.g. fair in Brazil ruling
and bringing to light demands of West African countries but
weak to dominant players like US

27. How far does the
cotton case show
problems
developing
countries might
have in benefiting
from the rules of
the world trading
system?
Problems Cotton Case Example
High costs of hiring external experts Brazil hired US trade experts and lawyers
Standing up against stronger political alliance EU and US joint draft agriculture text vs. G-20
formation at Cancun ministerial
Rules more favourable to developed countries EU and US insisted implementation of Peace
Clause
Result manipulation US boxshifted domestic support payments with
no consequences
May be hard for countries with little economic
significance to have their concerns heard
W. African nations appealed to public opinion
via Oxfam
May be difficult for developing countries to
retaliate using DSU instrument
W. African nations reluctant to sign as co-
complainants on cotton case

28. How far should
national
governments have
the right to protect
domestic farming?
Theory
Free trade means everyone on same level playing field; no one
should have an advantage over another.
Reality
Governments protect their farmers despite trade distortion
because they need to1:
•Preserve rural societies;
•Protect economy from dumping;
•Shield farmers from occurrences such as yield loss and
weather;
•Protect weak agricultural sector from foreign competition
•Ensure enough food is produced to meet country’s needs
1Source: World Trade Organization, “Understanding the WTO”, p.26

29. How far should
national
governments have
the right to
protect domestic
farming?
• US in cotton case also complicated by domestic politics
• Developing countries: Some agreements on fair trade are
either not followed or favour developed nations hence the
need for developing nations to protect domestic economy
• Fair for governments to look after their citizens and national
economy but developed countries need to also find ways to
support the developing and least developed countries

30. Conclusion &
Recommendations

31. Conclusion
• Cotton case demonstrated whilst the WTO provides rules of trade, enables negotiations
and provides a platform for dispute settlement, its lack of power to enforce rulings
could resulted in complainants like Brazil to receive a fair ruling but not the benefits
from it until much later
• Difficulty and delay in US implementation of WTO rulings highlighted two issues:
a. How to balance between protecting domestic farming industries and politics
while being compliant with world trade rules
b. Power imbalance between developed vs developing nations like US and Brazil
• Lack of results for the West African countries: example that developing countries with
little economic significance could face problems in accessing the world trade system
and benefiting from its rules

32. Recommendations
Increase WTO Power
WTO needs some teeth especially when it comes to the dominant players
like the United States. Declaring winners is not enough, the WTO needs to
be able to enforce its rules.
Create Trade Development Fund
Developed nations are allowed moderate level of domestic support if they
contribute to this fund for developing nations used for R&D and other cost
reducing programs. (e.g. based on % of domestic support each year)
Capacity Building
An initiative should be launched to train trade experts from developing
nations to curb overreliance of experts from developed nations when
accessing WTO.