Posted: October 25, 2012

Brazil’s ambassador to the World Trade Organization this week made clear that his country is willing to be somewhat flexible when it comes to finding a permanent solution to the U.S.-Brazil WTO dispute over cotton and other agricultural subsidies. At the same time, he warned that Brazil has not seen enough engagement from the U.S. side thus far, and that Brazil will opt to implement retaliatory measures if the U.S. leaves it with no other option.

At an event in Washington on Oct. 25, Ambassador Roberto Azevedo said Brazil was now in a position to identify specific parameters of U.S. agricultural support programs that would need to be altered to bring the U.S. into compliance with the ruling. He said that while these alterations to the programs would not result in a “dream scenario” for Brazil, they are robust enough that Brazilian officials “could take them to Brazil and be able to sell them” to stakeholders.

The bilateral dispute has two main parts. The first relates to a WTO finding that U.S. trade-distorting subsidies to cotton growers caused adverse effects to their Brazilian counterparts. Both the House and Senate versions of a new farm bill would create a new crop insurance program for U.S. cotton producers known as STAX, and Brazil objects to the STAX program as currently designed in both versions (Inside U.S. Trade, July 13).

In his meetings with administration officials this week, however, Azevedo said he made clear that his country is willing to work “on the basis of what is on the table” when it comes to the STAX program as well as the general crop insurance and marketing loan program proposals contained in the House and Senate legislation. He explained that Brazil is not trying to “micromanage” the next farm bill, which is the venue for the U.S. to comply with its WTO obligations.

At the same time, he stressed that Brazil seeks to alter the details of these proposed programs to make them more acceptable. “We looked carefully at the structure of the programs which are in both [the House and Senate farm] bills to see if there is a way of adjusting the parameters” so that the distortion that these programs cause to international trade flows is at least “reasonable,” he said.

Despite the fact that Brazil is willing to work within these programs’ current parameters, Azevedo stressed in an Oct. 23 interview with Inside U.S. Trade that the House and Senate versions are still “very far apart” from what Brazil would see as a reasonable solution. Moreover, he argued that the U.S. side has not done nearly enough when it comes to complying with the second main aspect of Brazil’s challenge, which relates to the General Sales Manager (GSM) 102 program (see related story).

The WTO determined that the GSM 102 program, which helps facilitate U.S. agricultural exports, provided prohibited export subsidies. As part of an interim U.S.-Brazil settlement worked out in 2010, the U.S. committed to raise the fees charged under the program every six months if usage exceeds certain levels. Those fee increases have regularly occurred because usage remains high, but Azevedo argued this week that this is not nearly enough.

U.S. actions to date “are not even close to what would be necessary to provide a satisfactory solution to this issue,” he stressed in the interview. Neither proposed version of a new farm bill would make any significant changes to the GSM 102 program, something that has irked Brazil.

More broadly, Azevedo argued that he is not seeing nearly enough engagement from the U.S. side on the issue of complying with WTO obligations in this case. Part of the problem, he conceded, is that Congress, which has direct control over the development of new farm legislation, “doesn’t really negotiate” with Brazil. Instead, Brazil talks with Obama administration officials, who can only indirectly influence the farm bill process.

“It’s very weird. I’ve never negotiated like this in my professional life,” he said. “The way that the system works doesn’t help a negotiation along the lines that we need.” He added that the current mechanism for negotiation is not very “agile.”

As a first step, the ambassador argued, the U.S. side must figure out how these three-party negotiations can operate in a reasonably efficient manner. The first step, he said, is for the U.S. to offer procedural solutions as to how the negotiations can even take place. There must be a process in place so that the talks are a “two-way street.” Thus far, Brazil has offered ideas and Congress and the administration have not really responded, he said.

“So either we figure out a way to have meaningful engagement in negotiations, or we cannot we can not be very optimistic about the outcomes,” he concluded.

The ambassador made clear that he so far sees very little evidence that the bilateral dispute will be worked out through negotiations. “As of now, we made sure that they understand what our concerns are, and the current dynamics [do not] offer us any other course of action other than to cross our fingers and hope for the best,” he said in the interview. “And maybe the best will be the outcome, but I’m not very optimistic about that.”

Azevedo signaled that the U.S. government is fully aware of the implications of its failure to engage in substantive negotiations with Brazil. “My assumption is that the U.S. government — and I mean the government in the broad sense, the administration, the Congress — knows what is at stake, and that they are doing what they are doing, and that they are negotiating or talking the way they are talking, fully conscious of the implications,” he said.

In order to prepare for the possibility of retaliation, the ambassador said Brazil has formed a technical working group tasked with coming up with retaliation options. He said this group has “nearly concluded” its work, although there are still “one or two things in the area of intellectual property, to finalize some of the legal implications of that.”

The technical group is examining issues related to intellectual property rights (IPR) because the WTO has granted Brazil the right to “cross retaliate” in sectors other than goods under certain circumstances. Cross retaliation is extremely difficult to implement under WTO rules. However, the fact that Brazil has been granted these rights gives it additional leverage in the compliance talks because U.S. IPR stakeholders would be loathe to see Brazil act in this sector.

The amount of overall retaliation rights — as well as the amount of cross retaliation rights — changes each year based on a WTO formula. Taking into account changes to GSM 102 program, as well as the changing nature of U.S.-Brazil trade flows, the most recent data would give Brazil far less in retaliation rights the use of older data did and would preclude cross retaliation (Inside U.S. Trade, June 22).

This has led Brazil to consider whether it might try to justify the use of older data from when the WTO released its formula in determining its future retaliation rights, a controversial move that would likely raise the ire of the United States. Azevedo said there is still no decision on this specific point in Brazil. “I think that will be a decision that will be taken at the highest political level,” he said in the interview.

Using older data could give Brazil nearly $1 billion in overall retaliation rights, and as much as $269 million in cross retaliation rights. Newer data, however, yields far less robust figures: about $500 million in retaliation and no cross retaliation rights whatsoever, experts have said.

The dispute over U.S. farm subsidies benefiting U.S. cotton producers arises from a successful WTO challenge launched by Brazil that culminated in a 2005 Appellate Body ruling that U.S. domestic subsidies had a detrimental impact on Brazilian cotton growers, and that the GSM 102 program provided prohibited export subsidies.

Brazil received authority from the WTO to retaliate in November 2009, but reached an interim agreement with the U.S. in June 2010 to delay retaliation. The interim agreement included a U.S. commitment to reach a definitive solution when Congress enacts “successor” legislation to the 2008 farm bill.

Since then, the U.S. and Brazil agreed that the interim agreement will not terminate in case of a short-term extension of the farm bill. But some observers now wonder whether the agreement would continue to hold if, for instance, Republicans take over the Senate during the upcoming elections and Congress therefore decides to reconsider its approach on the farm bill, leading to more delays.

This week, Azevedo signaled that this means a truly short term extension and that a longer extension — for instance, a one-year extension — would lead Brazil to reassess the situation.

The U.S. and Brazil “are both working under the assumption that we would have a farm bill in the next few months, either in the lame duck session, or very early in 2013,” he stressed. In a related development, Senate Agriculture Committee Chairwoman Debbie Stabenow (D-MI) welcomed reports that House Majority Leader Eric Cantor (R-VA) has agreed to bring the farm bill to a House vote in the lame-duck session, according to an Oct. 25 statement.

Under the interim agreement, the U.S. pays Brazil $147 million annually for the development of the Brazilian cotton sector. Moreover, it agreed to periodically raise up fees under the GSM 102 program.

Azevedo: U.S. Reluctant To Make Administrative Changes To GSM 102

Posted: October 25, 2012

Brazil’s ambassador to the World Trade Organization this week said the Obama administration has been hesitant to make far-reaching changes to the operation of the General Sales Manager (GSM) 102 export credit guarantee program despite having the leeway to make these changes administratively.

“The basic argument is that although they have the administrative powers to do so, if they change the program very significantly, the expectation is that Congress may act, removing those discretionary powers that they have,” Roberto Azevedo said in an Oct. 23 interview with Inside U.S. Trade. “So they want to tread very carefully.”

“And we can appreciate that, but the fact is that the actions that have been taken so far are not even close to what would be necessary to provide a satisfactory solution to this issue,” he said.

The GSM 102 program was faulted by the WTO as a prohibited export subsidy in a challenge launched by Brazil. Overall, Azevedo said there has been very little progress on bringing GSM 102 into compliance thus far.

The Appellate Body ruling led to an interim settlement agreement in 2010 between the U.S. and Brazil, in which USDA committed to increasing the fees it charges under the program every six months if a certain threshold of usage was exceeded. The latest fee increase occurred earlier this month.

The idea was that increased fees would drive down usage, which would help Brazilian producers compete with U.S. cotton exports benefiting from the operation of the GSM 102 program.

Azevedo pointed out that usage of the program is still “very high” despite repeated fee increases.

Beyond the fact that the fees remain “extremely low” and do not cover the operating costs and losses of the program, Azevedo signaled that the program must also be altered in other ways to ensure it does not favor U.S. agricultural exporters with favorable repayment periods or tenors.

For instance, he said a commercial bank would never provide loan tenors of up to 24 months for agricultural exporters, as is the case under the GSM 102 program, and instead would insist on a repayment period of around six months.

“That’s why in the WTO under the Doha round, we were going to limit that to six months,” he said, in reference to a draft Doha round agriculture text to which WTO members never formally agreed. “And it would have a frequent check of the cost and losses of the program — a more frequent one,” he said.

He said the U.S. does not want that such frequent reviews and favors “very large periods for review.”