It will be extremely difficult for the United States and Brazil to negotiate an end to a nine-year battle over US cotton subsidies, increasing the chances Brazil could retaliate on US exports in 2010. The World Trade Organisation (WTO) in 2009 gave Brazil the go-ahead to impose sanctions against the United States after ruling the US government spent too much on subsidies for cotton farmers, and on an export credit guarantee program.
Both countries have said they want to negotiate a solution, but analysts say there are no obvious fixes. If Brazil wants meaningful changes to US farm programs - criticised for depressing world prices - it may need to employ sanctions such as lifting intellectual property protections on drugs, software and movies to cause a stir on Capitol Hill.
Major changes to cotton subsidies or to the export credit program would require approval of US Congress. So far, cotton-state lawmakers have dismissed the WTO ruling as outdated, while others in Congress may need to feel the sting of sanctions in their districts and states to engage on the unfamiliar issue.
The Obama administration may be able to make some tweaks without Congress to the export credit guarantee program - used to help finance sales of US commodities to developing nations - but that may not be enough to satisfy Brazil. "The question is, what does Brazil think? I'm not sure that Brazil has stated what they think yet," said William Gillon, trade counsel for the US National Cotton Council.
RETALIATION COULD TURN UP PRESSURE The WTO authorised Brazil to impose sanctions worth $147.3 million a year to retaliate against US cotton supports. Total sanctions could be worth $829 million based on 2008 data for the export credit guarantee program, Brazil's foreign trade ministry Camex said in December.
Brazil has identified more than 200 possible US targets for trade retaliation, ranging from foodstuffs to textiles to pharmaceuticals. Trade officials will decide how to narrow the list at a February meeting.
Brazil must avoid hurting its own consumers and industries that rely on US imports with the sanctions - while carefully targeting US sectors that could exert enough pressure in Washington to rival the US farm lobby. It will face internal pressure from its own farm groups to adeptly wield its WTO-granted clout - as well as from African producers of cotton and development groups such as Oxfam, which have used the Brazil cotton case to press for US reform. There is no deadline for Brazil to apply sanctions.
STALLED DOHA TALKS ANOTHER ROADBLOCK Influential farm-state lawmakers have said they agree with US farm groups that the WTO did not account for changes made to cotton supports and the export credit program since 2005 - the year on which its ruling was based. They want the United States to seek a new ruling from the WTO on the changes it has made.
"The US cotton program today isn't distorting world trade," said Gillon, noting that US cotton production has dropped by 46 percent since 2005, and exports by 25 percent. "But as long they've got the win based on 2005, I would suspect that they would strongly consider trying to exploit that win," Gillon said.
The slow-down in the Doha round of trade talks has further complicated the resolution of the issue, analysts said. The USTR has been unequivocally opposed to cutting a Doha deal on cotton and export credits with Brazil and African producers ahead of a multilateral deal on all issues. China, India and Brazil need to provide better access to their farm markets before the United States will agree to any deal, US officials have said.
CREATIVE THINKING NEEDED TO FIND FIX A financial compensation agreement probably would not be palatable to Brazil, even if the US Congress could agree to one, said Kimberly Elliott of the Center for Global Development. "They really want the subsidies fixed," Elliott said. "Compensation just really doesn't get to that."
But "strange bedfellows" could help lead to a fix, said Jon Huenemann, a former US Trade Representative official, at the Wilson Center discussion. For example, Brazil might be convinced to retreat on cotton in exchange for a reduction to a US tariff that keeps out imports of ethanol made from Brazilian sugar cane. The US ethanol tariff is a top farm issue for Brazil, but also one where the "heavy politics" of US agriculture would prevent an easy fix, Huenemann acknowledged. "I think this is really an issue that calls for creative thinking," he said.