By Simon Lester in WTO Disputes — 03 Sep 2009

The WTO Cotton Dispute: Another Compliance Panel?

Not too many years ago, it was a bit unclear whether a respondent in a WTO dispute could go to DSU Article 21.5 and ask a panel to declare that it was in compliance, so as to put an end to the trade sanctions it was facing. However, the Hormones Suspension decisions clarified this situation, finding that such an action was permitted, and that's just what some U.S. cotton and other farm groups want the U.S. to do in relation to the Cotton 22.6 arbitration decisions:

In response to the WTO Arbitration Panel decision on the USDA export credit guarantee (“GSM-102”) program released August 31, the North American Export Grain Association, National Cotton Council, CoBank, Farm Credit Council, US Rice Producers Association, and National Council of Farmer Cooperatives released the following statement:

We are very disappointed that the panel based its decision on the GSM program as it existed in 2005, and failed to recognize the significant changes that have been made to the GSM-102 program since 2005. As a result, we urge the U.S. government to request a new Compliance Panel to update this ruling to reflect the changes in the program made by Congress and the USDA since 2005.

The extent of the program changes is demonstrated in the President’s budget for fiscal year 2010. According to the U.S. Office of Management and Budget, in 2010 the GSM program will generate a positive return to the federal government of $54 million. In other words, the revenues from guarantee premiums charged to program participants more than offset the cost of program operations, including any credit losses. Under the WTO panel’s obsolete ruling, Brazil would be entitled to place tariffs or other import penalties on an amount of U.S. products based on the use, each year in the future, of a program that is clearly not a subsidy.

The WTO panel also failed to recognize the benefits that have accrued to Brazil’s banks as a result of their significant participation in the GSM-102 program. These benefits far outweigh the costs arrived at by the arbitration panel. Ironically, Brazil’s banks have been by far the largest users of the GSM-102 program since 2002 – the year in which Brazil initiated its WTO case against the United States. Since that time, Brazilian banks have taken more than $5.4 BILLION in loans under the GSM-102 program.

On July 1, 2005, USDA adopted measures to bring its three export credit guarantee programs into compliance with WTO obligations. USDA adopted risk-based guarantee premiums for the GSM-102 Program and the Supplier Credit Guarantee Program and suspended the GSM-103 program.

The U.S. Congress made these changes permanent by enacting them into law as part of the 2008 Farm Bill. As part of that bill, Congress eliminated the GSM-103 program and abolished the statutory one percent “cap” on guarantee premiums that could be charged by USDA. Congress also eliminated the Supplier Credit Guarantee Program, leaving GSM-102 as the sole remaining USDA export credit guarantee program. In addition, Congress included language in the Farm Bill requiring USDA to operate the GSM-102 program at no net cost to the government, thereby ensuring that the program would not be a subsidy and would comply with the WTO obligation that guarantee premiums received under the program would cover its operating costs and losses.

The panel’s decision to award Brazil retaliatory authority in amounts based on the future use of a program that is now compliant with WTO rules makes no sense. The panel’s award decision seems to punish the U.S. for its compliance efforts. The panel’s decision also is inconsistent with the WTO Doha trade negotiating text which permits export credit guarantee programs that have been subject to appropriate “disciplines.”

Notably, the $2 billion in GSM-102 loans taken by Brazil’s banks during the country’s 2002-2003 financial crisis constituted a vital source of foreign exchange liquidity at a time when Brazil was virtually cut off from the international credit and trade finance markets. In fact, the liquidity afforded by the GSM-102 program was instrumental in allowing Brazil to avert a collapse of its banking system, its balance of payments, and its economy as a whole. With the onset of the global credit crisis, Brazilian banks have again turned to the GSM-102 program as a source of vital trade finance liquidity, taking more than $1.1 billion in GSM-102 loans during FY08-FY09.

This response suggests that perhaps a quick negotiated settlement is not likely. But they better hurry with the 21.5 request, because Brazil is busy preparing its sanctions list.