In 2009, after seven years of negotiating the cumbersome WTO dispute settlement and appeals process, Brazil was given the green light to retaliate for the injury it sustained as a result of certain U.S. cotton support payments and export credit guarantees, to the tune of more than $800 million. In granting the authority, the WTO allowed Brazil not only to retaliate against imports of U.S. goods, but also to engage in cross-retaliation, that is, to take retaliatory actions in the areas of services and intellectual property rights.
In March of 2010, Brazil released a preliminary list of proposed intellectual property sanctions that it might impose on the United States. The list included the suspension of intellectual property rights on pharmaceuticals and chemicals and biotechnology products for agricultural use; as well as copyrights on music, books, films and other audiovisual products. Brazil also signaled it could impose additional fees for the registration or renewal of patents and copyrights and confiscate a portion of the royalties that Brazilian branches of U.S. firms return to their parent companies.
This list was the attention grabber. The WTO had authorized cross-retaliation in only two other cases, and in no case had an aggrieved party ever implemented cross-retaliatory measures. With its list of intellectual property sanctions, Brazil was announcing its intention to do what has never been done before.
Whether the list was a ploy or a promise, it created enough of a sense of urgency on the part of the U.S. government to enter into an interim agreement that, among other things, obligated the United States to make annual payments of $150 million to the Brazilian cotton industry in return for Brazil’s commitment to withhold retaliatory actions until Congress addressed the trade-distorting provisions of U.S. cotton policies.
Enter the farm bill. As the vehicle for authorizing price support programs for a host of agricultural commodities, it is the obvious candidate for making the kind of statutory changes to the cotton and export credit guarantee programs that would make them WTO-compliant. Both Brazil and the United States acknowledge that resolution of the dispute is not possible until after enactment of the 2012 farm bill when the shape of domestic cotton subsidies will be apparent.
The problem is, Congress is not cooperating. The Senate has passed its farm bill and the House Agriculture Committee has reported its version of the legislation. However, Brazil is not happy with either bill’s changes to the cotton program. The proposed modifications “would leave Brazilian farmers worse off than they are now,” says Brazil’s ambassador to the WTO.
In order to avoid a precedent-setting imposition of cross-retaliatory trade sanctions on intellectual property, Congress needs to, first, design a domestic cotton subsidy program that provides significantly less support than the average annual level of trade-distorting support provided by the United States for upland cotton during 1999-2005 (which was about $3.568 billion); and, second, set the premium rates for export credit guarantees under the GSM-102 program at levels sufficient to cover long-run program operating costs, with a further requirement that in the event the GSM-102 program operates at a loss during any given year, the premium rates would be adjusted higher for the next year to offset the current year’s loss.
Anything short of this is likely to invite retaliation from Brazil. Movie producers, record labels, book publishers, pharmaceutical companies, and the biotech industry will pay the price for Congressional intransigence — a price that will only increase with the proliferation of cross-retaliation in future trade disputes.
The threat is real; the time for defusing it is short. A gridlocked Congress will have to enact a new farm bill that satisfies Brazil on cotton while simultaneously addressing budget sequestration, expiration of the Bush tax cuts and the debt ceiling. The clock is ticking and so is the bomb.
Leonard served as special assistant to President Reagan for food and agriculture. He was previously a professional staff member on the U.S. Senate Agriculture Committee. He is currently a senior consultant at Prime Policy Group in Washington, D.C.