US Farm Subsidies Gradually Coming Under Pressure at WTO

Agriculture subsidies by Europe and the US sticks in the craw of many developing countries. It can distort prices, spur excess production and retard development. In recent years US corn subsidies and EU sugar subsidies have been challenged. The World Trade Organization has succeeded the GATT, which some believe stood for the General Agreement to Talk and Talk, and is also engaged in lengthy legal maneuverings. And like the wheels of the gods grinds slowly, so too does the WTO. Yet one of the most noteworthy aspects to both GATT and the WTO is the conflict resolution process.

On Monday, the WTO authorized Brazil to retaliate against US cotton subsidies. The WTO approved of Brazilian sanctions of just shy of $300 mln on US. This is the second largest retaliation that the WTO has approved. Brazil wants to impose $800 mln of sanction, half to be levied on services and intellectual property, according to some reports. Brazil's Foreign Ministry argues that the WTO used outdated data to calculate the sanctions. Brazil asked for authorization for $2.7 bln of sanctions.

The US also argues that WTO used old information, saying that the data was largely from 2005, when US cotton output peaked. The US share of world cotton supplies is now near 12%, the lowest in a quarter of a century, compared with 20% in 2005.

Brazil will first conduct a series of negotiations with the US before retaliating. However, for the US it might not be a question of principle but of pragmatism. If the political value of subsidizing cotton is worth more than $300 mln, then it may simply accept the penalty. Isn't it like fouling Patrick Ewing on an easy lay-up to force him to make a free throw ? The victory for Brazil could be largely superficial. Moreover, Brazil's suit was not brought by any individual company, which means there may not be direct compensation for Brazil's cotton growers. Brazil then probably will get more out of the WTO ruling by using it to achieve what they really want--reduce US agricultural subsidies rather than using the sanctions to raise funds or provide assistance to a particular sector.

While there does not appear to be a clear trade generated from the WTO ruling or Brazil's response, the whole edifice of the EU and US agricultural subsidies is slowly being whittled down. At the G20 meeting there is bound to be a reaffirmation and recommitment to finishing the Doha round of the WTO. More talk, but little action in the near term.