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Learning from the "Cotton Problem": Settling Trade Disputes

John Baffes's picture

For nearly a decade, Brazil and the United States have been embroiled in a dispute over cotton subsidies. On April 6 this year, the US Trade Representative and the US Secretary of Agriculture announced that the countries had agreed on a path toward negotiated settlement. Two weeks later a Memorandum of Understanding (MOU) was signed. Although its details have yet to be spelled out, the MOU highlights both strengths and limitations of the current dispute settlement system. On the one hand, an agreement was reached through WTO rules and a “trade war” was avoided. Moreover, the agreement shows that less powerful members of the global trading system (in this case, Brazil) can successfully argue their case in the WTO. But two key limitations were also exposed: Unless the “injured” party has enough trade leverage with the “guilty” party, authorization of countermeasures—the typical WTO remedy—is of no use. And many countries may not be able to make their case to the WTO, either because of weak capacity or because the relevant sector is too small to justify raising the issue.
   
The MOU proposed the establishment of a fund for technical assistance and capacity building of Brazil’s cotton sector. Some of the fund’s resources will be used for activities related to international cooperation in the cotton sectors of sub-Saharan Africa and other regions. Although not explicitly stated, the use of resources for third countries was in response to another on-going cotton dispute that was brought to the WTO in 2003 by four African cotton producing countries over the same subsidies. Therefore, the MOU in addition to addressing the US-Brazil cotton dispute, it deals with a number of development issues.

What would have been a more appropriate course of action? For the United States (and other cotton-subsidizing countries), not having subsidies at all or, a second best, phasing them out as the US General Accountability Office recommended 15 years ago. For the four African cotton producing countries (and, perhaps, other cotton producing developing countries) joining forces with Brazil in its dispute settlement case may have been most beneficial.

Going forward, until WTO rules are reconfigured to address the dispute settlement system’s shortcomings, the smallest and poorest developing countries should align their interest and form coalitions with more powerful developing nations. Of course, such opportunities may not be available, underscoring the need for a reform of the dispute settlement system that includes monetary compensation as a remedy.

I explored this topic in greater detail for the Carniegie Endowment for International Peace and you can read the full piece here.

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