The Office of the United States Trade Representative

WTO Panel Issues Mixed Verdict in Cotton Case
United States Successfully Defends Decoupled Payments from "Serious Prejudice" Claims 09/08/2004

WASHINGTON - U.S. Trade Representative Robert B. Zoellick said today a World Trade Organization (WTO) panel has issued a mixed verdict in a dispute brought by Brazil challenging several types of U.S. agricultural support measures, including support for cotton farmers. The United States has announced its intention to appeal aspects of today’s report. The process is lengthy, and there will be no immediate impact on US farm programs.

In the panel proceedings, the United States successfully defended U.S. decoupled income support payments – such as direct payments under the 2002 farm legislation – as not causing "serious prejudice" to Brazil’s interests. Specifically, the panel agreed with the United States that income support provided to U.S. cotton farmers and others that is fully decoupled from production and prices – that is, a recipient does not have to produce cotton to get the payment and can choose to produce nothing at all – has not suppressed or depressed world cotton prices.

"We welcome the panel’s findings that U.S. decoupled income support payments have not caused ‘serious prejudice’ under WTO rules. This report confirms that reforms in our 1996 farm legislation and continued in 2002 have worked and that fully decoupled payments do not cause WTO-inconsistent effects by distorting production or trade," said Zoellick.

"U.S. farmers and ranchers are among the most efficient in the world," said Agriculture Secretary Ann M. Veneman. "U.S. farm programs were designed to be fully compliant with our WTO obligations. We will strongly defend the U.S. position and work to ensure a level playing field for U.S. producers."

Many critics have claimed that even decoupled payments spur agricultural production and drive down prices. However, the panel rejected Brazil’s arguments, essentially siding with the overwhelming body of agricultural economics literature showing that these payments have no more than minimal effects. The report should dispel concerns that all U.S. support payments distort production and trade.

The panel also sided with the United States in rejecting several of Brazil’s other claims. For example:

• the panel found that Brazil had failed to show that U.S. domestic support programs caused an increase in U.S. world market share for upland cotton,

• the panel also found that certain U.S. export credit guarantees were consistent with U.S. WTO obligations,

• finally, and most importantly in terms of future implications of this ruling, the Panel declined to find that U.S. domestic support programs threatened to cause, or per se cause, serious prejudice to Brazil's interests from 2003-2007.

However, the panel did side with Brazil on some of its claims that some U.S. farm payments cause adverse effects to Brazil and that other U.S. measures are prohibited, including export credit guarantees for some agricultural commodities.

"We strongly disagree with some aspects of the panel report, which we will be appealing. The facts do not show that U.S. farm programs have distorted trade and caused low cotton prices. Moreover, some aspects of the panel report belong in negotiation and not litigation, namely in the Doha Development Agenda negotiations. We believe the Appellate Body will agree," continued Zoellick.

The United States believes that the best way to address any distortions in world agricultural markets is through the WTO agriculture negotiations. Multilateral commitments to reduce tariffs and subsidies will increase role of market forces globally and is the only way to address core issues.

The United States has been a leader in the Doha Round of trade negotiations, including playing a key role in July on a framework agreement for the agriculture negotiations. This framework builds on the U.S. comprehensive proposal in 2002 to reform all trade-distorting measures in agriculture. The U.S. objective is to create new market access opportunities for all countries by achieving specific reform commitments in each of the areas of export subsidies, trade-distorting domestic support and market access in all countries.


Brazil challenged numerous U.S. agricultural programs as being WTO-inconsistent and as not being protected by the "Peace Clause".

Brazil’s principal claims were that:

(1) U.S. domestic support for cotton causes "serious prejudice" to Brazilian interests by depressing or suppressing world cotton prices and unfairly expanding or maintaining U.S. world market share,

(2) U.S. export credit guarantees for all commodities confer export subsidies (the United States has no allowable export subsidies for most agricultural products),

(3) Step 2 payments for cotton are both prohibited export subsidies and prohibited import substitution subsidies; and

(4) FSC/ETI tax benefits are prohibited export subsidies.

The WTO panel report is a long and complicated document, and the panel made findings that side with Brazil on certain of its claims in this dispute and other findings that side with the United States:

• The panel found that the "Peace Clause" in the WTO Agreement on Agriculture did not apply to a number of U.S. measures, including (1) domestic support measures and (2) export credit guarantees for "unscheduled commodities" and rice (a "scheduled commodity"). Therefore, Brazil could proceed with certain of its challenges.

• The panel found that export credit guarantees for "unscheduled commodities" (such as cotton and soybeans) and for rice are prohibited export subsidies. However, the panel also found that Brazil had not demonstrated that the guarantees for other "scheduled commodities" exceeded U.S. WTO reduction commitments and therefore breached the Peace Clause. Further, Brazil had not demonstrated that the programs threaten to lead to circumvention of U.S. WTO reduction commitments for other "scheduled commodities" and for "unscheduled commodities" not currently receiving guarantees.

• Some U.S. domestic support programs (i.e., marketing loan, counter-cyclical, market loss assistance, and Step 2 payments) were found to cause significant suppression of cotton prices in the world market in marketing years 1999-2002 causing serious prejudice to Brazil’s interests.

• However, the panel found that other U.S. domestic support programs (i.e., production flexibility contract payments, direct payments, and crop insurance payments) did not cause serious prejudice to Brazil’s interests because Brazil failed to show that these programs caused significant price suppression.

• The panel also found that Brazil failed to show that any U.S. program caused an increase in U.S. world market share for upland cotton constituting serious prejudice.

• The panel did not reach Brazil’s claim that U.S. domestic support programs threatened to cause serious prejudice to Brazil’s interests in marketing years 2003-2007. The panel declined to find that U.S. domestic support programs per se cause serious prejudice in those years.

• The panel also found that Brazil had failed to establish that FSC/ETI tax benefits for cotton exporters were prohibited export subsidies.

• Finally, the panel found that Step 2 payments to exporters of cotton are prohibited export subsidies, not protected by the Peace Clause, and Step 2 payments to domestic users are prohibited import substitution subsidies because they were only made for U.S. cotton.


Peace Clause - Article 13 of the WTO Agreement on Agriculture is commonly referred to as the Peace Clause. Generally, as long as a WTO Member is meeting the criteria set out in Article 13, such as domestic support and export subsidy reduction commitments, other WTO Members are prohibited during the implementation period of the Agreement from challenging those domestic support or export subsidy measures through the WTO dispute settlement process.

Unscheduled commodities - products for which the United States is not permitted to provide export subsidies because they are not set out in the export subsidy part of the final U.S. WTO schedule which the United States filed in 1994. "Scheduled commodities" are set out in the U.S. schedule, and the United States is permitted to provide export subsidies up to the scheduled level. Besides rice, U.S. "scheduled commodities" are wheat, skim milk powder, coarse grains, butter, bovine meat, other milk products, poultry meat, vegetable oils, live dairy cattle, cheese, eggs, and pigmeat.