How to twist a giant’s arm? Brazil, USA, the WTO, and cotton subsidiesSeptember 18th, 2012 | by Gawain Kripke
What do ketchup, shaving cream, and Viagra have in common?
They all could be targeted for retaliation by Brazil if Congress doesn’t reform the Farm Bill. US exporters of these products, and hundreds more, could pay higher tariffs or lose their patent rights if the Brazilian government imposes trade retaliation against the USA for violating WTO rules on farm subsidies. Brazil brought a legal case to the WTO complaining about US cotton subsidies in 2002. They won the case, proving that US cotton subsidies were huge and unfair. The USA never fully reformed the subsidies, so Brazil asked for, and was granted, the right to retaliate. Hence, the list of products (English version here).
It’s interesting to think about the political calculations underneath the products chosen. Creating a retaliation list is an exercise in practical political economy. How do you create enough economic and political pain on the United States to force a reform of cotton subsidies? Which industries or companies do you target? Do you try to target specific politicians by hitting products and companies that are from their constituency? Or do you try to gain some economic advantage by raising tariffs on some products? Certainly, there are domestic businesses in Brazil that are eager to hurt their foreign competition and lobby for tariffs in their sector.
The thing about raising tariffs is that it hurts the exporting producer, but it also hurts the importing consumer by raising prices and reducing choice. In order to hurt the US, Brazil also has to hurt some Brazilian consumers of US products.
According to the rules, Brazil can impose more than $800 million in retaliation. But $800m in new tariffs is painful for Brazilians also. So Brazil asked for permission from the WTO to retaliate in a different way. Brazil can suspend intellectual property rights on certain products. This is where the retaliation gets really interesting. Brazil hasn’t published a list, but has identified categories for intellectual property rights retaliation. Products could include patents and copyrights on medicines, agrochemicals, music, videos, and software. These products won’t face new tariffs, but Brazilian producers might be able to manufacture and sell these products without paying royalties or licenses.
Brazil was days away from imposing this kind of retaliation in 2010 when officials from the US Trade Representative’s office flew down to hurriedly negotiate a compromise. The agreement was that Brazil would postpone retaliation and the US would pay Brazil $147.3 million annually until a new Farm Bill was enacted.
So far, no new Farm Bill. Not even close. This week Congress will decide whether to extend the current Farm Bill by three months or by a year. Either way, Brazil will have to decide what the next step is. Brazil is once again preparing to retaliate. Brazil may alter the retaliation list and has convened a technical committee to review the list.