US-Brazil Cotton Dispute Might Ignite All-Out Trade War

Brazil is threatening to launch a full-blown trade war against the U.S. next month, accusing Congress of ignoring an order by the World Trade Organization to stop subsidizing its domestic cotton growers.

It’s evolved into an ugly dispute: The impact could sweep through more than a dozen cotton-producing states and, some fear, cost thousands of jobs in other industries.

“It’s serious,” said Charles Dittrich, the vice president of regional trade initiatives for the National Foreign Trade Council in Washington, a business advocacy group.

The argument might escalate next month, with Brazil moving to impose sizable tariffs on more than 100 American products, making it more expensive to export everything from cars to carpeting. A final decision is expected by Feb. 28.

“We are in the position where there are no options left but retaliation,” Welber Oliveira Barral, Brazil’s former secretary of development, industry and foreign trade, said at a meeting with reporters last week in Washington.

That has many U.S. business officials fretting. They want to head off losses by getting the United States to comply with all international trade rules.

The case is an example of the inconsistencies in global trade: Just last week, the Obama administration complained that China had ignored WTO rules in a dispute the U.S. won over high-tech steel.

It’s another example of the sometimes-confusing complexity that surrounds farm policy. Congress spends billions to subsidize farmers in California, Texas, Florida, North Carolina, South Carolina, Georgia, Mississippi, Missouri, Kansas and another eight cotton-producing states.

But since 2010, the United States has been spending $147 million a year to prop up Brazilian cotton growers, too.

Democratic Rep. Ron Kind of Wisconsin, who introduced a bill last year that would junk the Brazilian payments, called them “absurd public policy.”

Congress began making monthly payments of more than $12 million to the Brazil Cotton Institute as part of an interim settlement. In return, Brazil agreed to postpone retaliation, even though the WTO gave it the green light to proceed with tariffs of $829 million per year, the second-largest amount the world body had ever authorized. (The largest was the $4 billion it authorized the European Union to impose in 2002 in retaliatory tariffs against the U.S. for offering a system of tax breaks to businesses that it said was illegal.)

But the U.S. payments stopped last October, which is fueling the impatience. Brazilian farmers were surprised, expecting the payments to continue until Congress approved a new farm bill. The Obama administration stopped the payments because Congress hadn’t yet approved a farm bill. Members of Congress have been feuding over the level of crop subsidies and how much to spend on food stamps, among other things.

Critics called the payments bribes and pushed hard to end them. Brazilian growers charge that the U.S. action is more proof that it doesn’t want to follow the rules of the WTO, which it helped create in 1995.

The U.S. Chamber of Commerce is siding with the Brazilian cotton growers, saying the payments have staved off more than $2 billion in trade retaliation in the past three years. In a letter to the White House in November, the chamber’s president, Thomas Donohue, said it was imperative to resume the payments “to avoid costly job-killing trade sanctions against U.S. manufacturers, farmers and innovators.”

In 2010, Brazil published a list of 102 U.S. goods in line for retaliation, with tariffs of 14 to 100 percent. The list included farm products such as dairy, fruit and grains, and other products such as chemicals, biotechnology, motion pictures, music and pharmaceutical drugs. U.S. cotton growers would effectively be locked out of the Brazilian market, since American cotton would be hit with a 100 percent import tariff.

While more than 80 countries produce cotton, the U.S., China, India and Pakistan provide nearly 75 percent of the world’s supply, according to the U.S. Department of Agriculture. The U.S. is the largest exporter, with the domestic industry accounting for more than $25 billion in products each year, supporting roughly 200,000 jobs across the nation. The 17 cotton-producing states cover a large swath of the country, from California to Virginia, with major concentrations in California’s San Joaquin Valley, Texas, Georgia, Mississippi, Arkansas and Louisiana.

Brazil has emerged as a key global player, but it has long complained about unfair competition.

The outcome might hinge on what emerges in a new farm bill. While House of Representatives and Senate conferees have been negotiating details in private, Brazilian growers say they’re not optimistic.

“We have not yet seen sufficient effort to make the new farm bill comply with the WTO rules,” Gilson Pinesso, the president of the Brazilian Cotton Growers Association, said last week. He spoke through an interpreter after attending meetings on Capitol Hill to discuss the farm bill talks.

Others are more optimistic.

Jay Boyette, the director of commodities for the North Carolina Farm Bureau, predicted that Congress will approve a farm bill that will scrap direct subsidies for domestic growers, which he said should go a long way toward satisfying the Brazilians.

Many U.S. growers still want protection from Congress under a crop-insurance program that would cover lost income during tough times. But Boyette said such a plan would probably be met with fewer objections from Brazil.

With so much uncertainty, Larry Wooten, the president of the North Carolina Farm Bureau, said the dispute was just one more reason that Congress needed to pass a farm bill quickly.

After all, he said, Brazil is an important trading partner for the U.S. and an important consumer of American products.

“We would certainly try to prevent a full-fledged trade war,” Wooten said, adding the caveat, “as long as we didn’t feel the American producers were being personally impacted and taken advantage of.”