The WTO Decision on U.S. Cotton Subsidies
March 19, 2005
On March 3, 2005, the WTO Appellate Body (AB) issued a landmark decision interpreting key WTO provisions on agricultural subsidies and upholding a prior panel ruling finding various US cotton subsidies to be WTO illegal. In September 2004 the panel, in a challenge by Brazil, had ruled that various US agricultural programs constituted illegal subsidies under the WTO Agreement on Subsidies and Countervailing Measures, the Agreement on Agriculture and Article XVI of the GATT 1994.
The importance of the AB ruling goes far beyond its impact on US cotton farmers.
The AB demonstrated a notable consistency in broadly interpreting the coverage of WTO provisions disciplining subsidies and narrowly interpreting provisions exempting government programs from those disciplines. The interpretations given by the AB to various WTO rules increase the likelihood of successful challenges to a vast array of government measures. The likely result will be to deter the granting of future support to agriculture and add pressure on all nations to reduce their current support as part of the ongoing Doha Round negotiations.
On a preliminary issue, the AB ruled that WTO Members may challenge the laws of other Members even if those laws have expired, provided only that the law continues to have an adverse effect on the complaining country. This allowed Brazil to challenge two cotton support programs that had expired in 2002. The typical remedy in WTO cases -- that the offending measure be brought into conformity -- is clearly not available when dealing with an expired law. However, in the case of a subsidy an alternative remedy is available: removal of any adverse effects of that subsidy. Thus, the effect of the AB ruling is that nations may be called upon to take remedial actions for subsidy laws even after the laws have expired. This provides a significant deterrent to the granting of subsidies, particularly given the risk that future panels and ABs will follow this AB's lead and interpret the rules so as to tighten the disciplines applicable to pre-existing subsidies.
In one of the more far reaching portions of its report, the AB narrowly defined the two categories of domestic agriculture support programs that are exempt from challenge under Article 13 of the Agreement on Agriculture, entitled "Due Restraint" and often referred to as the "peace clause." It provides in relevant part that from 1995 to 2004, domestic support programs that meet the requirements of Annex 2 of the Agreement shall be exempt from challenge.
The first category of programs eligible for peace clause treatment concerns so-called "green box" subsidies. These include "decoupled income support" programs in which the amount of payment is not based on the type or volume of production and therefore have minimal effects, at most, on production.
The AB ruled that domestic programs that condition support payments on a producer's not producing certain crops do not qualify as green box "decoupled income support" falling under the peace clause. The US programs at issue were the production flexibility contract program and its successor, the direct payments program. Under these programs producers had considerable flexibility on what they could produce and still receive payments, including the right not to produce at all. However, payment would be denied if certain specified crops were produced. In the AB view, this ban effectively "coupled" payment with production because it had the effect of channeling production toward crops that remain eligible for payments.
Although the peace clause has expired, the "green box"-- or permissible subsidies program -- remains in effect. This ruling, narrowly defining its coverage, will place considerable constraints on the US' and other governments" agricultural support policies.
The second (and less important) category concerns programs in which the support granted "to a specific commodity" does not exceed the support provided in base year 1992. Here again the AB limited the coverage of the peace clause. The AB broadly defined the category of support measure qualifying as directly supporting a particular commodity and as such included in the calculation of current payments. Specifically, the AB included in its calculation of current support all payments that actually went to the production of cotton despite the facts that the decision to plant cotton was beyond the control of the government (the program did not require that cotton be produced) and payments would have been made even if a different crop had been produced. The effect of this determination was to increase the assessed value of current payments and thereby limit the number of programs saved from challenge by the peace clause. Even though the peace clause has expired, the concept of "support to a specific commodity" remains relevant in the Doha round of agriculture talks.
Having determined that various US cotton subsidization programs were subject to challenge, the AB proceeded to evaluate the validity of Brazil's specific challenges. With only minor exceptions the AB supported Brazils complaints and did so through an analysis with significant implications:
The Agreement on Subsidies and Countervailing Measures (The SCM Agreement) bans subsidies that cause significant price suppression in the market and thereby seriously prejudice the interests of another Member. The AB's interpretation of this provision significantly broadened its scope. The AB ruled that the selection of the market in which the existence of price suppression was to be determined was up to the complainant and could be any market in which the complainant's and the respondent's products compete, including the world market. Further, in cases in which the world market was selected, the price to be examined could be either the price on world markets of the complainant's product or the general "world price," again leaving the selection to the complainant. Thirdly, the time period in which the price effect of the subsidy is determined may, at complainant's request, include years beyond the year in which it is paid. Providing the complaining country wide latitude in selecting the market, the prices and the time period to be examined seriously tips the scales against the subsidy-providing country.
The SCM Agreement provides that the prohibition on certain specified domestic subsidies applies "except as provided in the Agreement on Agriculture." The AB narrowly interpreted this carve-out, subjecting a wide range of agriculture subsides to challenge under the SCM Agreement even though they are in full compliance with the Agreement on Agriculture. In the view of the AB, only agriculture subsidies that are specifically authorized by the Agreement on Agriculture are exempt from an SCM challenge, and compliance with the provisions of the Agreement on Agriculture does not constitute specific authorization.
As part of the Agreement on Agriculture  Member governments undertook to develop disciplines on the provision of export credit guarantees and, thereafter, to comply with those disciplines. Although no disciplines have been agreed to under this provision, the AB ruled that export credit guarantees were subject to disciplines under other provisions of the Agreement. In its view, an undertaking to develop disciplines and a commitment to comply after such development does not mean applicable disciplines do not already exist. Consequently the AB ruled that US export credit guarantees are subject to the existing disciplines on export subsidies in the Agreement on Agriculture and in the SCM Agreement and fail to comply with both. Again the AB broadened the coverage of the WTO rules, adding another deterrent to the provision of an entire category of agricultural support programs.
This case represents an important victory for the developing world and all those seeking to limit farm subsidies. In it, the AB interpreted WTO provisions to significantly expand the restriction on agricultural support programs generally. Moreover, if future panels continue to read disciplines broadly and exemptions narrowly, agricultural support programs may be headed for zero tolerance regardless of the outcome of the Doha Round negotiations.
About the author:
Eliza Patterson is a Harvard Law School graduate. She currently teaches international trade law at Washington and Lee School of Law. She can be contacted at firstname.lastname@example.org
 WT/DS267/AB/R, United States -- Subsidies on Upland Cotton.
 The ruling by the WTO Dispute Settlement Panel (WT/DS267/R) dealt with the following US agricultural programs: marketing loan program payments, user marketing payments, production flexibility contract payments, market loss assistance payments, direct payments, counter-cyclical payments, crop insurance payments, cottonseed payments, and export credit guarantees.
 To comply with the ruling, the US would have to cut over $3 billion a year in payments to its 25,000 cotton farmers and eliminate its export credit program.
 Green box subsidies are exempt from the domestic support reduction obligations of the Agreement on Agriculture
 Annex 2, para. 6 of the Agreement on Agriculture.
 The AB dismissed the US argument that paragraph 6(b) did not cover "negative" prohibitions on the production of certain crops, but only requirements that specified crops be produced. The AB also rejected the US claim that the program was saved by the fact that the producer had the right not to produce at all and still receive payments.
 SCM Agreement, Articles 5, 6.3(c).
 SCM Agreement, Article 3.1.
 These are subsidies contingent on the use of domestic over imported goods.
 Agreement on Agriculture, Article 10.2.
 In an unusual development, one member of the AB dissented from this portion of the report, concluding that export guarantee programs are not subject to the disciplines of either the Agreement on Agriculture or the SCM Agreement. His reasoning was that an agreement to develop disciplines and comply with them thereafter implied that current disciplines applicable to these measures do not exist.