A little over six months ago, the WTO ruled that Brazil could impose sanctions on the United States in retaliation for US cotton subsidies. On March 8, Brazil announced new tariffs on over 200 US goods ranging from Heinz ketchup to cosmetic products. And last week, the Wall Street Journal reported that Brazil took one more step by threatening to impose measures against US intellectual property and patent rights.
Brazil, the world’s fifth largest cotton producer, claims that the US (third largest) can set prices and control the cotton market through government subsidies. According to the National Cotton Council of America, the US is the leading exporter of cotton in the world, sending nearly 2/3 of the yearly crop around the globe. A CRS Report cited that the US in 2001-02 spent over $3 billion on cotton subsidies, while the industry generated approximately $5.3 billion in revenue (5% of estimated receipts from US crops). Meanwhile, Brazilian sanctions, tariffs, and IP violations would amount to almost $830 million. The Heritage Foundation points out:
A November 2009 preliminary list proposed that 222 American products—including food, medicine, medical equipment, cotton, appliances, cosmetics, and car parts—face tariff rates of over 100 percent.
However, the sanctions and tariffs approved by the WTO have done little to convince US lawmakers to change the cotton subsidy policy. To make matters worse, the most recent announcement by Brazil to flout US intellectual property rights will hurt much more than just the cotton industry – everything from movies to pharmaceuticals to chemicals will feel the effects.
The decision to break IP laws represents a significant event in the history of trade, for if Brazil votes to carry out their intentions, this will be the first successful cross-retaliation for violation of trade agreements. America has until April 7 to change cotton subsidy laws before Brazil will impose their sanctions.
While some believe subsidizing industry is a smart move, the fact is that the only people who benefit from the subsidy are those directly pocketing the money. Logically, in order to raise the money to subsidize cotton farmers, the US government first has to tax the average consumer. On the opposite end of the cycle, foreign cotton producers have a hard time selling their product in the global market because US cotton farmers can offer a much lower price – which is exactly what has Brazil up in arms.
Additionally, the decision to break patents and property rights will send a shockwave through dozens of US industries. US exports to Brazil will decrease dramatically once Brazilian citizens can purchase generic versions of everything from chemicals to pharmaceuticals from domestic companies. The Obama administration would do well to examine the cotton subsidies and comply with WTO agreements. Because if the US continues with the current system, in the end everyone loses.