Brazil's and Canada's WTO Cases Against U.S. Agricultural Support

Brazil’s and Canada’s WTO Cases
Against U.S. Agricultural Support
February 1, 2008
Randy Schnepf
Specialist in Agricultural Policy
Resources, Science, and Industry Division



Brazil’s and Canada’s WTO Cases Against
U.S. Agricultural Support
Summary
On December 17, 2007, the World Trade Organization’s (WTO’s) Dispute
Settlement Body (DSB) established a single panel to consider charges against U.S.
farm programs brought in two separate but similar cases: DS357, brought by Canada,
and DS365, brought by Brazil. Both cases make two charges against U.S. farm
programs — first, that the United States has exceeded its annual WTO commitment
levels for total aggregate measurement of support (AMS) for agriculture in each of
the years 1999, 2000, 2001, 2002, 2004, and 2005, and second, that the U.S. export
credit guarantee program for agricultural commodities operates as a WTO-illegal
export subsidy.
Both charges stem, in large part, from a previous negative ruling against U.S.
farm programs in a case (DS267) brought by Brazil against the U.S. cotton program.
In that case, a WTO panel ruled (the ruling subsequently was upheld by a WTO
Appellate Body), first, that direct payments made under U.S. farm programs do not
qualify for green box exemption status because of a restriction prohibiting the
planting of fruits, vegetables, or wild rice on payment acres; and second, that the U.S.
export credit guarantee program operates as a prohibited export subsidy program
because the financial benefits returned by these programs failed to cover their long-
run operating costs. As a result, export credit guarantees are subject to previously
scheduled export subsidy commitments. For more information, see CRS Report
RS22187, Brazil’s WTO Case Against the U.S. Cotton Program: A Brief Overview,
by Randy Schnepf.
Canada and Brazil claim that, since they fail to qualify for inclusion in the green
box, U.S. direct payments should be added to its AMS when calculating total
domestic support. In addition, they also charge that the United States has improperly
notified several of its farm support programs as exempt from the AMS limit, while
several other programs were improperly excluded from U.S. notifications. Canada
and Brazil claim that when all of the outlays from these allegedly misnotified
programs are included, then the U.S. AMS total exceeds its WTO commitment level.
The panel hearing the case is not likely to conclude its work until late 2008.
Should any eventual changes in U.S. farm policy be needed to comply with a WTO
ruling against the United States, it would likely involve action by Congress to
produce new legislation.
This report provides background and details, as well as the current status of the
two WTO dispute settlement cases. In addition, it discusses the role of Congress in
responding to developments. This report will be updated as events warrant.



Contents
In troduction ..................................................1
Background on the Evolution of the Two Cases......................1
Origins of Canada’s WTO Case..............................3
Origins of Brazil’s WTO Case................................5
Status of the Two Cases.....................................6
Major Charges Against U.S. Farm Programs.........................6
First Allegation: U.S. Total Domestic Agricultural Support
Exceeds Its WTO Limit.................................6
Second Allegation: U.S. Export Credit Guarantees Are
WTO-Illegal Export Subsidies...........................10
U.S. Response...............................................10
Potential Implications and Role of Congress........................11
List of Figures
Figure 1. U.S. AMS Outlays and Direct Payments........................9
Figure 2. U.S. Outlays for AMS, Direct Payments (DP), Market Loss
Assistance (MLA), and Counter-Cyclical Payments (CCP).............9
List of Tables
Table 1. Time Line of the WTO Dispute Settlement Cases DS357 (Canada)
and DS365 (Brazil) Against the United States........................2
Table 2. WTO Time Line for Dispute Settlement.......................13
Table 3. The Main Stages of a WTO Panel’s Work......................14



Brazil’s and Canada’s WTO Cases Against
U.S. Agricultural Support
Introduction
In 2007, Canada and Brazil initiated separate but similar WTO cases against
certain U.S. farm programs as they relate to U.S. commitments made to the World
Trade Organization (WTO). Both Canada’s (DS357) and Brazil’s (DS365) cases
make two broad charges. First, they contend that the United States has exceeded the
subsidy spending limit it committed to for domestic agricultural support programs.
Second, they charge that the United States operates its agricultural export credit
guarantee program in such a manner as to provide prohibited subsidies to those
exports made under the programs. On December 17, 2007, the WTO’s Dispute
Settlement Body (DSB) announced the establishment of a panel to hear both cases
against U.S. farm programs.
A panel ruling is not expected until late 2008. Subsequent appeals of any
negative ruling and disagreement over appropriate retaliatory levels, etc., could push
resolution of the dispute well into the future. However, the importance of the case
is not diminished to the U.S. agricultural community. U.S. agriculture depends
heavily on international markets to sell its surpluses. In FY2007, U.S. agricultural1
exports were a record $81.9 billion and represented 24% of gross farm income.
This report begins with background on the evolution of the Canadian and
Brazilian WTO cases. This is followed by a section that describes in detail the nature
of the two major charges made against U.S. farm programs in the two cases and the
U.S. response to those charges. Finally, the report briefly discusses the implications
of the case and the potential role of Congress.
Each of these sections may be read independent of the other; thus, readers only
interested in the specific charges and their implications may proceed directly to those
sections of the report.
Background on the Evolution of the Two Cases
This section provides a historical record of the evolution of both Canada’s and
Brazil’s WTO cases against U.S. farm programs. It includes a timeline (Table 1) of
the official events as well as a descriptive narrative of the likely motivations and
circumstances behind each country’s case.


1 Outlook for U.S. Agricultural Trade, AES-56, USDA, ERS, November 30, 2007; and
Agricultural Income and Finance Outlook, AIS-85, USDA, ERS, December 2007.

Table 1. Time Line of the WTO Dispute Settlement Cases
DS357 (Canada) and DS365 (Brazil) Against the United States
DateEvent
Jan. 8, 2007Canada makes a formal “request for consultations” with the United
States (WT/DS357/1) to discuss three charges: (1) U.S. export credit
guarantee programs operate as prohibited export subsidies; (2) the
United States provides total AMS support in excess of its
commitment levels; and (3) U.S. support programs provided to U.S.
corn producers result in adverse effects in the form of serious
prejudice to the interests of Canada during the 1996 to 2006 period
in violation of Articles 5(c) and 6.3(c) of the WTO’s Agreement ona
Subsidies and Countervailing Measures (SCM Agreement).
Jan. 22, 2007Several additional WTO members — Australia, Argentina, Australia,
to Brazil, the European Communities, Guatemala, Nicaragua, Thailand,
Jan. 24, 2007and Uruguay — officially request to join the consultations as
interested third parties in accordance with Article 4.11 of the Disputeb
Settlement Memorandum of Understanding (DSU).
Feb. 7, 2007Canada and the United States hold consultations to discuss Canada’s
allegations. The consultations fail to resolve the dispute.
June 7, 2007 Canada requests (WT/DS357/11) that the establishment of a dispute
panel to rule on its complaint in case DS357 be included on the
Dispute Settlement Body’s (DSB’s) agenda for its next monthly
meeting. Canada drops its “serious prejudice” charge against U.S.
corn subsidies, but retains the two other charges identified in its
Jan. 8, 2007, consultations request.
June 21, 2007 Canada’s first request for the establishment of a dispute panel to rule
on its complaint is vetoed by the United States at the DSB’s monthly
meeting.
July 11, 2007Brazil makes a formal “request for consultations” with the United
States (WT/DS365/1) to discuss two charges: (1) U.S. export credit
guarantee programs operate as prohibited export subsidies; and (2)
the United States provides total AMS support in excess of its
commitment levels.
July 24, 2007Several additional WTO members — Canada, Guatemala, Costa
to Rica, the European Communities (EC), Mexico, Australia,
Aug. 1, 2007Argentina, Thailand, India, and Nicaragua — officially request toc
join the consultations as interested third parties.
Aug. 22, 2007Brazil and the United States hold consultations to Brazil’s
allegations in case DS365. The consultations fail to resolve the
dispute.
Oct. 8, 2007The United States notifies data to the WTO for domestic support for
the marketing years 2002, 2003, 2004, and 2005.
Nov. 8, 2007Brazil (WT/DS365/13) and Canada (WT/DS357/12) request that the
establishment of a dispute panel to rule on their complaints against
the United States be included on the DSB agenda for its next
monthly meeting.



DateEvent
Nov. 27, 2007At the DSB meeting, both Canada’s and Brazil’s requests for a panel
on cases DS357 and DS365 were blocked by the United States,.
Dec. 17, 2007The DSB, at its monthly meeting, announced the establishment of a
single panel to examine jointly Brazil’s and Canada’s charges against
U.S. farm subsidies and domestic support.
Early 2008Appointment of the panelists by the WTO Director-General.
Late 2008Once formed, a panel normally has 6 months to hold hearings and
gather testimony before issuing its final report to both parties.
See Table 2 for a WTO Dispute Settlement process timeline; and
Table 3 for a timeline of a panel’s work stages.
Source: Compiled by CRS from official WTO documents and news sources as cited. All WTO
official documents for each of these cases are available at the WTO Documents Online
gateway and may be accessed by a simple search on the respective case number, DS357 or
DS365, at [http://docsonline.wto.org/gen_search.asp?searchmode=simple].
a. For a description and interpretation of Articles 5(c) and 6.3(c) of the SCM Agreement, see CRS
Report RL33697, Potential Challenges to U.S. Farm Subsidies in the WTO, by Randy Schnepf and
Jasper Womach.
b. Official WTO documents are Australia, WT/DS357/2; Guatemala, WT/DS357/3; Brazil,
WT/DS357/4; Argentina, WT/DS357/5; the EC, WT/DS357/6; Uruguay, WT/DS357/7; Nicaragua,
WT/DS357/8; and Thailand, WT/DS357/9.
c. Official WTO documents are Canada, WT/DS365/2; Guatemala, WT/DS365/3; Costa Rica,
WT/DS365/4; the EC, WT/DS365/5; Mexico, WT/DS365/6; Australia, WT/DS365/7; Argentina,
WT/DS365/8; Thailand, WT/DS365/9; India, WT/DS365/10; and Nicaragua, WT/DS365/11.
Origins of Canada’s WTO Case. Canada and the United States have a
history of commodity trade disputes, traditionally focused on various wheat support
programs and trade practices.2 In 2005, after several years of wrangling over wheat
trade issues, Canada extended its disagreement with U.S. farm programs to the corn
sector when Canadian corn producers sought legal action for alleged unfair
subsidization and dumping of U.S. corn in Canadian markets. Canada’s International
Trade Tribunal (CITT) ultimately ruled on the 2005 anti-dumping and countervailing3
(AD/CV) duty case in favor of the United States. However, Canadian corn
producers continued to press their concerns upon the Canadian government about
perceived unfair subsidization of U.S. corn.
In January 2007, Canada requested consultations with the United States to
discuss three specific charges against U.S. farm programs: (1) U.S. farm support
resulted in serious prejudice against Canadian corn producers, (2) U.S. domestic
support exceeded its WTO commitments; and (3) U.S. export credit guarantee
programs contained implicit WTO-illegal subsidies. Canada’s first allegation in its


2 For more information see CRS Report RL32426, U.S.-Canada Wheat Trade Dispute, by
Randy Schnepf.
3 CITT, Dumping and Subsidizing: Finding, Inquiry No. NQ-2005-001, Unprocessed Grain
Corn, April 18, 2006, at [http://www.citt-tcce.gc.ca/dumping/inquirie/findings/nq2f001
_e.asp].

WTO case built upon previous trade complaints against the United States initiated
by Canadian corn producers starting in 2005, while the latter two allegations were
based on a previous WTO ruling in a case (WTO case DS267) brought by Brazil
against the U.S. cotton program.4
Another potential factor motivating Canada to bring its case against U.S. farm
subsidies was Canadian domestic political concerns emanating from a weak coalition
government responding to pressure from corn-producing interests following the
unfavorable CITT AD/CV corn duty ruling. In addition, Canada had a general
interest in influencing the 2007 U.S. farm bill debate in favor of lower amber-box-
type support.5 A news report suggested that two additional factors motivating
Canada’s case included the temporary suspension of Doha Round negotiations (July
24, 2006), which indefinitely postponed the possibility of U.S. farm program reforms
under multilateral trade negotiations, and the settlement of a softwood lumber dispute
between Canada and the United States, which freed up Canadian government trade
attorneys to refocus on the WTO litigation against U.S. farm programs.6
The request for consultations represented the first step in instituting a WTO
dispute settlement case against the United States — the assigning of an official
dispute settlement case number (DS357) — thus setting in motion the explicit rules
and timetables of the WTO DSU process.7 Following Canada’s request for
consultations, several other WTO members — Argentina, Australia, Brazil, the
European Communities, Guatemala, Nicaragua, Thailand, and Uruguay — officially
requested to join the consultations as interested third parties.
On February 7, 2007, Canada and the United States held consultations
concerning the three charges raised by Canada. Under WTO rules, for subsidy
complaints alleging adverse effects, a minimum 60-day consultation period is
required before a country can ask the WTO to establish a dispute settlement panel.8
Although the consultations failed to resolve the dispute, the Canadian International
Trade Minister, David Emerson, announced on May 2, 2007, that the Canadian
government would temporarily hold off on taking any further action in its WTO


4 For more information, see CRS Report RS22187, Brazil’s WTO Case Against the U.S.
Cotton Program: A Brief Overview, and CRS Report RL32571, Brazil’s WTO Case Against
the U.S. Cotton Program, both by Randy Schnepf.
5 The amber box includes those policies that result in market-distorting support. For a
discussion of proposed reductions in WTO domestic support commitments, see CRS Report
RL33144, WTO Doha Round: The Agricultural Negotiations, by Charles Hanrahan and
Randy Schnepf.
6 Inside U.S. Trade, “Johanns Says U.S. Will Defend Farm Programs from Canadian
Challenge,” January 12, 2007.
7 For more information, see CRS Report RS20088, Dispute Settlement in the World Trade
Organization: An Overview, by Jeanne Grimmett.
8 Article 7.4, SCM Agreement.

dispute settlement proceeding (DS357) against U.S. corn subsidies until at least the
end of the year, pending the outcome of Doha Round trade negotiations.9
However, in June 2007, Canada requested that the establishment of a WTO
dispute settlement panel to hear its case against U.S. farm programs be included on
the agenda of the next meeting of the WTO’s Dispute Settlement Body (DSB). In its
panel request, Canada dropped the serious prejudice charge against U.S. corn
subsidies, probably in large part because corn market prices have risen so
dramatically since mid-2006 and were projected to remain high for at least the next
ten years.10 The United States blocked Canada’s request at the June 21, 2007, DSB
meeting. According to WTO rules, a panel can be blocked only once, implying that
a second request by Canada, if made at one of the subsequent DSB meetings, would
have to be honored. However, Canada refrained from pursuing the establishment of
a panel to hear the case at the next several DSB meetings.
Origins of Brazil’s WTO Case. Brazil — which has already won a series
of WTO dispute settlement rulings against U.S. cotton programs11 — introduced its
new challenge against U.S. farm programs on July 11, 2007, when it requested
consultations with the United States to discuss the same two charges against U.S.
farm programs as in Canada’s case (DS357).
The context for Brazil’s new challenge of U.S. farm programs is significant.
First, the new challenge builds on panel rulings from Brazil’s successful case
(DS267) against certain aspects of the U.S. cotton program. Previous findings in the
case, although not part of the final recommendations, appear to have set legal
precedent and could facilitate Brazil’s new claims. Second, the Doha Round of
WTO trade negotiations continues to make very little apparent progress after having
resumed in September 2007, possibly providing further incentive to seek legal
recourse under WTO’s dispute settlement process rather than via negotiation.12
Third, the U.S. Congress is presently revisiting omnibus farm legislation. Brazil has
a general interest in influencing the U.S. farm bill debate in favor of lower
amber-box-type support. Fourth, Canada had already initiated a similar case. Brazil
initially joined Canada’s case as an “interested third party”; however, Brazil has since
chosen to pursue its own separate but similar case. News sources speculate that
Brazil did this in order to have a “greater voice” in the WTO dispute settlement13
process. Furthermore, Brazil’s case appears to be more comprehensive than
Canada’s WTO case in terms of the level of detail of program support activity that


9 “Holding Up on the US Corn WTO Case,” Washington Trade Daily, Vol. 16, No. 88, May

3, 2007.


10 For long-run commodity price projections, see USDA’s Agricultural Baseline Projections;
available at [http://www.ers.usda.gov/Briefing/Baseline/].
11 For more information, see CRS Report RS22187, Brazil’s WTO Case Against the U.S.
Cotton Program: A Brief Overview, and CRS Report RL32571, Brazil’s WTO Case Against
the U.S. Cotton Program, both by Randy Schnepf.
12 Doha Round talks were indefinitely suspended on July 24, 2007, but have since restarted.
For more information, see CRS Report RL33144, WTO Doha Round: The Agricultural
Negotiations, by Charles Hanrahan and Randy Schnepf.
13 “Brazil Changes Course by Filing Separate Case Rather than Joining Canada,” Jim
Wiesemeyer, AgWeb.com, July 12, 2007.

is alleged to have been incorrectly notified as exempt or excluded from the AMS
spending limit.
Following Brazil’s request for consultations, several other WTO members —
Canada, Guatemala, Costa Rica, the European Communities (EC), Mexico, Australia,
Argentina, Thailand, India, and Nicaragua — officially requested to join the
consultations as interested third parties. As with Canada’s case, Brazil was assigned
an official dispute settlement case number (DS365) — thus setting in motion the
explicit rules and timetables of the WTO dispute settlement process.14 Consultations
between Brazil and the United States were held on August 22, 2007, but failed to
resolve the dispute.
Status of the Two Cases. By late 2007, Canada and Brazil appear to have
coordinated their efforts as both countries submitted official requests on November

8, 2007, for the DSB to add the establishment of a panel to its next meeting agenda.


Again, according to the WTO rules, the United States blocked this new panel request
at the November 27, 2007, DSB meeting. However, at its next meeting on December
17, the DSB announced the establishment of a single panel to jointly hear both cases
brought by Canada (DS357) and Brazil (DS365) against U.S. farm programs. In their
requests, Brazil and Canada asked for a single panel to be established to consider15
both cases jointly. The United States did not object to this proposal.
In accordance with the Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU),16 once the establishment of a panel has been
announced the DSB has up to 45 days for a panel to be appointed, plus six months
for the panel to conclude its work. As a result, it is not likely that the panel, once
appointed, will finish its work and issue a final ruling before late 2008.
Major Charges Against U.S. Farm Programs
Both the Canadian (DS357) and Brazilian (DS365) cases raise two principal
charges against U.S. farm programs. Each of these is discussed below.
First Allegation: U.S. Total Domestic Agricultural Support Exceeds
Its WTO Limit. In accordance with WTO commitments, all WTO members have
agreed to submit annual notifications of their farm program outlays to the WTO, and
these outlays are subject to specific limits. For the United States, its total spending
limit for “amber box” programs (i.e., programs that are trade- and market-distorting)
was $19.9 billion in 1999 and $19.1 billion in all subsequent years.17 To date, the


14 For more information, see CRS Report RS20088, Dispute Settlement in the World Trade
Organization: An Overview, by Jeanne Grimmett.
15 WTO Dispute Settlement Body monthly news release, December 17, 2007, available at
[ h t t p : / / www.wt o.or g/ engl i s h/ news_e/ n ews07_e/ d sb_17dec07_e.ht m] .
16 WTO Legal Texts, Annex 2 — Dispute Settlement Understanding (DSU); available at
[ h t t p : / / www.wt o.or g/ engl i s h/ docs_e/ l e ga l _ e/ l e ga l _ e.ht m] .
17 Amber box outlays are actually a residual category comprised of the total Aggregate
Measure of Support (i.e., a total of all market and trade distorting support) less those outlays
(continued...)

United States has notified details of its farm program outlays through 2005.18
According to U.S. farm program spending notifications to the WTO, U.S. domestic
support outlays have remained well within U.S. WTO spending commitments.19
However, Canada and Brazil argue that several U.S. program payments were either
omitted from the notification data, or incorrectly notified either as green box or as
non-product-specific AMS (where they would more easily qualify for exclusion from
amber box limits under the non-product-specific de minimis exemption). Canada
and Brazil contend that when all of the disputed payments and other subsidies are
included in the U.S. AMS calculation, then the total outlays would exceed the
spending commitment in each of 1999, 2000, 2001, 2002, 2004, and 2005.
The claim that the United States has exceeded its total spending limits hinges
largely on a previous ruling from the U.S.-Brazil cotton case in which a WTO panel
found that U.S. payments made under the Production Flexibility Contract (PFC) and
Direct Payment (DP) programs do not qualify for the WTO’s green box exemption
category because of their prohibition on planting fruits, vegetables, and wild rice on
covered program acreage.20 However, the panel did not make the extension that PFC
and DP payments should therefore be counted as amber box programs, but instead
was mute on this point. In its WTO notifications, the United States has notified its
PFC payments as fully decoupled and green box compliant.21 This is an important
distinction because the green box contains only non-distorting program payments and
is not subject to any limit. Canada and Brazil argue that, because of the previous
panel ruling, PFC and DP payments do not conform with WTO green-box rules and
should be included with U.S. amber box payments.
Furthermore, Canada and Brazil argue that several other U.S. program payments
were incorrectly notified as exempt from the U.S. AMS limit. These include:


17 (...continued)
that are exempt from any limit under four possible exclusion classifications: green box, blue
box, and product- or nonproduct-specific de minimis exclusions. For more information on
WTO support classifications see CRS Report RS20840, Agriculture in the WTO: Limits on
Domestic Support.
18 At the time that both Canada and Brazil initiated their cases (DS357 and DS365), the
United States had only notified its domestic support data through marketing year 2001. The
United States notified for the marketing years 2002, 2003, 2004, and 2005 on October 8,

2007.


19 For more information on WTO commitments and actual outlays, see CRS Report
RL30612, Agriculture in the WTO: Member Spending on Domestic Support, and CRS
Report RL32916, Agriculture in the WTO: Policy Commitments Made Under the Agreement
on Agriculture, both by Randy Schnepf.
20 For more information on these restrictions see USDA, Farm Service Agency, Fact Sheet,
Direct and Counter-Cyclical Payment Program Wild Rice, Fruit, and Vegetable Provisions,
February 2003, at [http://www.fsa.usda.gov/pas/publications/facts/html/fav03.htm].
21 Decoupled means it has no influence on producer’s decision-making process; green box
compliant means it adheres to the terms and conditions of Annex 2 of the Agreement on
Agriculture.

!Production Flexibility Contract (PFC) and Direct Payment (DP)
programs whose payments were notified as green box under
“decoupled income” payments;
!Non-insured Crop Disaster Assistance Program (NAP) payments,
Crop Disaster Assistance, Emergency Feed, Livestock Indemnity,
and Tree Assistance programs that were notified as green box under
“payments for relief from natural disasters;” and
!emergency “crop market loss assistance” payments from the early
2000s that were notified as non-product-specific AMS, but which
Brazil and Canada contend would be more correctly notified as
product-specific AMS outlays.
In addition, both Canada and Brazil argue that CCP payments (established
under the 2002 Farm Act [P.L. 107-171]) should similarly be counted against the
U.S. amber box spending limit of $19.1 billion. In contrast, the United States has
notified CCP payments as exempt from AMS limits under the non-product specific
de minimis exemption. In addition, as part of its Doha policy reform proposal the
United States recommends that CCP payments be eligible for the blue box, where
they would be subject to a different limit than the amber box.22
Unlike Canada’s case, Brazil cited several additional U.S. farm support
programs that it claims were simply not notified (i.e., they were omitted from
inclusion in the U.S. AMS total). These include:
!both direct and guaranteed loans, and USDA farm loan programs;
!programs exempting on-farm use of gasoline and diesel fuel from
payment of various excise and sales taxes;
!programs exempting U.S. farmers from taxes based on overall farm
income — e.g., deductions from taxable income from farming; farm
marketing and purchasing cooperatives; and export transactions of
agricultural commodities; and
!subsidies related to the operation and maintenance of irrigation
works by the U.S. Department of the Interior.
Canada and Brazil charge that, when PFC, DP, and CCP payments for all
covered crops — wheat, corn, grain sorghum, barley, oats, upland cotton, rice,
soybeans, and other oilseeds — as well as the additional program outlays that were
excluded from U.S. notifications are included in the U.S.’s amber box, then the total
outlays would exceed the spending commitment in each of 1999, 2000, 2001, 2002,
2004, and 2005. However, neither Canada nor Brazil provide the specific details on
its year-by-year determinations, so direct comparisons are not possible.
CRS calculations based on U.S. notifications and available USDA data suggest
that, with the inclusion of the otherwise excluded PFC and DP, the U.S. AMS total
would exceed the spending limit in two of the years indicated (Figure 1). The
further inclusion of both market loss assistance and CCP payments as product
specific amber box payments to the U.S. AMS total suggests that the spending limit
would be exceeded in five of the years indicated (Figure 2).


22 Blue box payments are defined as “production-limiting” types of payments. For more
information see CRS Report RL33144, WTO Doha Round: The Agricultural Negotiations,
by Charles Hanrahan and Randy Schnepf.

Figure 1. U.S. AMS Outlays and Direct Payments
25AMS Limit
20Direct
Payments
15
10
5
AM S
0
19 9 5 19 98 20 01 20 04 20 07
Note: Direct payments include PFC and DP payments.
Source: data for 1995-2005 are from U.S. WTO notifications; and 2006-2008 are
CRS calculations based on USDA data;.
Figure 2. U.S. Outlays for AMS, Direct Payments (DP), Market Loss
Assistance (MLA), and Counter-Cyclical Payments (CCP)


30
AMS MLA
Limit
25
CCP
20
15Direct
Payments
10

5 AM S


0
19 95 19 98 20 01 20 04 20 07
Note: DP includes PFC and DP payments.; MLA (1998-2001); CCP (2002-2008).
Source: data for 1995-2005 are from U.S. WTO notifications; and 2006-2008 are
CRS calculations based on USDA data;.

Second Allegation: U.S. Export Credit Guarantees Are WTO-Illegal
Export Subsidies. Canada and Brazil argue that the U.S. export credit guarantee
program operates as a WTO-illegal export subsidy. In the U.S.-Brazil cotton case
(DS267), a WTO panel found that U.S. export credit guarantees effectively function
as export subsidies because the financial benefits returned by these programs failed
to cover their long-run operating costs.23 Furthermore, the panel found that this
applies not just to cotton, but to all commodities that benefit from U.S. commodity
support programs and receive export credit guarantees. As a result, export credit
guarantees for any recipient commodity are subject to previously scheduled WTO
spending limits. The panel recommended (and was upheld on appeal) that these
prohibited subsidies be removed by July 1, 2005. On December 18, 2007, a
compliance panel found that the United States had not yet fully complied with the
panel ruling.
With respect to the ruling that export credit guarantees operate like illegal export
subsidies, compliance through policy reform would likely involve incorporating user
fees that reflect the market risk associated with each loan guarantee. For example,
this could be achieved by removing the 1% cap on user fees charged under the export
credit guarantee program. The 1% fee cap prevents charging market-based fees and
contributes to the export credit guarantee program operating as a WTO-illegal export
subsidy. Both the Senate- and House-passed versions of the 2007 farm bill (H.R.
2419) include changes to the export credit program including the elimination of the
1% cap on user fees. In addition, both bills reauthorize direct payments, but without
the decoupling recommended to achieve green-box compliance.
U.S. Response
In response to Canada’s request for consultations on U.S. subsidies, then-U.S.
Secretary of Agriculture Mike Johanns declared in early 2007 that the United States
would vigorously defend U.S. farm programs against any possible WTO challenge
by Canada.24 A spokesman for the U.S. Trade Representative (USTR) declared that
it was disappointed at Canada’s and Brazil’s requests. The U.S. official said that this
dispute was an unnecessary diversion of resources and time from the Doha Round
negotiations. The official also stated that U.S. farm programs were designed to be in
compliance with its WTO obligations and believed that the panel would agree. The
official also added that some measures identified by Canada and Brazil had ceased
to exist five years ago (prior to the 2002 farm bill) and that others were not part of
the consultations with Canada. All three countries involved — the United States,
Canada, and Brazil — have agreed that the meeting of the panel would be open to the
public.


23 For more detail, see CRS Report RL32571, Brazil’s WTO Case Against the U.S. Cotton
Program, by Randy Schnepf.
24 Inside U.S. Trade, “Johanns Says U.S. Will Defend Farm Programs from Canadian
Challenge,” January 12, 2007.

Potential Implications and Role of Congress
Many market analysts suggest that the two recent cases brought by Brazil and
Canada are harbingers of future challenges to U.S. commodity programs. If either
country were to successfully pursue its case, it could affect most U.S. program
commodities, since the charges against the U.S. export credit guarantee program and
AMS limit extend to all major program crops. Should any eventual changes in U.S.
farm policy be needed to comply with a WTO ruling, Congress likely would be called
upon to address this issue (including adjustment, if not full removal, of the planting
restriction on base acres receiving direct payments).
Ultimately, Congress is responsible for passing farm program legislation that
complies with U.S. commitments in international trade agreements. When
confronted with a negative WTO dispute settlement ruling, a country has essentially
five options to choose from: eliminate the subsidy; reduce the subsidy to diminish its
adverse effect; revise the program function to reduce the linkage between the subsidy
and the adverse effect (referred to as decoupling); pay a mutually acceptable
compensatory payment to offset the adverse effects of the subsidy; or suffer the
consequences of trade retaliation.
While a WTO case can result in punitive sanctions being authorized, the
proceedings of a formal case can take many months, and sometimes years, to reach
a conclusion.25 For example, the U.S.-Brazil cotton case was initiated by Brazil’s
request for WTO consultations on September 27, 2002. A panel was established
nearly six months later on March 18, 2003. The panel’s final report was delivered
to the DSB on September 8, 2004. The case was appealed and the Appellate Body’s
final report was adopted by the DSB on March 21, 2005, nearly 30 months after the
initial request for consultations.26 Subsequently, Brazil requested a WTO compliance
panel to review whether the United States had fully complied with the panel’s
rulings. The WTO compliance panel issued its final ruling on December 18, 2007,
thus extending the length of the U.S.-Brazil cotton case to over five years.
Congress is presently revisiting omnibus farm legislation.27 Proposed provisions
in the House- and Senate-passed versions of the farm bill (H.R. 2419) would bring
the export credit guarantee program into compliance with WTO rules by eliminating
the “subsidy” component of export credit guarantees.28 However, neither version
appears to address the issue surrounding the disqualification of direct payments from
the WTO’s green box AMS exclusion due to the planting restriction on fruits,


25 For more information, see CRS Report RS20088, Dispute Settlement in the World Trade
Organization: An Overview, by Jeanne Grimmett.
26 This timeline is discussed in more detail in CRS Report RL32571, Background on the
U.S.-BrazilWTO Cotton Subsidy Dispute, by Randy Schnepf.
27 For more information see CRS Report RL33934, Farm Bill Legislative Action in the 110th
Congress, coordinated by Renee Johnson.
28 Section 3002, Title III of the House-passed H.R. 2419 (July 27, 2007); and Section 3101,
Title III of the Senate version of H.R. 2419 as passed (December 14, 2007) with
amendments.

vegetables, and wild rice on program base acres. Instead, direct payments are
extended with no change to the current planting restriction (except for a small pilot
program on 10,000 acres in Indiana). This retention of the status quo in the face of
the cotton panel’s ruling and recommendation has important WTO implications, as
it would appear to favor the charge that the United States has exceeded its total AMS
limit in at least two years (1999 and 2000) if direct payments are included in the
AMS calculation (Figure 1).
Many market watchers question the relevance of expending legal resources to
establish an historical AMS violation in light of the high commodity prices that have
persisted since mid-2007. U.S. farm program payments made under the marketing
loan provisions and CCP program have to be triggered by low commodity prices
before payments are made. Most long-run commodity market projections predict
high commodity prices and low government program support to persist well into the
future, thus, keeping U.S. domestic support outlays well within current AMS limits
without any further changes to the programs.
Additional uncertainty arises from the ongoing Doha Round of trade
negotiations, where a successful conclusion could potentially mitigate or end
Canada’s and Brazil’s interest in continuing its case against the U.S. farm programs.
Given the importance of agricultural trade in the U.S. agricultural economy,
Congress will likely be monitoring developments in the WTO AMS dispute. The
House and Senate Agriculture Committees regularly hold hearings on agricultural
trade negotiations. If the ongoing Doha Round of WTO trade negotiations were to
successfully conclude with a text for further multilateral trade reform, it is likely that
Congress would hold hearings and consult with the Administration concerning the
possible renewal of fast-track, or Trade Promotion Authority (TPA), legislation,29
which expired on July 1, 2007. Such hearings and consultations would be a major
vehicle for Members to express their views on the U.S.-Brazil AMS trade dispute,
on the negotiating issues that it raises, and on the potential implications for U.S. farm
policy.


29 For more information, see CRS Report RL33743, Trade Promotion Authority (TPA):
Issues, Options, and Prospects for Renewal, by J. F. Hornbeck and William H. Cooper.

Table 2. WTO Time Line for Dispute Settlement
Time AllowedaActivity

60 daysConsultations, mediation, etc.


45 daysPanel set up and panelists appointed
6 monthsFinal panel report to parties
3 weeksFinal panel report to WTO members

60 daysDispute Settlement Body adopts report (if no appeal)


Total = 1 yearWithout Appeal
60 to 90 daysAppeals report
30 daysDispute Settlement Body adopts appeals report
Grand Total = With Appeal
1 year 3 months
Source: WTO Dispute Settlement online resources; available at [http://www.wto.org/
english/tratop_e/dispu_e/dispu_e.htm] .
Note: These approximate periods for each stage of a dispute settlement procedure are target
figures — the agreement is flexible. In addition, the countries can settle their dispute
themselves at any stage. Totals are also approximate.
a. Time period begins when the official request for consultations is received by the WTO
Dispute Settlement Body (DSB).



Table 3. The Main Stages of a WTO Panel’s Work
TimingActivity
Establishment ofThe Dispute Settlement Body (DSB) has 45 days to appoint
Panel members to the panel.
Panel MembersThe panel has 6 months to finish hearings, rebuttals, and expert
Appointedtestimony, to review the evidence, and to produce a final report
on the case.
Before the firstEach side in the dispute presents its case in writing to the panel.
hearing
First hearingThe case for the complaining country and the defense. The
complaining country or countries, the responding country, and
those that have announced they have an interest in the dispute,
make their case at the panel’s first hearing.
Rebuttals The countries involved submit written rebuttals and present oral
arguments at the panel’s second meeting.
Experts If one side raises scientific or other technical matters, the panel
may consult experts or appoint an expert review group to prepare
an advisory report.
First draft The panel submits the descriptive (factual and argument)
sections of its report to the two sides, giving them two weeks to
comment (this report does not include findings and conclusions).
Interim reportThe panel then submits an interim report, including its findings
and conclusions, to the two sides, giving them one week to ask
for a review.
ReviewThe period of review must not exceed two weeks (during that
time, the panel may hold additional meetings with the two sides).
Final reportA final report is submitted to the two sides and three weeks later,
it is circulated to all WTO members. If the panel decides that the
disputed trade measure does break a WTO agreement or an
obligation, it recommends that the measure be made to conform
with WTO rules. The panel may suggest how this could be done.
The reportThe report becomes the DSB’s ruling or recommendation within
becomes a ruling60 days unless a consensus rejects it. Both sides can appeal the
report (and in some cases both sides do).
Source: WTO Dispute Settlement online resources; available at [http://www.wto.org/
english/tratop_e/dispu_e/dispu_e.htm] .