A World Trade Organization compliance panel ruling in the U.S.-Brazil cotton case appears to ignore the current world cotton market situation and the U.S. cotton program’s current operation, the National Cotton Council said.

The ruling, which was made public Tuesday (Dec. 18), said the United States Government had failed to comply with another WTO panel’s finding the U.S. cotton program had caused “serious prejudice” to Brazil’s cotton sector. Brazil has reserved the right to seek $3 billion in damages from the case.

A spokesman for the office of the U.S. Trade Representative said it was disappointed with the compliance panel’s findings and was considering a final appeal of the decision, which was released to the two governments last July.

“We continue to believe that support payments and export credit guarantees under our programs are fully consistent with our WTO obligations,” said the USTR’s Gretchen Hamel.

National Cotton Council leaders said they had not had an opportunity to review the opinion in detail – such rulings are “confidential” until translated into the language of the countries. But the Council’s legal expert said he wasn’t sure the WTO compliance panel is seeing the same world market.

“The only way for the panel to have reached the conclusion that the U.S. cotton program is presently causing serious prejudice to Brazil is for the panel to have ignored the facts in the world cotton market and based its decision on a subjective opinion that the United States simply did not change its programs enough,” said attorney Bill Gillon.

Council leaders said they believed the United States has already taken significant actions to comply with the first WTO panel ruling, including the elimination of a major component of the U.S. cotton program and a significant revision to the export credit guarantee program.

Furthermore, the panel failed to appropriately evaluate the full impact of the elimination of Step 2 of the U.S. three-step competitiveness program or recent world cotton market trends that demonstrate that the U.S. is not adversely affecting world prices, said Council Chairman John Pucheu.

“U.S. cotton acreage fell by 29 percent in 2007 and is expected to continue to decline in 2008,” said Pucheu, a producer from Tranquillity, Calif. “U.S. exports fell significantly in 2006 and have declined overall as a percent of world exports. It is not credible to assert that U.S. cotton is currently causing serious prejudice to anyone in the world cotton market.”

While U.S. cotton acreage is the lowest since 1989, acreage is up in many major-producing countries around the world, the NCC chairman said. Payments under the U.S. cotton marketing loan for 2006 are down more than 40 percent from 2004 and are expected to be zero in 2007.

“The international cotton market is strong, demand is exceeding production, world prices are up, and exports in countries such as India and Brazil are dramatically rising. Cotton production outside the U.S. mushroomed to 100 million bales in 2006 and is hovering near record levels for 2007,” said Pucheu.

“India is harvesting an all-time record crop and has dramatically increased their exports. In addition to the changes already undertaken by the United States, the farm bills passed by the House of Representatives and the Senate both contain reductions in the U.S. cotton program.”

The NCC singled out several areas where the compliance panel seemed to be looking at a different cotton market than most:

-- While almost 85 percent of world cotton production and more than 95 percent of the world’s textile mill use is outside the United States, the WTO panel concludes U.S. cotton exports are having significant price impacts. That’s despite declining acreage, declining levels of support, declining U.S. mill use, declining U.S. exports, and increasing production and exports from other major cotton producers.

-- Although the original panel insisted on the elimination of the Step 2 program because, among other reasons, that program contributed to price suppression in the world cotton market, the compliance panel held that the elimination of this subsidy does not affect the price suppressing effects of the remaining parts of the U.S. cotton program. Thus, it contradicted the first panel’s findings on the impact of this program, in the face of evidence showing declining U.S. cotton exports.

-- Brazil and several non-governmental organizations repeatedly cite economic analysis prepared by Brazil’s paid economist as independent confirmation that the U.S. cotton program has had international price impacts. The NCC notes this panel, like previous panels, has questioned Brazil’s biased economic work, agreeing with the United States that the Brazil model had no foundation in economic circles and still needed “to earn the confidence of the panel.”

-- Despite the fact the panel was supposed to determine whether the U.S. cotton program had a “significant” price suppressing effect on the world market, this panel, like all previous panels, declined to make any finding as to the magnitude of the alleged U.S. program impacts even stating that it “was not in a position to judge the exact magnitude by which world prices would rise” should the U.S. cotton program be eliminated.

The credible economic analysis that was before the panel generally found international price impacts between 2 and 3 percent. This hardly rises to the level of “significant price suppression,” said Gillon. “It is not a responsible conclusion to find that any possible impact of U.S. agricultural programs must be a ‘significant’ impact.”

Brazil just recently completed harvesting a cotton crop that is 49 percent above last year’s production and actually sold government cotton stocks during 2007 in an attempt to depress cotton prices, the NCC said.

Meanwhile, it said, U.S. expenditures in respect of cotton or cotton base acres, without any further changes in any future farm bill, are expected to decline significantly for 2007, 2008 and 2009.

“We hope the U.S. Trade Representative will promptly appeal this ruling as it seems unsupportable to the U.S. cotton industry,” Pucheu stated. “Current U.S. production and export levels, as well as U.S. spending levels, all seem directly contrary to a finding of current serious prejudice against the U.S. cotton program.”

Gillon said he had “no idea” how Brazil or any panel could justify $3 billion in injury to its cotton sector in this case. “But I also find it difficult to understand how this last panel could have found in favor of Brazil.”

The U.S. Trade Representative could file an appeal as early as January or February, said Gillon. “It will be an expedited appeal and should be final within 90 days. We expect that after the appeal decision, Brazil would announce retaliation and the United States would invoke its right to an arbitration panel, starting early May.

“The arbitration panel would calculate the amount of injury to Brazil and is to be completed within 60 days. It’s likely, therefore, that the final, final part of this case will be completed in mid-summer 2008.”

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