The adverse World Trade Organization ruling, allowing most of Brazil's claims against the U.S. cotton program, particularly a requirement that Step 2 payments comply with the WTO's edict by July 1, leaves the U.S. Government with three avenues available, says Neal Gillen, Executive Vice President and General Counsel for the American Cotton Shippers Association.

“Compliance is a challenge,” Gillen said, “as there are no clear guidelines in the ruling, just vague language stating that the current Step 2 program payments were not single or ‘monolithic,’ that different terms were specified for domestic and export shipments, and different types of documentation were required.”

Gillen mapped out the challenge of compliance in an address to the annual meeting of the Texas Cotton Association recently in Austin.

Options include:

  1. Make appropriate administrative changes in the Step 2 payment formula by tailoring the program to comport with the WTO's panel reasoning. “That's the most desirable approach,” Gillen said. “But its complications make it the most difficult to sell to the mills, producers, and cooperatives. Should we accomplish that difficult task, we must sell the proposal to USDA/USTR and ultimately to the Brazilians. Should it not be acceptable to Brazil they will take it back to the WTO and the same panel that found the program to violate the Uruguay Round Agreement would hear any new challenge.”

  2. The administration could refer the matter to Congress with specific recommendations to bring the Step 2 Program into WTO compliance with specific restrictions such as a higher threshold level, a cap on certificate increases to limit high sales volumes, or recommend that the program be repealed.

  3. The administration could take the view that since the industry is at odds on how to fix the Step 2 Program Congress should make this determination in its review of the Farm Bill later this year and early next year. “This in effect would be a decision to continue the program and to structure compliance with the WTO decision through a new agricultural trade agreement,” Gillen said.

“This could subject the administration to criticism, but whether the Brazilians would go along with such an approach is another question. We would have to convince Brazil that we will comply by phasing out the Step 2 program no later than the expiration of the 2002 Farm Bill. This would allow the Step 2 Program to be part of the compromise reached in the ongoing Doha Round of agricultural negotiations.”

Gillen said the third option is the approach many in the industry and some in government prefer. (That option) “would require consent of the Brazilians,” he said. “If such an approach is not acceptable to the government of Brazil, it could seek authorization to invoke sanctions against U.S. products — an approach that both governments want to avoid. The U.S. and Brazil desire a successful Doha Round and the final resolution of the Step 2 issue could be the key to achieving that end.”

Gillen said significant questions remain before the July deadline. “Will Brazil force our hand? Will it give us the time we need to either correct or repeal the Step 2 Program?

“While answers to these questions are critical to resolving this issue — regardless of what USDA, USTR, Brazil or the WTO say or do, nothing changes. We will continue to have a Step 2 Program until Congress takes it away. Congress created the Step 2 Program and only Congress can end it.”