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Why the deal to pay Brazil $300 million just to keep U.S. cotton subsidies is bad for the WTO, poor countries, and U.S. taxpayers

The U.S. prefers to pay $300 million to Brazil over bringing its cotton subsidies in line with WTO trade rules (AP Photo)

The World Trade Organization (WTO) does not allow countries to buy their way out of violations. (I have written on this topic here and here). So how is it that the United States did just that this week, paying its way out of a long-standing dispute against Brazil over cotton, for the second time in a row? And what does this mean for the WTO?

When the WTO’s Appellate Body upheld Brazil’s claim that U.S. cotton subsidies were depressing world prices and hurting Brazilian cotton farmers in the process, the United States did not amend its subsidies to make them compliant. Rather, it agreed to pay Brazil $147 million a year for the privilege of continuing to subsidize its own farmers in a WTO-inconsistent way. This week, the United States reached another settlement, buying Brazil’s peace once more, this time to the tune of a $300 million lump sum payment.

The key to understanding this outcome is to know that the WTO relies on a decentralized enforcement system. There is no WTO public prosecutor or WTO attorney general: No violation is challenged unless another member state files a formal complaint. And while this is meant to reassure states wary of ceding too much sovereignty to the institution, it also means that the system is ripe for collusion. In this case, the United States only had to satisfy Brazil to make the case go away — for a while.

As it is, U.S. policy continues to flout international trade rules (indeed, the United States would not be paying Brazil off if this were not the case). Yet as long as Brazil declares itself satisfied, little more can be done, unless another country takes up the matter. This is an unlikely prospect, since the other countries with a high stake in cotton are poor African nations, and filing a dispute comes at considerable financial and political cost. These developing countries, alongside American taxpayers, are the ones ultimately losing from the settlement. In Benin, Burkina Faso, Chad, and Mali, known collectively as the “Cotton Four”, the more than 10 million people relying on cotton revenue will continue to compete against subsidized American farmers. The promise of WTO litigation is that complainants provide a public good by seeking enforcement on behalf of all countries with a stake in the matter. Bilateral settlements such as the U.S.-Brazil deal negate this hope.

This week’s settlement with Brazil thus represents private peace at the expense of public justice. That turns out to be a not infrequent occurrence in legal systems that allow for bilateral settlements. The one positive thing that can be said about this particular deal is that it is transparent — though neither party likely wished it to be so. Such transparency has allowed for its widespread condemnation, from The Washington Post’s editorial board to the halls of the WTO itself. Less blatant discriminatory settlements, which satisfy the complainant at the expense of the remainder of the membership, seem to take place frequently, something I demonstrate in an article forthcoming in the British Journal of Political Science, co-authored with Jeffrey Kucik.

The WTO explicitly condemns deals that come at the expense of “public justice” in this way. The rules say that private settlements of one violation cannot result in another form of violation (see Article 3.5 of the Dispute Settlement Understanding). Yet that is exactly what has happened in this case: while the United States has made cosmetic reforms to its subsidy scheme, it has merely dressed it in new (and equally expensive) garbs.

As for what this outcome means for the WTO, it is, paradoxically, both a reaffirmation of the need for a multilateral trade organization, and a demonstration of its limits. More than anything, what is stunning in the cotton case is just how much the satisfaction of a small, well-off interest group is worth to the U.S. administration. The tab runs high: not only does it include the $32.9 billion spent on otherwise uncompetitive U.S. farmers over the past 20 years, it now also counts the more than half-billion dollars paid to Brazil.

This is where the WTO is meant to come in. More than an agreement to open foreign markets, the WTO is meant to decrease the political cost of denying distortionary protection to domestic producers. Governments do not like subsidizing uncompetitive industries. International agreements allow them to strengthen their bargaining position, and tell their powerful interests that they cannot have it their way, because that would be breaking trade rules. But sometimes these interests are so powerful, that international law is of little avail. Governments might prefer to be shown in violation than to lose elections. The WTO thus exists because of how tempting it is to give in to the agricultural lobby and groups like it. But this settlement also brings to light its limits: When dealing with highly mobilized, geographically concentrated groups, even the threat of appearing in violation will do little to sway governments.

The other overlooked cost of this settlement, beyond American taxpayers footing the bill and African nations dealing with artificially low cotton prices, is the prospect for future litigation. China is another country that heavily subsidizes cotton. This week’s settlement gives Brazil (not to mention the United States, which also loses from Chinese subsidies), less ground to stand on to file a complaint against China. In sum, bilateral settlements such as these embolden other violators. The United States is heavily invested in the international trade regime; it invariably loses from suggesting that anything but full compliance is a satisfactory outcome to a trade dispute.

What does the future hold? The obvious disadvantage of extra-legal measures is that they do not themselves benefit from legal protection. In other words, what amounts to a gentlemen’s agreement of a lump sum payment against the promise not to sue anew could be broken at any moment. Brazil has no means of formally ridding itself of the right to challenge a violation that remains. And even within the terms of the settlement, Brazil can reassess American measures in 2018, and if it is unsatisfied, it may sue again. The United States, and its taxpayers, have not seen the end of the cotton saga.

Krzysztof J. Pelc is the William Dawson Scholar and Associate Professor in the Department of Political Science at McGill University